Edgar Filing: KILROY REALTY CORP

12.31.14 KRC & KRLP 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(MARK ONE)


x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014


¨	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)
Registrant’s telephone number, including area code: (310) 481-8400

Securities registered pursuant to Section 12(b) of the Act:



Registrant	Title of each class	Name of each exchange on which registered
Kilroy Realty Corporation	Common Stock, $.01 par value	New York Stock Exchange
Kilroy Realty Corporation	6.875% Series G Cumulative Redeemable Preferred Stock, $.01 par value	New York Stock Exchange
Kilroy Realty Corporation	6.375% Series H Cumulative Redeemable Preferred Stock, $.01 par value	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:



Registrant	Title of each class
Kilroy Realty, L.P.	Common Units Representing Limited Partnership Interests

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Kilroy Realty Corporation Yes x No ¨ Kilroy Realty, L. P. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

Kilroy Realty Corporation Yes ¨ No x Kilroy Realty, L. P. Yes ¨ No x

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 x No ¨ Kilroy Realty, L. P. Yes x No ¨

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 x No ¨ Kilroy Realty, L. P. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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
x	Large accelerated filer	o	Accelerated filer	o	Non-accelerated filer (Do not check if a smaller reporting company)	o	Smaller reporting company

Kilroy Realty, L.P.
o	Large accelerated filer	o	Accelerated filer	x	Non-accelerated filer (Do not check if a smaller reporting company)	o	Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Kilroy Realty Corporation Yes ¨ No x Kilroy Realty, L. P. Yes ¨ No x

The aggregate market value of the voting and non-voting shares of common stock held by non-affiliates of Kilroy Realty Corporation was approximately $5,152,002,640 based on the quoted closing price on the New York Stock Exchange for such shares on June 30, 2014.

There is no public trading market for the common units of limited partnership interest of Kilroy Realty, L.P. As a result, the aggregate market value of the common units of limited partnership interest held by non-affiliates of Kilroy Realty, L.P. cannot be determined.

As of February 6, 2015, 86,377,404 shares of Kilroy Realty Corporation’s common stock, par value $.01 per share, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Kilroy Realty Corporation’s Proxy Statement with respect to its 2014 Annual Meeting of Stockholders to be filed not later than 120 days after the end of the registrant’s fiscal year are incorporated by reference into Part III of this Form 10‑K.

EXPLANATORY NOTE

This report combines the annual reports on Form 10-K for the year ended December 31, 2014 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 December 31, 2014, the Company owned an approximate 98.0% common general partnership interest in the Operating Partnership. The remaining approximate 2.0% common limited partnership interests are owned by non-affiliated investors and certain directors and 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 that are reflected in the disclosures in this Form 10-K. 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 generally contributes to the Operating Partnership in exchange for units of partnership interest, 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 units of partnership interest.

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, to the extent not held by the Company, 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. a Delaware limited partnership (the “Finance Partnership”). This noncontrolling interest represents the Company’s 1% indirect general partnership interest in the Finance Partnership, 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 in the Operating Partnership’s noncontrolling interest in the Finance Partnership.

We believe combining the annual reports on Form 10-K 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:


•	Item 6. Selected Financial Data – Kilroy Realty Corporation;


•	Item 6. Selected Financial Data – Kilroy Realty, L.P.;


•	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:


◦	—Liquidity and Capital Resources of the Company; and


◦	—Liquidity and Capital Resources of the Operating Partnership;


•	consolidated financial statements;


•	the following notes to the consolidated financial statements:


◦	Note 6, Secured and Unsecured Debt of the Company;


◦	Note 7, Secured and Unsecured Debt of the Operating Partnership;


◦	Note 9, Noncontrolling Interests on the Company’s Consolidated Financial Statements;


◦	Note 10, Stockholders’ Equity of the Company;


◦	Note 11, Preferred and Common Units of the Operating Partnership;


◦	Note 19, Net Income Available to Common Stockholders Per Share of the Company;


◦	Note 20, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;


◦	Note 22, Quarterly Financial Information of the Company (Unaudited); and


◦	Note 23, Quarterly Financial Information of the Operating Partnership (Unaudited).

This report also includes separate sections under Item 9A. 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 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.

TABLE OF CONTENTS



		Page
	PART I
Item 1.	Business	5
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	29
Item 2.	Properties	30
Item 3.	Legal Proceedings	39
Item 4.	Mine Safety Disclosures	39
	PART II
Item 5.	Market for Kilroy Realty Corporation’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	40
	Market for Kilroy Realty, L.P.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	41
Item 6.	Selected Financial Data – Kilroy Realty Corporation	43
	Selected Financial Data – Kilroy Realty, L.P.	45
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	83
Item 8.	Financial Statements and Supplementary Data	84
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	84
Item 9A.	Controls and Procedures	85
Item 9B.	Other Information	89
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	89
Item 11.	Executive Compensation	89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89
Item 13.	Certain Relationships and Related Transactions, and Director Independence	89
Item 14.	Principal Accountant Fees and Services	89
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	90
	SIGNATURES	97

PART I

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, without limitation, information concerning projected future occupancy and rental rates, lease expirations, debt maturity, potential investments, strategies such as capital recycling, development and redevelopment activity, projected construction costs, dispositions, future executive incentive compensation and other forward-looking financial data, as well as the discussion in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations.” Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary materially from those indicated in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results or events. All forward-looking statements are based on currently available information and speak only as of the date on which they are made. We assume no obligation to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under U.S. federal securities laws.


ITEM 1.	BUSINESS

The Company

We are a self-administered REIT active in premier office 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 County, the San Francisco Bay Area and greater Seattle, 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 own our interests in all of our properties through the Operating Partnership and the Finance Partnership and generally conduct substantially all of our operations through the Operating Partnership. We qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

Our stabilized portfolio of operating properties was comprised of the following office properties at December 31, 2014:



	Number of Buildings	Rentable Square Feet	Number of Tenants	Percentage Occupied
Stabilized Office Properties	111	14,096,617	526	94.4	%

Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently under construction or committed for construction, “lease-up” properties, undeveloped land, and real estate assets held for sale. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. As of December 31, 2014, we had no redevelopment 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. There were no operating properties in “lease-up” as of December 31, 2014. As of December 31, 2014, we had one land parcel held for sale. During the year ended December 31, 2014, we stabilized a redevelopment project in San Francisco, California, a development project consisting of three office buildings encompassing 587,429 square feet and a development project consisting of two office buildings encompassing 340,913 square feet, both in the San Francisco Bay Area, California. These projects are included in our stabilized portfolio as of December 31, 2014.

As of December 31, 2014, the following properties were excluded from our stabilized portfolio:



	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾
Development projects under construction	6	1,732,000

_______________


(1)	Estimated rentable square feet upon completion. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Influence Future Results of Operations —Completed, In-Process and Future Development Pipeline” for more information.

Our stabilized portfolio also excludes our future development pipeline, which is comprised of nine potential development sites, representing approximately 104 gross acres of undeveloped land on which we believe we have the potential to develop over 3.0 million square feet of office space, depending upon economic conditions.

As of December 31, 2014, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of thirteen office properties located in the state of Washington. All of our properties and development projects are 100% owned, excluding a development project owned by Redwood City Partners, LLC, a consolidated subsidiary (see Note 3 “Acquisitions” to our consolidated financial statements included in this report) and certain properties held at qualified intermediaries for potential future transactions that are intended to qualify as like-kind exchanges pursuant to Section 1031 of the Code (“Section 1031 Exchanges”) to defer taxable gains on dispositions for federal and state income tax purposes, which have been consolidated for financial

reporting purposes (see Note 2 “Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements included in this report).

We own our interests in all of our real estate assets through the Operating Partnership and the Finance Partnership and generally conduct substantially all of our operations through the Operating Partnership of which we owned a 98.0% common general partnership interest as of December 31, 2014. The remaining 2.0% common limited partnership interest in the Operating Partnership as of December 31, 2014 was owned by non-affiliated investors and certain of our executive officers and directors. Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a 1.0% common general partnership interest. The Operating Partnership owns the remaining 99.0% common limited partnership interest. We conduct substantially all of our development activities through Kilroy Services, LLC (“KSLLC”), which is a wholly owned subsidiary of the Operating Partnership. With the exception of the Operating Partnership, certain properties held in Section 1031 Exchanges and Redwood City Partners LLC, all of the Company’s subsidiaries are wholly owned.

Available Information; Website Disclosure; Corporate Governance Documents

Kilroy Realty Corporation was incorporated in the state of Maryland on September 13, 1996 and Kilroy Realty, L.P. was organized in the state of Delaware on October 2, 1996. Our principal executive offices are located at 12200 W. Olympic Boulevard, Suite 200 Los Angeles, California 90064. Our telephone number at that location is (310) 481-8400. Our website is www.kilroyrealty.com. The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this annual report on Form 10-K or any other report or document we file with or furnish to the SEC. All reports we will file with the SEC will be available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. All reports that we will file with the SEC will also be available free of charge on our website at www.kilroyrealty.com as soon as reasonably practicable after we file those materials with, or furnish them to, the SEC.

The following documents relating to corporate governance are also available free of charge on our website under “Investor Relations —Corporate Governance” and available in print to any security holder upon request:


•	Corporate Governance Guidelines;


•	Code of Business Conduct and Ethics;


•	Audit Committee Charter;


•	Executive Compensation Committee Charter; and


•	Nominating / Corporate Governance Committee Charter.

You may request copies of any of these documents by writing to:

Attention: Investor Relations

Kilroy Realty Corporation

12200 West Olympic Boulevard, Suite 200

Los Angeles, California 90064

Business and Growth Strategies

Growth Strategies. We believe that a number of factors and strategies will enable us to continue to achieve our objectives of long-term sustainable growth in Net Operating Income (defined below) and FFO (defined below) as well as maximization of long-term stockholder value. These factors and strategies include:


•	the quality, geographic location, physical characteristics and operating sustainability of our properties;


•	our ability to efficiently manage our assets as a low cost provider of commercial real estate through our seasoned management team possessing core capabilities in all aspects of real estate ownership, including property management, leasing, marketing, financing, accounting, legal, and construction and development management;


•	our access to development, redevelopment, acquisition and leasing opportunities as a result of our extensive experience and significant working relationships with major West Coast property owners, corporate tenants, municipalities and landowners given our over 65-year presence in the West Coast markets;


•	our active development program and our extensive future development pipeline of undeveloped land sites (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations —Information on Leases Commenced and Executed” for additional information pertaining to the Company’s in-process and future development pipeline);


•	our capital recycling program (see “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Operating Partnership” for additional information pertaining to the Company’s capital recycling program and related 2014 and 2015 property and land dispositions);


•	our ability to capitalize on inflection points in a real estate cycle to add quality assets to our portfolio at substantial discounts to long-term value, through either acquisition, development or redevelopment; and


•	our strong financial position that has and will continue to allow us to pursue attractive acquisition and development and redevelopment opportunities.

“Net Operating Income” is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, real estate taxes, provision for bad debts and ground leases) before depreciation. “FFO” is funds from operations as defined by the National Association of Real Estate Investment Trusts (“NAREIT”). See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations” and “—Non-GAAP Supplemental Financial Measures: Funds From Operations” for a reconciliation of these measures to generally accepted accounting principles (“GAAP”) net income available to common stockholders.

Operating Strategies. We focus on enhancing long-term growth in Net Operating Income and FFO from our properties by:


•	maximizing cash flow from our properties through active leasing, early renewals and effective property management;


•	structuring leases to maximize returns and internal growth;


•	managing portfolio credit risk through effective underwriting, including the use of credit enhancements and interests in collateral to mitigate portfolio credit risk;


•	managing operating expenses through the efficient use of internal property management, leasing, marketing, financing, accounting, legal, and construction and development management functions;


•	maintaining and developing long-term relationships with a diverse tenant base;


•	managing our properties to offer the maximum degree of utility and operational efficiency to tenants;


•	building our current development projects to Leadership in Energy and Environmental Design (“LEED”) specifications. All of our development projects are now designed to achieve LEED certification, generally LEED Platinum or Gold;

•

actively pursuing LEED certification for over 1.7 million square feet of office space under construction. During the past few years we have significantly enhanced the sustainability profile of our portfolio, ending the year with 39% of our properties LEED certified and 56% ENERGY STAR certified. During 2014, the Company was recognized for our sustainability efforts with multiple industry leadership awards, including NAREIT's 2014 Office Leader in the Light Award. The company is also recognized by the Global Real Estate Sustainability Benchmark as the North American leader in sustainability and was ranked first among 151 North American participants across all asset types;


•	continuing to effectively manage capital improvements to enhance our properties’ competitive advantages in their respective markets and improve the efficiency of building systems;


•	enhancing our management team with individuals who have extensive regional experience and are highly knowledgeable in their respective markets; and


•	attracting and retaining motivated employees by providing financial and other incentives to meet our operating and financial goals.

Development and Redevelopment Strategies. We and our predecessors have developed office properties primarily located in California since 1947. As of December 31, 2014, our future development pipeline was comprised of nine potential development sites, representing approximately 104 gross acres of undeveloped land on which we believe we have the potential to develop over 3.0 million square feet of office space, depending upon economic conditions. Our strategy with respect to development is to:


•	maintain a disciplined approach by emphasizing pre-leasing, commencing development in stages or phasing, and cost control;


•	be the premier provider of modern and collaborative office buildings on the West Coast with focus on design and environment;


•	reinvest capital from dispositions of selective assets into new state-of-the-market development and acquisition assets with higher cash flow and rates of return;


•	execute on our development projects under construction and our future development pipeline, including expanding entitlements; and


•	evaluate redevelopment opportunities in supply-constrained markets because such efforts generally achieve similar returns to new development with reduced entitlement risk and shorter construction periods.

Redevelopment opportunities are those projects in which we spend significant development and construction costs on existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We may engage in the additional development or redevelopment of office properties when market conditions support a favorable risk-adjusted return on such development or redevelopment. We expect that our significant working relationships with tenants, municipalities and landowners on the West Coast will give us further access to development and redevelopment opportunities. We cannot assure you that we will be able to successfully develop or redevelop any of our properties or that we will have access to additional development or redevelopment opportunities.

Acquisition Strategies. We believe we are well positioned to acquire properties and development and redevelopment opportunities as the result of our extensive experience, strong financial position and ability to access capital. We continue to actively monitor our target markets and to pursue the acquisition of value add office properties and development and redevelopment opportunities that add immediate Net Operating Income to our portfolio or play a strategic role in our future growth and that:


•	provide attractive yields and significant potential for growth in cash flow from property operations;


•	present growth opportunities in our existing or other strategic markets; and


•	demonstrate the potential for improved performance through intensive management, repositioning and leasing that should result in increased occupancy and rental revenues.

Financing Strategies. Our financing policies and objectives are determined by our board of directors. Our goal is to limit our dependence on leverage and maintain a conservative ratio of debt-to-total market capitalization. As of December 31, 2014, our total debt as a percentage of total market capitalization was 28.2%, and our total debt and liquidation value of our preferred equity as a percentage of total market capitalization was 30.4%, both of which were calculated based on the quoted closing price per share of the Company’s common stock of $69.07 on December 31, 2014 (see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Company —Capitalization” for additional information). Our financing strategies include:


•	maintaining financial flexibility, including a low secured to unsecured debt ratio, to maximize our ability to access a variety of both public and private capital sources;


•	maintaining a staggered debt maturity schedule in which the maturity dates of our debt are spread over several years to limit risk exposure at any particular point in the capital and credit market cycles;


•	completing financing in advance of the need for capital; and


•	managing interest rate exposure by generally maintaining a greater amount of fixed-rate debt as compared to variable-rate debt.

We utilize multiple sources of capital, including borrowings under our unsecured line of credit, proceeds from the issuance of public or private debt or equity securities and other bank and/or institutional borrowings and dispositions of selective assets. There can be no assurance that we will be able to obtain capital as needed on terms favorable to us or at all. See the discussion under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations” and “Item 1A. Risk Factors.”

Significant Tenants

As of December 31, 2014, our 15 largest tenants in terms of annualized base rental revenues represented approximately 35.3% of our total annualized base rental revenues, defined as annualized monthly contractual rents from existing tenants as of December 31, 2014. Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue.

For further information on our 15 largest tenants and the composition of our tenant base, see “Item 2. Properties —Significant Tenants.”

Competition

We compete with several developers, owners, operators and acquirers of office, undeveloped land and other commercial real estate, many of which own properties similar to ours in the same submarkets in which our properties

are located. For further discussion of the potential impact of competitive conditions on our business, see “Item 1A. Risk Factors.”

Segment and Geographic Financial Information

During 2014 and 2013, we had one reportable segment, our office properties segment. For information about our office property revenues and long-lived assets and other financial information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations.”

As of December 31, 2014, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of thirteen office properties located in the state of Washington. All of our properties and development projects are 100% owned, excluding a development project owned by Redwood City Partners, LLC, a consolidated subsidiary, and certain properties held in Section 1031 Exchanges, which have been consolidated for financial reporting purposes as variable interest entities (see Note 2 “Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements included in this report).

Employees

As of December 31, 2014, we employed 226 people through the Operating Partnership, KSLLC, and Kilroy Realty TRS, Inc. We believe that relations with our employees are good.

Environmental Regulations and Potential Liabilities

Government Regulation Relating to the Environment. Many laws and governmental regulations relating to the environment are applicable to our properties, and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently and may adversely affect us.

Existing conditions at some of our properties. Independent environmental consultants have conducted Phase I or similar environmental site assessments on all of our properties. We generally obtain these assessments prior to the acquisition of a property and may later update them as required for subsequent financing of the property or as requested by a tenant. Site assessments are generally performed to American Society for Testing and Materials standards then-existing for Phase I site assessments and typically include a historical review, a public records review, a visual inspection of the surveyed site, and the issuance of a written report. These assessments do not generally include any soil samplings or subsurface investigations; however, if a Phase 1 does recommend that soil samples be taken or other subsurface investigations take place, we generally perform such recommended actions. Depending on the age of the property, the Phase I may have included an assessment of asbestos-containing materials or a separate hazardous materials survey may have been conducted. For properties where asbestos-containing materials were identified or suspected, an operations and maintenance plan was generally prepared and implemented.

Historical operations at or near some of our properties, including the presence of underground or above ground storage tanks, may have caused soil or groundwater contamination. In some instances, the prior owners of the affected properties conducted remediation of known contamination in the soils on our properties. Although we may be required to conduct further clean-up of the soil at these properties (see Note 15 “Commitments and Contingencies” to our consolidated financial statements included in this report for additional information regarding our ground lease obligations), we are not aware of any such condition, liability, or concern by any other means that would give rise to material environmental liability. However, our assessments may have failed to reveal all environmental conditions, liabilities, or compliance concerns; there may be material environmental conditions, liabilities, or compliance concerns that arose at a property after the review was completed; future laws, ordinances, or regulations may impose material additional environmental liability; and environmental conditions at our properties may be affected in the future by tenants, third parties, or the condition of land or operations near our properties, such as the presence of underground storage tanks. We cannot be certain that costs of future environmental compliance will not have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.

Use of hazardous materials by some of our tenants. Some of our tenants handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations may subject these tenants, and potentially us, to liability resulting from such activities. We generally require our tenants in their leases to comply with these environmental laws and regulations and to indemnify us for any related liabilities. As of December 31, 2014, other than routine cleaning materials, approximately 5-10% of our tenants handled hazardous substances and/or wastes on approximately 2-5% of the aggregate square footage of our properties as part of their routine operations. These tenants are primarily involved in the life sciences business. The hazardous substances and wastes are primarily comprised of diesel fuel for emergency generators and small quantities of lab and light manufacturing chemicals including, but not limited to, alcohol, ammonia, carbon dioxide, cryogenic gases, dichlorophenol, methane, naturalyte acid, nitrogen, nitrous oxide, and oxygen which are routinely used by life science companies. We are not aware of any material noncompliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties, and management does not believe that on-going activities by our tenants will have a material adverse effect on our operations.

Costs related to government regulation and private litigation over environmental matters. Under applicable environmental laws and regulations, we may be liable for the costs of removal, remediation, or disposal of certain hazardous or toxic substances present or released on our properties. These laws could impose liability without regard to whether we are responsible for, or even knew of, the presence or release of the hazardous materials. Government investigations and remediation actions may have substantial costs, and the presence or release of hazardous substances on a property could result in governmental clean-up actions, personal injury actions, or similar claims by private plaintiffs.

Potential environmental liabilities may exceed our environmental insurance coverage limits, transactional indemnities or holdbacks. We carry what we believe to be commercially reasonable environmental insurance. Our environmental insurance policies are subject to various terms, conditions and exclusions. Similarly, in connection with some transactions we obtain environmental indemnities and holdbacks that may not be honored by the indemnitors, may be less than the resulting liabilities or may otherwise fail to address the liabilities adequately. Therefore, we cannot provide any assurance that our insurance coverage or transactional indemnities will be sufficient or that our liability, if any, will not have a material adverse effect on our financial condition, results of operations, cash flows, quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.

ITEM 1A. RISK FACTORS

The following section sets forth material factors that may adversely affect our business and operations. The following factors, as well as the factors discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations” and other information contained in this report, should be considered in evaluating us and our business.

Risks Related to our Business and Operations

Global market and economic conditions may adversely affect our liquidity and financial condition and those of our tenants. In the United States, market and economic conditions continue to be challenging with stricter regulations and modest growth. While recent economic data reflects moderate economic growth in the United States, there continues to be concern regarding the stability of the economy and credit markets generally. Volatility in the U.S. and international capital markets and concern over a return to recessionary conditions in global economies, and in the California economy in particular, may adversely affect our liquidity and financial condition and the liquidity and financial condition of our tenants. If these market conditions continue, they may limit our ability and the ability of our tenants to timely refinance maturing liabilities and access the capital markets to meet liquidity needs.

All of our properties are located in California and greater Seattle, Washington and we may therefore be susceptible to adverse economic conditions and regulations, as well as natural disasters, in those areas. Because all of our properties are concentrated in California and greater Seattle we may be exposed to greater economic risks than if we owned a more geographically dispersed portfolio. Further, within California, our properties are concentrated in Los Angeles, Orange County, San Diego County and the San Francisco Bay Area, exposing us to risks associated with those specific

areas. We are susceptible to adverse developments in the economic and regulatory environments of California and greater Seattle (such as business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other factors) as well as adverse weather conditions and natural disasters that occur in those areas (such as earthquakes, wind, landslides, droughts, fires and other events). In addition, California is also regarded as more litigious and more highly regulated and taxed than many other states, which may reduce demand for office space in California.

Any adverse developments in the economy or real estate market in California and the surrounding region, or in greater Seattle or any decrease in demand for office space resulting from the California or greater Seattle regulatory or business environment could impact our ability to generate revenues sufficient to meet our operating expenses or other obligations, which would adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Our performance and the market value of our securities are subject to risks associated with our investments in real estate assets and with trends in the real estate industry. Our economic performance and the value of our real estate assets and, consequently the market value of the Company’s securities, are subject to the risk that our properties may not generate revenues sufficient to meet our operating expenses or other obligations. A deficiency of this nature would adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Events and conditions applicable to owners and operators of real estate that are beyond our control and could impact our economic performance and the value of our real estate assets may include:


•	local oversupply or reduction in demand for office or other commercial space, which may result in decreasing rental rates and greater concessions to tenants;


•	inability to collect rent from tenants;


•	vacancies or inability to rent space on favorable terms or at all;


•	inability to finance property development and acquisitions on favorable terms or at all;


•	increased operating costs, including insurance premiums, utilities and real estate taxes;


•	costs of complying with changes in governmental regulations;


•	the relative illiquidity of real estate investments;


•	changing submarket demographics;


•	changes in space utilization by our tenants due to technology, economic conditions and business culture;


•	the development of harmful mold or other airborne toxins or contaminants that could damage our properties or expose us to third-party liabilities; and


•	property damage resulting from seismic activity or other natural disasters.

We depend upon significant tenants, and the loss of a significant tenant could adversely affect our financial condition, results of operations, ability to borrow funds and cash flows. As of December 31, 2014, our 15 largest tenants represented approximately 35.3% of total annualized base rental revenues. See further discussion on the composition of our tenants by industry and our largest tenants under “Item 2. Properties —Significant Tenants.”

Our financial condition, results of operations, ability to borrow funds and cash flows would be adversely affected if any of our significant tenants fails to renew its lease(s), renew its lease(s) on terms less favorable to us, or becomes bankrupt or insolvent or otherwise unable to satisfy its lease obligations.

Downturn in tenants’ businesses may reduce our revenues and cash flows. For the year ended December 31, 2014, we derived approximately 98.3% of our revenues from continuing operations from rental income and tenant reimbursements. A tenant may experience a downturn in its business, which may weaken its financial condition and result in its failure to make timely rental payments or result in defaults under our leases. In the event of default by a tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.

The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under federal bankruptcy law, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might permit the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid and future rent could be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. Therefore, our claim for unpaid rent would likely not be paid in full. Any losses resulting from the bankruptcy of any of our existing tenants could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

A large percentage of our tenants operate in a concentrated group of industries and downturns in these industries could adversely affect our financial condition, results of operations and cash flows. As of December 31, 2014, as a percentage of our annualized base rental revenue, 45% of our tenants operated in the technology and media industry, 15% in the finance, insurance and real estate industries, 14% in the professional, business and other services industries, 10% in the education and health services industries and 16% in other industries. As we expand our acquisition and development activities in markets populated by knowledge and creative based tenants in the technology and media industry, our tenant mix may become more concentrated, further exposing us to risks associated with that industry. For a further discussion of the composition of our tenants by industry, see “Item 2. Properties —Significant Tenants.” An economic downturn in any of these industries, or in any industry in which a significant number of our tenants currently or may in the future operate, could negatively impact the financial condition of such tenants and cause them to fail to make timely rental payments or default on lease obligations, fail to renew their leases or renew their leases on terms less favorable to us, become bankrupt or insolvent, or otherwise become unable to satisfy their obligations to us. As a result, a downturn in an industry in which a significant number of our tenants operate could adversely affect our financial conditions, result of operations and cash flows.

We may be unable to renew leases or re-lease available space. Most of our income is derived from the rent earned from our tenants. We had office space representing approximately 5.6%, of the total square footage of our properties that was not occupied as of December 31, 2014. In addition, leases representing approximately 8.7% and 6.0% of the leased rentable square footage of our properties are scheduled to expire in 2015 and 2016, respectively. Above market rental rates on some of our properties may force us to renew or re-lease expiring leases at rates below current lease rates. We cannot provide any assurance that leases will be renewed, available space will be re-leased or that our rental rates will be equal to or above the current rental rates. If the average rental rates for our properties decrease, existing tenants do not renew their leases, or available space is not re-leased, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected.

We are subject to governmental regulations that may affect the development, redevelopment, and use of our properties. Our properties are subject to regulation under federal laws, such as the Americans with Disabilities Act of 1990 (the “ADA”), pursuant to which all public accommodations must meet federal requirements related to access and use by disabled persons, and state and local laws addressing earthquake, fire, and life safety requirements. Although we believe that our properties substantially comply with requirements under applicable governmental regulations, none of our properties have been audited or investigated for compliance by any regulatory agency. If we were not in compliance with material provisions of the ADA or other regulations affecting our properties, we might be required to take remedial action, which could include making modifications or renovations to our properties. Federal, state, or local governments may also enact future laws and regulations that could require us to make significant modifications

or renovations to our properties. If we were to incur substantial costs to comply with the ADA or any other regulations, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected.

Our properties are subject to land use rules and regulations that govern our development, redevelopment and use of our properties, such as Title 24 of the California Code of Regulations (“Title 24”), which prescribes building energy efficiency standards for residential and nonresidential buildings in the State of California. If we were not in compliance with material provisions of Title 24 or other regulations affecting our properties, we might be required to take remedial action, which could include making modifications or renovations to our properties. Changes in the existing land use rules and regulations and approval process that restrict or delay our ability to develop, redevelop or use our properties (such as potential restrictions on the use and/or density of new developments, water use and other uses and activities) or prescribe additional standards could have an adverse effect on our financial position, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We may not be able to meet our debt service obligations. As of December 31, 2014, we had approximately $2.5 billion aggregate principal amount of indebtedness, of which $395.1 million is contractually due prior to December 31, 2015. Our total debt and preferred equity at December 31, 2014 represented 30.4% of our total market capitalization (which we define as the aggregate of our long-term debt, liquidation value of our preferred equity, and the market value of the Company’s common stock and the Operating Partnership’s common units of limited partnership interest, or common units). For calculation of our market capitalization and additional information on debt maturities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Company —Capitalization” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Operating Partnership —Liquidity Uses.”

The instruments and agreements governing some of our outstanding indebtedness (including borrowings under the Operating Partnership’s unsecured revolving credit facility, unsecured term loan facility and unsecured term loan) contain provisions that require us to repurchase for cash or repay that indebtedness under specified circumstances or upon the occurrence of specified events (including certain changes of control of the Company), and our future debt agreements and debt securities may contain similar provisions or may require that we offer to repurchase the applicable indebtedness for cash under specified circumstances or upon the occurrence of specified events. We may not have sufficient funds to pay our indebtedness when due (including upon any such required repurchase, repayment or offer to repurchase), and we may not be able to arrange for the financing necessary to make those payments on favorable terms or at all. In addition, our ability to make required payments on our indebtedness when due (including upon any such required repurchase, repayment or offer to repurchase) may be limited by the terms of other debt instruments or agreements. Our failure to pay amounts due in respect of any of our indebtedness when due may constitute an event of default under the instrument governing that indebtedness, which could permit the holders of that indebtedness to require the immediate repayment of that indebtedness in full and, in the case of secured indebtedness, could allow them to sell the collateral securing that indebtedness and use the proceeds to repay that indebtedness. Moreover, any acceleration of or default in respect of any of our indebtedness could, in turn, constitute an event of default under other debt instruments or agreements, thereby resulting in the acceleration and required repayment of that other indebtedness.

We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs, including cash distributions necessary to maintain the Company’s REIT qualification. Additionally, if we incur additional indebtedness in connection with future acquisitions or for any other purpose, our debt service obligations could increase.

We may need to refinance all or a portion of our indebtedness on or before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:

•our financial condition, results of operations and market conditions at the time; and

•restrictions in the agreements governing our indebtedness.

As a result, we may not be able to refinance our indebtedness on commercially reasonable terms or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity financing, delaying capital expenditures, or strategic acquisitions and alliances. Any of these events or circumstances could have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders. In addition, foreclosures could create taxable income without accompanying cash proceeds, which could require us to borrow or sell assets to raise the funds necessary to meet the REIT distribution requirements discussed below, even if such actions are not on favorable terms.

The covenants in the agreements governing the Operating Partnership’s unsecured revolving credit facility, unsecured term loan facility and unsecured term loan may limit our ability to make distributions to the holders of our common stock. The Operating Partnership’s $600.0 million unsecured revolving credit facility, $150.0 million unsecured term loan facility and $39.0 million unsecured term loan contain financial covenants that could limit the amount of distributions payable by us on our common stock and preferred stock. We rely on cash distributions we receive from the Operating Partnership to pay distributions on our common stock and preferred stock and to satisfy our other cash needs, and the unsecured revolving credit facility, unsecured term loan facility and unsecured term loan provide that the Operating Partnership may not, in any year, make partnership distributions to us or other holders of its partnership interests in an aggregate amount in excess of the greater of:


•	95% of the Operating Partnership’s consolidated funds from operations (as defined in the agreements governing the unsecured revolving credit facility, unsecured term loan facility and unsecured term loan) for such year; and

•

an amount which results in distributions to us (excluding any preferred partnership distributions to the extent the same have been deducted from consolidated funds from operations (as so defined) for such year) in an amount sufficient to permit us to pay dividends to our stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and (b) avoid the payment of federal or state income or excise tax.

In addition, the agreements governing the unsecured revolving credit facility, unsecured term loan facility and unsecured term loan each provides that, if the Operating Partnership fails to pay any principal of or interest on any borrowings or other amounts payable under such agreement when due, the Operating Partnership may make only those partnership distributions that result in distributions to us in an amount sufficient to permit us to make distributions to our stockholders that we reasonably believe are necessary to maintain our status as a REIT for federal and state income tax purposes. Any limitation on our ability to make distributions to our stockholders, whether as a result of these provisions in the unsecured revolving credit facility, the unsecured term loan facility, unsecured term loan or otherwise, could have a material adverse effect on the market value of our common stock.

A downgrade in our credit ratings could materially adversely affect our business and financial condition. The credit ratings assigned to the Operating Partnership’s debt securities and our preferred stock could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any rating will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, these credit ratings do not apply to our common stock and are not recommendations to buy, sell or hold our common stock or any other securities. If any of the credit rating agencies that have rated the Operating Partnership’s debt securities or our preferred stock downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a so-called “watch list” for a possible downgrading or lowering or otherwise indicates that its outlook for that rating is negative, it could have a material adverse effect on our costs and availability of capital, which could in turn have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We face significant competition, which may decrease the occupancy and rental rates of our properties. We compete with several developers, owners and operators of office, undeveloped land and other commercial real estate, many of which own properties similar to ours in the same submarkets in which our properties are located but which have lower occupancy rates than our properties. Therefore, our competitors have an incentive to decrease rental rates until their available space is leased. If our competitors offer space at rental rates below the rates currently charged by us for comparable space, we may be pressured to reduce our rental rates below those currently charged in order to retain tenants when our tenant leases expire. As a result, our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders may be adversely affected.

In order to maintain the quality of our properties and successfully compete against other properties, we must periodically spend money to maintain, repair and renovate our properties, which reduces our cash flows. If our properties are not as attractive to current and prospective tenants in terms of rent, services, condition or location as properties owned by our competitors, we could lose tenants or suffer lower rental rates. As a result, we may from time to time be required to make significant capital expenditures to maintain the competitiveness of our properties. There can be no assurances that any such expenditure would result in higher occupancy or higher rental rates, or deter existing tenants from relocating to properties owned by our competitors.

Potential casualty losses, such as earthquake losses, may adversely affect our financial condition, results of operations and cash flows. We carry comprehensive liability, fire, extended coverage, rental loss and terrorism insurance covering all of our properties. Management believes the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for generally uninsurable losses such as loss from riots or acts of God. In addition, all of our properties are located in earthquake-prone areas. We carry earthquake insurance on our properties in an amount and with deductibles that management believes are commercially reasonable. However, the amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. We may also discontinue earthquake insurance on some or all of our properties in the future if the cost of premiums for earthquake insurance exceeds the value of the coverage discounted for the risk of loss. If we experience a loss that is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. Further, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the properties were irreparable.

We are subject to environmental and health and safety laws and regulations, and any costs to comply with, or liabilities arising under, such laws and regulations could be material. As an owner, operator, manager, acquirer and developer of real properties, we are subject to environmental and health and safety laws and regulations. Certain of these laws and regulations impose joint and several liability, without regard to fault, for investigation and clean-up costs on current and former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment. At some of our properties, there are asbestos-containing materials, or tenants routinely handle hazardous substances as part of their operations. In addition, historical operations, including the presence of underground storage tanks, have caused soil or groundwater contamination at or near some of our properties. Although we believe that the prior owners of the affected properties or other persons may have conducted remediation of known contamination at these properties, not all such contamination has been remediated and further clean-up at these properties may be required. Unknown or unremediated contamination or the compliance with existing or new environmental or health and safety laws and regulations could require us to incur costs or liabilities that could be material. See “Item 1. Business —Environmental Regulations and Potential Liabilities.”

We may be unable to complete acquisitions and successfully operate acquired properties. We continually evaluate the market of available properties and may continue to acquire office properties and undeveloped land when strategic opportunities exist. Our ability to acquire properties on favorable terms and successfully operate them is subject to various risks, including the following:


•	we may potentially be unable to acquire a desired property because of competition from other real estate investors with significant capital, including both publicly traded and private REITs, institutional investment funds and other real estate investors;


•	even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price;


•	even if we enter into agreements for the acquisition of a desired property, we may be unable to complete such acquisitions because they remain subject to customary conditions to closing, including the completion of due diligence investigations to management’s satisfaction;


•	we may be unable to finance acquisitions on favorable terms or at all;


•	we may spend more than budgeted amounts in operating costs or to make necessary improvements or renovations to acquired properties;


•	we may lease acquired properties at economic lease terms different than projected;


•	we may acquire properties that are subject to liabilities for which we may have limited or no recourse; and


•	we may be unable to complete an acquisition after making a nonrefundable deposit and incurring certain other acquisition-related costs.

If we cannot finance property acquisitions on favorable terms or operate acquired properties to meet financial expectations, our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected.

We may be unable to successfully complete and operate acquired, developed, and redeveloped properties. There are significant risks associated with property acquisition, development and redevelopment, including the possibility that:


•	we may be unable to lease acquired, developed or redeveloped properties at projected economic lease terms or within budgeted timeframes;


•	we may not complete development or redevelopment properties on schedule or within budgeted amounts;


•	we may expend funds on and devote management’s time to acquisition, development or redevelopment properties that we may not complete;


•	we may encounter delays or refusals in obtaining all necessary zoning, land use, and other required entitlements, and building, occupancy, and other required governmental permits and authorizations;


•	we may encounter delays, refusals, unforeseen cost increases and other impairments resulting from third-party litigation; and


•	we may fail to obtain the financial results expected from properties we acquire, develop or redevelop.

If one or more of these events were to occur in connection with our acquired properties, undeveloped land, or development or redevelopment properties under construction, we could be required to recognize an impairment loss. These events could also have an adverse impact on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

While we historically have acquired, developed and redeveloped office properties in California markets, over the past few years we have acquired thirteen properties in greater Seattle and may in the future acquire, develop or redevelop properties for other uses and expand our business to other geographic regions where we expect the development or acquisition of property to result in favorable risk-adjusted returns on our investment. Presently, we do not possess the

same level of familiarity with other outside markets, which could adversely affect our ability to acquire, develop or redevelop properties or to achieve expected performance.

We face risks associated with the development of mixed-use commercial properties. We are currently developing, and in the future may develop, properties either alone or through joint ventures that are known as “mixed-use” developments. This means that in addition to the development of office space, the project may also include space for residential, retail or other commercial purposes. Generally we have less experience developing and managing non-office real estate. As a result, if a development project includes non-office space, we may develop that space ourselves or seek to partner with a third-party developer with more experience. If we do not partner with such a developer, or if we choose to develop the space ourselves, we would be exposed to specific risks associated with the development and ownership of non-office real estate. In addition, if we elect to participate in the development through a joint venture, we may be exposed to the risks associated with the failure of the other party to complete the development as expected, which could require that we identify another joint venture partner and/or complete the project ourselves (including providing any necessary financing). In the case of residential properties, these risks include competition for prospective tenants from other operators whose properties may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and amenities that the tenant seeks. With residential properties, we will also compete against apartments, condominiums and single-family homes that are for sale or rent. Because we have less experience with residential properties, we may retain third parties to manage these properties. If we decide to wholly own a non-office project and hire a third-party manager, we could be dependent on that party and its key personnel to provide services to us, and we may not find a suitable replacement if the management agreement is terminated, or if key personnel leave or otherwise become unavailable to us.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers’ financial condition, and disputes between us and our co-venturers and could expose us to potential liabilities and losses. In addition to the Redwood City Partners, LLC venture formed during 2013 (see Note 2 “Basis of Presentation and Significant Accounting Policies” and Note 3 “Acquisitions” to our consolidated financial statements included in this report), we may continue to co-invest in the future with third parties through partnerships, joint ventures or other entities, or through acquiring non-controlling interests in, or sharing responsibility for, managing the affairs of a property, partnership, joint venture or other entity, which may subject us to risks that may not be present with other methods of ownership, including the following:


•	we would not be able to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity, which would allow for impasses on decisions that could restrict our ability to sell or transfer our interests in such entity or such entity’s ability to transfer or sell its assets;


•	partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions, which could delay construction or development of a property or increase our financial commitment to the partnership or joint venture;


•	partners or co-venturers may pursue economic or other business interests, policies or objectives that are competitive or inconsistent with ours;


•	if we become a limited partner or non-managing member in any partnership or limited liability company, and such entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity;


•	disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business; and


•	we may, in certain circumstances, be liable for the actions of our third-party partners or co-venturers.

We own certain properties subject to ground leases and other restrictive agreements that limit our uses of the properties, restrict our ability to sell or otherwise transfer the properties and expose us to the loss of the properties if such agreements are breached by us, terminated or not renewed. As of December 31, 2014, we owned eleven office buildings, located on various land parcels and regions, which we lease individually on a long-term basis. As of December 31, 2014, we had approximately 1.9 million aggregate rentable square feet, or 13.2% of our total stabilized portfolio, of rental space located on these leased parcels and we may in the future invest in additional properties that are subject to ground leases or other similar restrictive arrangements. Many of these ground leases and other restrictive agreements impose significant limitations on our uses of the subject property, restrict our ability to sell or otherwise transfer our interests in the property or restrict our leasing of the property. These restrictions may limit our ability to timely sell or exchange the properties, impair the properties’ value or negatively impact our ability to find suitable tenants for the properties. In addition, if we default under the terms of any particular lease, we may lose the ownership rights to the property subject to the lease. Upon expiration of a lease, we may not be able to renegotiate a new lease on favorable terms, if at all. The loss of the ownership rights to these properties or an increase of rental expense could have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Real estate assets are illiquid, and we may not be able to sell our properties when we desire. Our investments in our properties are relatively illiquid, limiting our ability to sell our properties quickly in response to changes in economic or other conditions. In addition, the Code generally imposes a 100% prohibited transaction tax on the Company on profits derived from sales of properties held primarily for sale to customers in the ordinary course of business, which effectively limits our ability to sell properties other than on a selected basis. These restrictions on our ability to sell our properties could have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We may invest in securities related to real estate, which could adversely affect our ability to pay dividends and distributions to our security holders. We may purchase securities issued by entities that own real estate and may, in the future, also invest in mortgages. In general, investments in mortgages are subject to several risks, including:


•	borrowers may fail to make debt service payments or pay the principal when due;


•	the value of the mortgaged property may be less than the principal amount of the mortgage note securing the property; and


•	interest rates payable on the mortgages may be lower than our cost for the funds used to acquire these mortgages.

Owning these securities may not entitle us to control the ownership, operation, and management of the underlying real estate. In addition, we may have no control over the distributions with respect to these securities, which could adversely affect our ability to pay dividends and distributions to our security holders.

We face risks associated with short-term liquid investments. From time to time, we have significant cash balances that we invest in a variety of short-term investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments may include (either directly or indirectly):


•	direct obligations issued by the U.S. Treasury;


•	obligations issued or guaranteed by the U.S. government or its agencies;


•	taxable municipal securities;


•	obligations (including certificates of deposits) of banks and thrifts;


•	commercial paper and other instruments consisting of short-term U.S. dollar denominated obligations issued by corporations and banks;


•	repurchase agreements collateralized by corporate and asset-backed obligations;


•	both registered and unregistered money market funds; and


•	other highly rated short-term securities.

Investments in these securities and funds are not insured against loss of principal. Under certain circumstances we may be required to redeem all or part of our right to redeem some or all of our investment may be delayed or suspended. In addition, there is no guarantee that our investments in these securities or funds will be redeemable at par value. A decline in the value of our investment or a delay or suspension of our right to redeem may have a material adverse effect on our results of operations or financial condition.

Future terrorist activity or engagement in war by the United States may have an adverse effect on our financial condition and operating results. Terrorist attacks in the United States and other acts of terrorism or war, may result in declining economic activity, which could harm the demand for and the value of our properties. In addition, the public perception that certain locations are at greater risk for attack, such as major airports, ports, and rail facilities, may decrease the demand for and the value of our properties near these sites. A decrease in demand could make it difficult for us to renew or re-lease our properties at these sites at lease rates equal to or above historical rates. Terrorist activities also could directly impact the value of our properties through damage, destruction, or loss, and the availability of insurance for these acts may be less, and cost more, which could adversely affect our financial condition. To the extent that our tenants are impacted by future attacks, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.

Terrorist acts and engagement in war by the United States also may adversely affect the markets in which our securities trade and may cause further erosion of business and consumer confidence and spending and may result in increased volatility in national and international financial markets and economies. Any one of these events may cause a decline in the demand for our office leased space, delay the time in which our new or renovated properties reach stabilized occupancy, increase our operating expenses, such as those attributable to increased physical security for our properties, and limit our access to capital or increase our cost of raising capital.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) will subject us to substantial additional federal regulation. There are significant corporate governance and executive compensation-related requirements that have been, and will in the future be, imposed on publicly-traded companies under the Dodd-Frank Act. Several of these provisions require the SEC to adopt additional rules and regulations in these areas. For example, the Dodd-Frank Act requires publicly-traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, heightens certain independence standards for compensation advisers and authorizes the SEC to promulgate rules that would allow stockholders to nominate their own candidates for board seats using a registrant’s proxy materials. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities. In addition, if stockholders do not vote to approve our executive compensation practices and/or our equity plan amendments, these actions may interfere with our ability to attract and retain key personnel who are essential to our future success. Given the uncertainty associated with both the results of the existing Dodd-Frank Act requirements and the manner in which additional provisions of the Dodd-Frank Act will be implemented by various regulatory agencies and through regulations, the full extent of the impact of such requirements on our operations is unclear. Accordingly, the changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, or otherwise adversely affect our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Our property taxes could increase due to reassessment or property tax rate changes. We are required to pay some state and local taxes on our properties. In addition, the real property taxes on our properties may increase as our properties are reassessed by taxing authorities or as property tax rates change. For example, under a current California law commonly referred to as “Proposition 13,” property tax reassessment generally occurs as a result of a “change in ownership” of a property, as specially defined for purposes of those rules. Because the property taxing authorities may

not determine whether there has been a “change in ownership” or the actual reassessed value of a property for a period of time after a transaction has occurred, we may not know the impact of a potential reassessment for a considerable amount of time following a particular transaction. Therefore, the amount of property taxes we are required to pay could increase substantially from the property taxes we currently pay or have paid in the past, including on a retroactive basis. In addition, from time to time voters and lawmakers have announced initiatives to repeal or amend Proposition 13 to eliminate its application to commercial property and/or introduce split tax roll legislation. Such initiatives, if successful, would increase the assessed value and/or tax rates applicable to commercial property in California, including our office properties. An increase in the assessed value of our properties or our property tax rates could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Unfavorable resolution of litigation matters and disputes could have a material adverse effect on our financial condition. From time to time, we are involved in legal proceedings, lawsuits and other claims. We may also be named as defendants in lawsuits allegedly arising out of our actions or the actions of our operators and tenants in which such operators and tenants have agreed to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their respective businesses. An unfavorable resolution of litigation could have an effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay our ability to pay dividends and distributions to our security holders. Regardless of its outcome, litigation may result in substantial costs and expenses and significantly divert the attention of our management. There can be no assurance that we will be able to prevail in, or achieve a favorable settlement of, litigation. In addition, litigation, government proceedings or environmental matters could lead to increased costs or interruption of our normal business operations.

Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, or otherwise adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems. We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems), and, in some cases, may be critical to the operations of certain of our tenants. There can be no assurance that our efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches or disruptions would not be successful or damaging. A security breach or other significant disruption involving our IT networks and related systems could, among other things:


•	result in unauthorized access to, destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, including personally identifiable and account information that could be used to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;


•	result in unauthorized access to or changes to our financial accounting and reporting systems and related data;


•	result in our inability to maintain building systems relied on by our tenants;


•	require significant management attention and resources to remedy any damage that result;


•	subject us to regulatory penalties or claims for breach of contract, damages, credits, penalties or terminations of leases or other agreements; or


•	damage our reputation among our tenants and investors.

These events could have an adverse impact on our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

An increase in interest rates would increase our interest costs on variable rate debt and could adversely affect our financial condition, results of operations and cash flows. As of December 31, 2014 approximately 13.4% of our total outstanding debt was subject to variable interest rates and therefore subject to interest rate risk. In addition, we have an unsecured revolving credit facility bearing interest at a variable rate on all amounts drawn on the facility and we may incur additional variable rate debt in the future. Increase in interest rates on variable rate debt would increase our interest expense. Further, rising interest rates could limit our ability to refinance existing debt when it matures. To mitigate this risk, in the future we may enter into interest rate swap agreements or other interest rate hedging contracts. While these agreements would be intended to lessen the impact of rising interest rates on us, they could also expose us to the risk that the counterparties fail to perform, or the underlying transactions could fail to qualify as highly-effective cash flow hedges under the accounting guidance.

The trading price of our common stock may fluctuate significantly. The trading price of our common stock may fluctuate significantly. Between January 1, 2014 and December 31, 2014, the closing sale price of KRC’s common stock on the New York Stock Exchange, or the NYSE, ranged from $50.18 to $71.10 per share. The trading price of our common stock may fluctuate in response to many factors, including:


•	actual or anticipated variations in our operating results, funds from operations, cash flows, liquidity or distributions;


•	our ability to successfully execute on our development program;


•	our ability to successfully complete acquisitions and operate acquired properties;


•	earthquakes;


•	changes in our earnings estimates or those of analysts;


•	publication of research reports about us, the real estate industry generally or the office and industrial sectors in which we operate;


•	the failure to maintain our current credit ratings or comply with our debt covenants;


•	increases in market interest rates that lead purchasers of our common stock to demand a higher dividend yield;


•	changes in market valuations of similar companies;


•	adverse market reaction to any debt or equity securities we may issue or additional debt we incur in the future;


•	additions or departures of key management personnel;


•	actions by institutional stockholders;


•	speculation in the press or investment community;


•	high levels of volatility in the credit markets;


•	general market and economic conditions; and


•	the realization of any of the other risk factors included in this report.

Many of the factors listed above are beyond our control. These factors may cause the trading price of our common stock to decline, regardless of our financial performance and condition and prospects. It is impossible to provide any assurance that the trading price of our common stock or the amount of dividends we pay on our common stock will not decline in the future, and it may be difficult for holders to resell shares of our common stock at prices they find attractive or at all.

Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial performance of our tenants. Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board and the Securities and Exchange Commission, which establish and govern accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements, including proposed changes in lease accounting.

Proposed and/or future changes in accounting standards could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations or could impact our tenants’ business decisions in leasing real estate.

We face risks associated with our tenants and contractual counterparties being designated “Prohibited Persons” by the Office of Foreign Assets Control. Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). OFAC regulations and other laws prohibit conducting business or engaging in transactions with Prohibited Persons (the “OFAC Requirements”). Certain of our loan and other agreements require us to comply with OFAC Requirements. Our leases and other agreements, in general, require the other party to comply with OFAC Requirements. If a tenant or other party with whom we contract is placed on the OFAC list we may be required by the OFAC Requirements to terminate the lease or other agreement. Any such termination could result in a loss of revenue or a damage claim by the other party that the termination was wrongful.

Risks Related to Our Organizational Structure

Loss of our key personnel could harm our operations and financial performance and adversely affect the quoted trading price of our securities. The leadership and performance of our executive and senior officers, play a key role in the success of the Company. They are integral to the Company’s success for many reasons, including that each has a strong national or regional reputation in our industry and investment community. In addition, they have significant relationships with investors, lenders, tenants and industry personnel, which benefit the Company.

Our growth depends on external sources of capital that are outside of our control and the inability to obtain capital on terms that are acceptable to us, or at all, could adversely affect our financial condition and results of operations. The Company is required under the Code to distribute at least 90% of its taxable income (subject to certain adjustments and excluding any net capital gain), and the Operating Partnership is required to make distributions to the Company to allow the Company to satisfy these REIT distribution requirements. Because of these distribution requirements, the Operating Partnership is required to make distributions to the Company, and we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, management relies on third-party sources of capital to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our leverage. Access to third-party sources of capital depends, in part, on general market conditions and the availability of credit, the market’s perception of our growth potential, our

current and expected future earnings, our cash flows and cash distributions and the quoted trading price of our securities. If we cannot obtain capital from third-party sources, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders may be adversely affected.

Our common limited partners have limited approval rights, which may prevent us from completing a change of control transaction that may be in the best interests of all our security holders. The Company may not withdraw as the Operating Partnership’s general partner or transfer its general partnership interest in the Operating Partnership without the approval of the holders of at least 60% of the units representing common limited partnership interests, including the common units held by the Company in its capacity as the Operating Partnership’s general partner. In addition, the Company may not engage in a merger, consolidation or other combination or the sale of substantially all of its assets or such similar transaction, without the approval of the holders of 60% of the common units, including the common units held by the Company in its capacity as the Operating Partnership’s general partner. The right of our common limited partners to vote on these transactions could limit our ability to complete a change of control transaction that might otherwise be in the best interest of all our security holders.

In certain circumstances, our limited partners must approve our dissolution and the disposition of properties contributed by the limited partners. For as long as limited partners own at least 5% of all of the Operating Partnership’s partnership interests, we must obtain the approval of limited partners holding a majority of the units representing common limited partnership interests before we may dissolve. As of December 31, 2014, limited partners owned approximately 2.0% of the Operating Partnership’s partnership interests, of which 0.9% was owned by John B. Kilroy, Jr. In addition, we agreed to use commercially reasonable efforts to minimize the tax consequences to common limited partners resulting from the repayment, refinancing, replacement, or restructuring of debt, or any sale, exchange, or other disposition of any of our other assets. The exercise of one or more of these approval rights by the limited partners could delay or prevent us from completing a transaction that may be in the best interest of all our security holders.

The Chairman of our board of directors and our President and Chief Executive Officer has substantial influence over our affairs. John B. Kilroy, Jr. is the Chairman of our board of directors and our President and Chief Executive Officer. John B. Kilroy, Jr. beneficially owned, as of December 31, 2014, approximately 1.8% of the total outstanding shares of our common stock. The percentage of outstanding shares of common stock beneficially owned includes 86,929 shares of common stock, 434,329 restricted stock units (“RSUs”) that were vested and held by John B. Kilroy, Jr. at December 31, 2014, and assumes the exchange into shares of our common stock of the 782,059 common units of the Operating Partnership held by John B. Kilroy, Jr. (which may be exchanged for an equal number of shares of our common stock).

Pursuant to the Company’s charter, no stockholder may own, actually or constructively, more than 7.0% (by value or by number of shares, whichever is more restrictive) of our outstanding common stock without obtaining a waiver from the board of directors. The board of directors has waived the ownership limits with respect to John B. Kilroy, Jr., members of his family and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 19.6% of the our common stock, excluding Operating Partnership units that are exchangeable into shares of our common stock. Consequently, John B. Kilroy Jr., has substantial influence over the Company, and because the Company is the manager of the Operating Partnership, over the Operating Partnership, and could exercise his influence in a manner that is not in the best interest of our stockholders, noteholders or unitholders. Also, John B. Kilroy Jr., may, in the future, have a substantial influence over the outcome of any matters submitted to our stockholders or unitholders for approval.

There are restrictions on the ownership of the Company’s capital stock that limit the opportunities for a change of control at a premium to existing security holders. Provisions of the Maryland General Corporation Law, the Company’s charter and bylaws and the Operating Partnership’s partnership agreement may delay, deter, or prevent a change of control of the Company, or the removal of existing management. Any of these actions might prevent our security holders from receiving a premium for their shares of common stock or common units over the then-prevailing market price of the shares of our common stock.

In order for the Company to qualify as a REIT under the Code, its stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of the Company’s stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). The Company’s charter contains restrictions on the ownership and transfer of its capital stock that are intended to assist the Company in complying with these requirements and continuing to qualify as a REIT. No single stockholder may own, either actually or constructively, absent a waiver from the board of directors, more than 7.0% (by value or by number of shares, whichever is more restrictive) of the Company’s outstanding common stock. Similarly, absent a waiver from the board of directors, no single holder of the Company’s 6.875% Series G Cumulative Redeemable Preferred stock (the “Series G Preferred Stock”) may actually or constructively own more than 9.8% (by value or by number of shares, whichever is more restrictive) of the Company’s Series G Preferred Stock; and no single holder of the Company’s 6.375% Series H Cumulative Redeemable Preferred stock (the “Series H Preferred Stock”) may actually or constructively own more than 9.8% (by value or by number of shares, whichever is more restrictive) of the Company’s Series H Preferred Stock.

The constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than the applicable ownership limit of a particular class of the Company’s capital stock could, nevertheless, cause that individual or entity, or another individual or entity, to constructively own stock in excess of, and thereby subject such stock to, the applicable ownership limit.

The board of directors may waive the ownership limits if it is satisfied that the excess ownership would not jeopardize the Company’s REIT status and if it believes that the waiver would be in our best interest. The board of directors has waived the ownership limits with respect to John B. Kilroy, Jr., members of his family and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 19.6% of our outstanding common stock, excluding common units that are exchangeable into shares of common stock.

If anyone acquires shares in excess of any ownership limits, the transfer to the transferee will be void with respect to the excess shares, the excess shares will be automatically transferred to a trust for the benefit of a qualified charitable organization, and the purported transferee or owner will have no rights with respect to those excess shares.

The Company’s charter contains provisions that may delay, deter or prevent a change of control transaction. The following provisions of the Company’s charter may delay or prevent a change of control over us, even if a change of control might be beneficial to our security holders, deter tender offers that may be beneficial to our security holders, or limit security holders’ opportunity to receive a potential premium for their shares and/or units if an investor attempted to gain shares beyond the Company’s ownership limits or otherwise to effect a change of control:

•

the Company’s charter authorizes the board of directors to issue up to 30,000,000 shares of the Company’s preferred stock, including convertible preferred stock, without stockholder approval. The board of directors may establish the preferences, rights and other terms, including the right to vote and the right to convert into common stock any shares issued. The issuance of preferred stock could delay or prevent a tender offer or a change of control even if a tender offer or a change of control was in our security holder’s interest. As of December 31, 2014, 8,000,000 shares of the Company’s preferred stock were issued and outstanding, consisting of 4,000,000 shares of the Company’s Series G Preferred Stock and 4,000,000 shares of the Company’s Series H Preferred Stock; and


•	the Company’s charter states that any director, or the entire board of directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of at least two thirds of the votes of the Company’s capital stock entitled to be cast in the election of directors.

The board of directors may change investment and financing policies without stockholder or unitholder approval. Our board of directors determines our major policies, including policies and guidelines relating to our acquisition, development and redevelopment activities, leverage, financing, growth, operations, indebtedness, capitalization and distributions to our security holders. Our board of directors may amend or revise these and other policies and guidelines from time to time without stockholder or unitholder approval. Accordingly, our stockholders and unitholders will have limited control over changes in our policies and those changes could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We are not limited in our ability to incur debt. Our financing policies and objectives are determined by the board of directors. Our goal is to limit our dependence on leverage and maintain a conservative ratio of debt to total market capitalization. However, our organizational documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may incur. As of December 31, 2014, we had approximately $2.5 billion aggregate principal amount of indebtedness outstanding, which represented 28.2% of our total market capitalization. Our total debt and the liquidation value of our preferred equity as a percentage of total market capitalization was approximately 30.4% as of December 31, 2014. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Company —Capitalization” for a calculation of our market capitalization. These ratios may be increased or decreased without the consent of our unitholders or stockholders. Increases in the amount of debt outstanding would result in an increase in our debt service, which could adversely affect cash flow and our ability to pay dividends and distributions to our security holders. Higher leverage also increases the risk of default on our obligations and limits our ability to obtain additional financing in the future.

We may issue additional common units and shares of capital stock without unitholder or stockholder approval, as applicable, which may dilute unitholder or stockholder investment. The Company may issue shares of our common stock, preferred stock or other equity or debt securities without stockholder approval, including the issuance of shares to satisfy REIT dividend distribution requirements. Similarly, the Operating Partnership may offer its common or preferred units for contributions of cash or property without approval by our stockholders or the Operating Partnership’s unitholders. Existing security holders have no preemptive rights to acquire any of these securities, and any issuance of equity securities under these circumstances may dilute a unitholder's or stockholder's investment.

The market price of our common stock may be adversely affected by future offerings of debt and equity securities by us or the Operating Partnership. In the future, we may increase our capital resources by offering our debt securities and preferred stock, the Operating Partnership’s debt securities and equity securities and our or the Operating Partnership’s other borrowings. Upon our liquidation, dissolution or winding-up, holders of such debt securities, our preferred stock and Operating Partnership’s equity securities, and lenders with respect to other borrowings by us and the Operating Partnership, will be entitled to receive distributions of our available assets prior to the holders of our common stock and it is possible that, after making distributions on these other securities and borrowings, no assets would be available for distribution to holders of our common stock. In addition, the Operating Partnership’s debt and equity securities and borrowings are structurally senior to our common stock, our debt securities and borrowings are senior in right of payment to our common stock, and our outstanding preferred stock has and any preferred stock we may issue in the future may have a preference over our common stock, and all payments (including dividends, principal and interest) and liquidating distributions on such securities and borrowings could limit our ability to pay dividends or make other distributions to the holders of our common stock. Because any decision to issue securities and make borrowings in the future will depend on market conditions and other factors, some of which may be beyond our control, we cannot predict or estimate the amount, timing or nature of our or the Operating Partnership’s future offerings or borrowings. Such future offerings or borrowings may reduce the market price of our common stock.

Sales of a substantial number of shares of the Company’s securities, or the perception that this could occur, could result in decreasing the quoted trading price per share of the Company’s common stock and of the Operating Partnership’s publicly-traded notes. Management cannot predict whether future issuances of shares of the Company’s common stock, or the availability of shares for resale in the open market will result in decreasing the market price per share of the Company’s common stock. As of December 31, 2014, 86,259,684 shares of the Company’s common stock and 8,000,000 shares of the Company’s preferred stock, consisting of 4,000,000 shares of Series G Preferred Stock and 4,000,000 shares of Series H Preferred Stock, were issued and outstanding.

As of December 31, 2014, the Company had reserved for future issuance the following shares of common stock: 1,804,200 shares issuable upon the exchange, at the Company’s option, of the Operating Partnership’s common units; 681,626 shares remained available for grant under our 2006 Incentive Award Plan (see Note 12 “Shared-Based Compensation” to our consolidated financial statements included in this report); 1,248,352 shares issuable upon settlement of RSUs; 247,089 shares contingently issuable upon settlement of RSUs subject to performance conditions; and 1,008,000 shares issuable upon exercise of outstanding options. The Company has a currently effective registration statement registering 7,120,000 shares of our common stock for possible issuance under our 2006 Incentive Award Plan. The Company has a currently effective registration statement registering 1,821,503 shares of our common stock for possible issuance to and resale by certain holders of the Operating Partnership’s common units. That registration statement also registers 141,634 shares of common stock held by certain stockholders for possible resale. Consequently, if and when the shares are issued, they may be freely traded in the public markets. The Company has a currently effective registration statement registering a total of up to 9,236,100 shares of our common stock (subject to certain anti-dilution and other potential adjustments) issuable upon conversion of our Series G preferred stock and Series H preferred stock following a “Change of Control” (as defined in the terms of the Series G preferred stock and Series H preferred stock, respectively) of the Company, and, if and when issued, will generally be freely tradable in the public markets. The Company also has a currently effective registration statement registering 1,575,981 shares of our common stock issued in net settlement of the 4.25% Exchangeable Notes. Consequently, if and when the shares are issued or sold under these registration statements, they will be freely tradable in the public markets.

Risks Related to Taxes and the Company’s Status as a REIT

Loss of the Company’s REIT status would have significant adverse consequences to us and the value of the Company’s common stock. The Company currently operates in a manner that is intended to allow it to qualify as a REIT for federal income tax purposes under the Code. If the Company were to lose its REIT status, the Company would face adverse tax consequences that would substantially reduce the funds available for distribution to its stockholders for each of the years involved because:


•	the Company would not be allowed a deduction for dividends paid to its stockholders in computing the Company’s taxable income and would be subject to federal income tax at regular corporate rates;


•	the Company could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and


•	unless entitled to relief under statutory provisions, the Company could not elect to be taxed as a REIT for four taxable years following the year during which the Company was disqualified.

In addition, if the Company failed to qualify as a REIT, it would not be required to make distributions to its stockholders. As a result of all these factors, the Company’s failure to qualify as a REIT also could impair our ability to expand our business and raise capital and could adversely affect the value and quoted trading price of the Company’s common stock.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Code is greater in the case of a REIT that, like the Company, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect the Company’s ability to continue to qualify as a REIT. For example, to qualify as a REIT, at least 95% of the Company’s gross income in any year must be derived from qualifying sources. Also, the Company must make distributions to its stockholders aggregating annually at least 90% of the Company’s net taxable income (excluding any net capital gains). In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect the Company’s security holders or the Company’s ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments. Although management believes that we are organized and operate in a manner to permit the Company to continue to qualify as a REIT, we cannot provide assurances that the Company has qualified or will continue to qualify as a REIT for tax purposes. We have not requested and do not plan to request a ruling from the Internal Revenue Service (“IRS”) regarding the Company’s qualification as a REIT.

To maintain the Company’s REIT status, we may be forced to borrow funds during unfavorable market conditions. To qualify as a REIT, the Company generally must distribute to its stockholders at least 90% of the Company’s net taxable income each year (excluding any net capital gains), and the Company will be subject to regular corporate income taxes to the extent that it distributes less than 100% of its net taxable income each year. In addition, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions it pays in any calendar year are less than the sum of 85% of its ordinary income, 95% of its net capital gains, and 100% of its undistributed income from prior years. To maintain the Company’s REIT status and avoid the payment of federal income and excise taxes, the Operating Partnership may need to borrow funds and distribute or loan the proceeds to the Company so it can meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from differences in timing between the actual receipt of income and inclusion of income for federal income tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments.

If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis. From time to time we dispose of properties in transactions that are intended to qualify as Section 1031 Exchanges. It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully challenged and determined to be currently taxable. In such case, our taxable income and earnings and profits would increase. This could increase the dividend income to our stockholders by reducing any return of capital they received. In some circumstances, we may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties. As a result, we may be required to borrow funds in order to pay additional dividends or taxes and the payment of such taxes could cause us to have less cash available to distribute to our stockholders. In addition, if a Section 1031 Exchange were later to be determined to be taxable, we may be required to amend our tax returns for the applicable year in question, including any information reports we sent our stockholders. Moreover, it is possible that legislation could be enacted that could modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or not possible for us to dispose of properties on a tax deferred basis.

Dividends payable by REITs, including us, generally do not qualify for the reduced tax rates available for some dividends. “Qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates generally are subject to tax at preferential rates. Subject to limited exceptions, dividends payable by REITs are not eligible for these reduced rates and are taxable at ordinary income tax rates. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the shares of our capital stock.

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes. A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments. To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. If we fail to comply with one or more of the asset tests at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. In order to meet these tests, we may be required to forego investments we might otherwise make or to liquidate otherwise attractive investments. Thus, compliance with the REIT requirements may hinder our performance and reduce amounts available for distribution to our stockholders.

Legislative or regulatory action could adversely affect us. In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future, and any such changes may adversely impact our ability to qualify as a REIT, our tax treatment as a REIT, our ability to comply with contractual obligations or the tax treatment of our stockholders and limited partners.


ITEM 1B.	UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

General

Our stabilized portfolio of operating properties was comprised of the following office properties at December 31, 2014:



	Number of Buildings	Rentable Square Feet	Number of Tenants	Percentage Occupied
Stabilized Office Properties	111	14,096,617	526	94.4	%

As of December 31, 2014, the following properties were excluded from our stabilized portfolio:



	Number of Properties/Projects	Estimated Rentable Square Feet⁽¹⁾
Development projects under construction	6	1,732,000

_______________


(1)	Estimated rentable square feet upon completion. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations —Completed, In-Process and Future Development Pipeline” for more information.

As of December 31, 2014, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of thirteen office properties located in the state of Washington. All of our properties and development projects are 100% owned, excluding a development project owned by Redwood City Partners, LLC, a consolidated subsidiary (see Note 3 “Acquisitions” to our consolidated financial statements included in this report) and certain properties held at qualified intermediaries for potential future Section 1031 Exchanges, which have been consolidated for financial reporting purposes (see Note 2 “Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements included in this report).

We own all of our properties through the Operating Partnership and the Finance Partnership. All our properties are held in fee, except for the eleven office buildings that are held subject to long-term ground leases for the land (see Note 15 “Commitments and Contingencies” to our consolidated financial statements included in this report for additional information regarding our ground lease obligations).

In general, the office properties are leased to tenants on a full service gross, modified gross or triple net basis. Under a full service gross lease, we are obligated to pay the tenant’s proportionate share of real estate taxes, insurance and operating expenses up to the amount incurred during the tenant’s first year of occupancy (“Base Year”) or a negotiated

amount approximating the tenant’s pro-rata share of real estate taxes, insurance and operating expenses (“Expense Stop”). The tenant pays its pro-rata share of increases in expenses above the Base Year or Expense Stop. A modified gross lease is similar to a full service gross lease, except tenants are obligated to pay their proportionate share of certain operating expenses, usually electricity, directly to the service provider. In addition, some office properties, primarily in the greater Seattle region, are leased to tenants on a triple net basis, pursuant to which the tenants pay their proportionate share of real estate taxes, operating costs and utility costs.

We believe that all of our properties are well maintained and do not require significant capital improvements. As of December 31, 2014, we managed all of our properties through internal property managers.

Office Properties

The following table sets forth certain information relating to each of the stabilized office properties owned as of December 31, 2014.



Property Location		No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2014 ⁽¹⁾		Annualized Base Rent (in $000’s) ⁽²⁾		Annualized Rent Per Square Foot ⁽²⁾
Los Angeles and Ventura Counties
23925 Park Sorrento, Calabasas, California	⁽³⁾	1	2001	11,789	100.0	%	$	421	$	35.72
23975 Park Sorrento, Calabasas, California	⁽³⁾	1	2002	104,797	100.0	%	3,482		34.10
24025 Park Sorrento, Calabasas, California	⁽³⁾	1	2000	108,671	96.9	%	3,638		34.56
2829 Townsgate Road, Thousand Oaks, California	⁽³⁾	1	1990	81,067	100.0	%	2,306		28.45
2240 E. Imperial Highway, El Segundo, California	⁽⁴⁾	1	1983/ 2008	122,870	100.0	%	4,129		33.60
2250 E. Imperial Highway, El Segundo, California	⁽⁸⁾	1	1983	298,728	100.0	%	9,779		32.87
2260 E. Imperial Highway, El Segundo, California	⁽⁴⁾	1	1983/ 2012	298,728	100.0	%	10,497		35.14
909 Sepulveda Blvd., El Segundo, California	⁽³⁾	1	1972/ 2005	241,607	100.0	%	6,643		27.82
999 Sepulveda Blvd., El Segundo, California	⁽³⁾	1	1962/ 2003	128,592	92.7	%	2,861		24.43
6255 W. Sunset Blvd, Los Angeles, California	⁽⁹⁾	1	1971/ 1999	324,617	90.6	%	10,256		35.71
3750 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1989	10,457	86.1	%	109		19.95
3760 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1989	165,278	75.3	%	3,726		29.95
3780 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1989	219,822	83.4	%	4,335		24.19
3800 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	2000	192,476	98.5	%	5,792		30.55
3840 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1999	136,026	100.0	%	4,915		36.13
3880 Kilroy Airport Way, Long Beach, California	⁽¹⁰⁾	1	1987/ 2013	96,035	100.0	%	2,793		29.08
3900 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1987	126,840	90.8	%	2,801		24.36
12100 W. Olympic Blvd., Los Angeles, California	⁽³⁾	1	2003	150,167	94.4	%	5,421		38.23
12200 W. Olympic Blvd., Los Angeles, California	⁽³⁾	1	2000	150,117	97.9	%	4,438		31.48
12233 W. Olympic Blvd., Los Angeles, California	⁽¹¹⁾	1	1980/ 2011	151,029	94.5	%	2,115		39.37



Property Location		No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2014 ⁽¹⁾		Annualized Base Rent (in $000’s) ⁽²⁾		Annualized Rent Per Square Foot ⁽²⁾
12312 W. Olympic Blvd, Los Angeles, California	⁽¹²⁾	1	1950/ 1997	76,644	—	%	—		—
1633 26th Street, Santa Monica, California	⁽³⁾	1	1972/ 1997	44,915	100.0	%	1,270		28.28
2100/2110 Colorado Avenue, Santa Monica, California	⁽³⁾	3	1992/ 2009	102,864	100.0	%	4,357		42.36
3130 Wilshire Blvd., Santa Monica, California	⁽³⁾	1	1969/ 1998	88,339	95.7	%	2,762		33.59
501 Santa Monica Blvd., Santa Monica, California	⁽³⁾	1	1974	73,115	78.8	%	2,558		45.70
Subtotal/Weighted Average – Los Angeles and Ventura Counties		27		3,505,590	92.8	%	$	101,404	$	32.39
Orange County
2211 Michelson, Irvine, California	⁽³⁾	1	2007	271,556	98.7	%	$	9,736	$	36.72
Subtotal/Weighted Average – Orange County		1		271,556	98.7	%	$	9,736	$	36.72
San Diego County
12225 El Camino Real, Del Mar, California	⁽⁴⁾	1	1998	58,401	100.0	%	$	1,965	$	33.64
12235 El Camino Real, Del Mar, California	⁽⁴⁾	1	1998	54,673	82.1	%	1,648		36.71
12340 El Camino Real, Del Mar, California	⁽⁴⁾	1	2002	87,374	88.8	%	3,370		43.43
12390 El Camino Real, Del Mar, California	⁽⁴⁾	1	2000	72,332	100.0	%	3,069		42.44
12348 High Bluff Drive, Del Mar, California	⁽¹³⁾	1	1999	38,806	100.0	%	1,275		32.86
12400 High Bluff Drive, Del Mar, California	⁽⁴⁾	1	2004	209,220	100.0	%	10,670		51.00
3579 Valley Centre Drive, Del Mar, California	⁽⁴⁾	1	1999	50,677	100.0	%	1,902		37.54
3611 Valley Centre Drive, Del Mar, California	⁽⁴⁾	1	2000	130,349	96.3	%	5,202		41.43
3661 Valley Centre Drive, Del Mar, California	⁽⁴⁾	1	2001	129,782	89.7	%	3,410		36.03
3721 Valley Centre Drive, Del Mar, California	⁽⁴⁾	1	2003	114,780	79.9	%	4,155		45.28
3811 Valley Centre Drive, Del Mar, California	⁽⁵⁾	1	2000	112,067	100.0	%	5,199		46.39
7525 Torrey Santa Fe, 56 Corridor, California	⁽⁵⁾	1	2007	103,979	100.0	%	3,012		28.97
7535 Torrey Santa Fe, 56 Corridor, California	⁽⁵⁾	1	2007	130,243	100.0	%	3,693		28.35
7545 Torrey Santa Fe, 56 Corridor, California	⁽⁵⁾	1	2007	130,354	100.0	%	3,609		27.68
7555 Torrey Santa Fe, 56 Corridor, California	⁽⁵⁾	1	2007	101,236	100.0	%	3,175		31.36
12780 El Camino Real, Del Mar, California	⁽⁵⁾	1	2013	140,591	100.0	%	6,366		45.28
12790 El Camino Real, Del Mar, California	⁽⁴⁾	1	2013	78,349	100.0	%	3,196		40.79
13280 Evening Creek Drive South, I-15 Corridor, California	⁽³⁾	1	2008	41,196	86.6	%	889		24.91
13290 Evening Creek Drive South, I-15 Corridor, California	⁽⁴⁾	1	2008	61,180	100.0	%	1,453		23.75
13480 Evening Creek Drive North, I-15 Corridor, California	⁽⁴⁾	1	2008	149,817	100.0	%	7,779		51.92
13500 Evening Creek Drive North, I-15 Corridor, California	⁽⁴⁾	1	2004	147,533	100.0	%	6,286		42.61



Property Location		No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2014 ⁽¹⁾		Annualized Base Rent (in $000’s) ⁽²⁾		Annualized Rent Per Square Foot ⁽²⁾
13520 Evening Creek Drive North, I-15 Corridor, California	⁽⁴⁾	1	2004	141,128	96.6	%	4,829		36.19
2355 Northside Drive, Mission Valley, California	⁽³⁾	1	1990	53,610	87.4	%	1,197		26.42
2365 Northside Drive, Mission Valley, California	⁽³⁾	1	1990	96,436	73.3	%	2,239		31.67
2375 Northside Drive, Mission Valley, California	⁽¹⁴⁾	1	1990	51,516	91.9	%	1,398		29.54
2385 Northside Drive, Mission Valley, California	⁽³⁾	1	2008	89,023	100.0	%	2,801		31.46
2305 Historic Decatur Road, Point Loma, California	⁽¹⁵⁾	1	2009	103,900	46.3	%	1,492		31.12
4921 Directors Place, Sorrento Mesa, California	⁽⁴⁾	1	2008	56,136	84.9	%	1,242		26.05
4939 Directors Place, Sorrento Mesa, California	⁽⁵⁾	1	2002	60,662	100.0	%	2,276		37.52
4955 Directors Place, Sorrento Mesa, California	⁽⁵⁾	1	2008	76,246	100.0	%	2,881		37.79
10770 Wateridge Circle, Sorrento Mesa, California	⁽⁵⁾	1	1989	174,310	70.8	%	1,854		15.02
6260 Sequence Drive, Sorrento Mesa, California	⁽⁶⁾	1	1997	130,536	100.0	%	2,908		22.28
6290 Sequence Drive, Sorrento Mesa, California	⁽⁵⁾	1	1997	90,000	—	%	—		—
6310 Sequence Drive, Sorrento Mesa, California	⁽⁵⁾	1	2000	62,415	100.0	%	1,295		20.75
6340 Sequence Drive, Sorrento Mesa, California	⁽⁵⁾	1	1998	66,400	100.0	%	1,416		21.32
6350 Sequence Drive, Sorrento Mesa, California	⁽⁶⁾	1	1998	132,600	100.0	%	3,111		23.46
10390 Pacific Center Court, Sorrento Mesa, California	⁽⁵⁾	1	2002	68,400	100.0	%	2,771		40.52
10394 Pacific Center Court, Sorrento Mesa, California	⁽⁵⁾	1	1995	59,630	100.0	%	1,182		19.83
10398 Pacific Center Court, Sorrento Mesa, California	⁽⁵⁾	1	1995	43,645	100.0	%	698		15.99
10421 Pacific Center Court, Sorrento Mesa, California	⁽⁵⁾	1	1995/ 2002	75,899	100.0	%	1,076		14.18
10445 Pacific Center Court, Sorrento Mesa, California	⁽⁵⁾	1	1995	48,709	100.0	%	936		19.22
10455 Pacific Center Court, Sorrento Mesa, California	⁽⁷⁾	1	1995	90,000	100.0	%	1,112		12.35
5717 Pacific Center Blvd, Sorrento Mesa, California	⁽⁶⁾	1	2001/ 2005	67,995	100.0	%	1,503		22.11
4690 Executive Drive, UTC, California	⁽¹⁶⁾	1	1999	47,212	100.0	%	1,077		22.82
6200 Greenwich Drive, Governor Park, California	⁽³⁾	1	1999	73,507	—	%	—		—
6220 Greenwich Drive, Governor Park, California	⁽⁴⁾	1	1996	141,214	100.0	%	4,286		30.35
Subtotal/Weighted Average – San Diego County		46		4,244,068	90.9	%	$	126,903	$	33.12
San Francisco
4100 Bohannon Drive, Menlo Park, California	⁽⁶⁾	1	1985	47,379	100.0	%	$	1,719	$	36.27
4200 Bohannon Drive, Menlo Park, California	⁽⁶⁾	1	1987	45,451	100.0	%	1,739		38.26
4300 Bohannon Drive, Menlo Park, California	⁽⁶⁾	1	1988	63,079	100.0	%	2,485		39.39



Property Location		No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2014 ⁽¹⁾			Annualized Base Rent (in $000’s) ⁽²⁾		Annualized Rent Per Square Foot ⁽²⁾
4400 Bohannon Drive, Menlo Park, California	⁽⁶⁾	1	1988	48,146	100.0	%		1,489		32.97
4500 Bohannon Drive, Menlo Park, California	⁽⁶⁾	1	1990	63,078	100.0	%		2,041		32.35
4600 Bohannon Drive, Menlo Park, California	⁽¹⁷⁾	1	1990	48,147	100.0	%		1,172		40.92
4700 Bohannon Drive, Menlo Park, California	⁽⁶⁾	1	1989	63,078	100.0	%		2,275		36.07
331 Fairchild Drive, Mountain View, California	⁽⁵⁾	1	2013	87,147	100.0	%		4,185		48.03
680 E. Middlefield Road Mountain View, California	⁽⁵⁾	1	2014	170,090	100.0	%		7,666		45.07
690 E. Middlefield Road Mountain View, California	⁽⁵⁾	1	2014	170,823	100.0	%		7,699		45.07
303 Second Street, San Francisco, California	⁽¹⁸⁾	1	1988	740,047	97.9	%		32,410		44.94
100 First Street, San Francisco, California	⁽¹⁹⁾	1	1988	466,490	95.7	%		21,182		48.33
250 Brannan Street, San Francisco, California	⁽⁴⁾	1	1907/ 2001	95,008	100.0	%		5,413		56.98
201 Third Street, San Francisco, California	⁽³⁾	1	1983	344,551	92.2	%		13,755		44.93
301 Brannan Street, San Francisco, California	⁽⁴⁾	1	1909/ 1989	74,430	100.0	%		3,336		44.82
360 Third Street, San Francisco, California	⁽²⁰⁾	1	2013	429,996	99.2	%		20,595		48.40
1310 Chesapeake Terrace, Sunnyvale, California	⁽⁶⁾	1	1989	76,244	100.0	%		2,369		31.08
1315 Chesapeake Terrace, Sunnyvale, California	⁽⁶⁾	1	1989	55,635	100.0	%		1,424		25.60
1320-1324 Chesapeake Terrace, Sunnyvale, California	⁽⁶⁾	1	1989	79,720	52.0	%	⁽²¹⁾	1,271		30.67
1325-1327 Chesapeake Terrace, Sunnyvale, California	⁽⁶⁾	1	1989	55,383	100.0	%		1,234		22.29
505 N. Mathilda Avenue, Sunnyvale, California	⁽⁵⁾	1	2014	212,322	100.0	%		9,449		44.50
555 N. Mathilda Avenue, Sunnyvale, California	⁽⁵⁾	1	2014	212,322	100.0	%		9,449		44.50
605 N. Mathilda Avenue, Sunnyvale, California	⁽⁵⁾	1	2014	162,785	100.0	%		7,244		44.50
599 N. Mathilda Avenue, Sunnyvale, California	⁽⁵⁾	1	2000	75,810	100.0	%		2,202		29.04
Subtotal/Weighted Average – San Francisco		24		3,887,161	97.3	%		$	163,803	$	43.84
Greater Seattle
601 108th Avenue NE, Bellevue, Washington	⁽⁶⁾	1	2000	488,470	99.3	%		$	16,408	$	34.19
10900 NE 4th Street, Bellevue, Washington	⁽³⁾	1	1983	416,755	97.4	%		14,532		35.93
10220 NE Points Drive, Kirkland, Washington	⁽⁶⁾	1	1987	49,851	100.0	%		1,287		26.05
10230 NE Points Drive, Kirkland, Washington	⁽⁶⁾	1	1990	98,982	76.4	%		2,075		27.96
10210 NE Points Drive, Kirkland, Washington	⁽⁶⁾	1	1988	84,641	94.4	%		1,962		24.57
3933 Lake Washington Blvd NE, Kirkland, Washington	⁽⁶⁾	1	1993	46,450	100.0	%		1,303		28.06
837 N. 34th Street, Lake Union, Washington	⁽⁶⁾	1	2008	111,580	100.0	%		3,255		29.17



Property Location		No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2014 ⁽¹⁾		Annualized Base Rent (in $000’s) ⁽²⁾		Annualized Rent Per Square Foot ⁽²⁾
701 N. 34th Street, Lake Union, Washington	⁽⁶⁾	1	1998	138,995	100.0	%	2,719		19.56
801 N. 34th Street, Lake Union, Washington	⁽⁵⁾	1	1998	169,412	100.0	%	4,423		26.11
320 Westlake Terry Avenue North, Lake Union, Washington	⁽⁶⁾	1	2007	184,643	100.0	%	6,314		34.20
321 Terry Avenue North, Lake Union, Washington	⁽⁶⁾	1	2013	135,755	100.0	%	4,465		32.89
15050 NE 36th Street Redmond, Washington	⁽⁵⁾	1	1998	122,103	100.0	%	3,124		25.59
401 Terry Avenue North, Lake Union, Washington	⁽⁵⁾	1	2003	140,605	100.0	%	6,207		44.15
Subtotal/Weighted Average – Greater Seattle		13		2,188,242	98.1	%	$	68,074	$	31.85
TOTAL/WEIGHTED AVERAGE		111		14,096,617	94.4	%	$	469,920	$	35.87

_________________


(1)	Based on all leases at the respective properties in effect as of December 31, 2014. Includes month-to-month leases as of December 31, 2014.

(2)

Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue. Excludes month-to-month leases and vacant space as of December 31, 2014.


(3)	For these properties, the leases are written on a full service gross basis.


(4)	For these properties, the leases are written on a modified gross basis.


(5)	For these properties, the leases are written on a modified net basis.


(6)	For these properties, the leases are written on a triple net basis.


(7)	For these properties, the leases are written on a gross basis.


(8)	For this property, leases of approximately 52,000 rentable square feet are written on a full service gross basis and approximately 246,000 rentable square feet are written on a modified gross basis.


(9)	For this property, leases of approximately 5,000 rentable square feet are written on a modified gross basis, approximately 272,000 rentable square feet are written on a full service gross basis and approximately 17,000 rentable square feet is written on a triple net basis.


(10)	For this property, leases of approximately 46,000 rentable square feet are written on a modified net basis and approximately 50,000 rentable square feet are written on a full service gross basis.


(11)	For this property, leases of approximately 26,000 rentable square feet are written on a full service gross basis, approximately 12,000 rentable square feet are written on a modified gross basis and approximately 104,000 rentable square feet are written on a gross basis.


(12)	As of December 31, 2014, we had executed a lease for the entire building on a modified net basis. This lease is expected to commence in the first quarter of 2015.


(13)	For this property, leases of approximately 23,000 rentable square feet are written on a full service gross basis and approximately 16,000 rentable square feet are written on a modified gross basis.


(14)	For this property, leases of approximately 29,000 rentable square feet are written on a gross basis and approximately 19,000 rentable square feet are written on a full service gross basis.


(15)	For this property, leases of approximately 26,000 rentable square feet are written on a full service gross basis and approximately 22,000 rentable square feet are written on a gross basis.


(16)	For this property, leases of approximately 28,000 rentable square feet are written on a full service gross basis and approximately 20,000 rentable square feet are written on a triple net basis.


(17)	For this property, leases of approximately 20,000 rentable square feet are written on a gross basis and approximately 29,000 rentable square feet are written on a triple net basis.


(18)	For this property, leases of approximately 617,000 rentable square feet are written on a full service gross basis, approximately 18,000 rentable square feet are written on a triple net basis, approximately 38,000 rentable square feet are written on a gross basis and approximately 26,000 rentable square feet are written on a modified gross basis.


(19)	For this property, leases of approximately 84,000 rentable square feet are written on a gross basis, approximately 355,000 rentable square feet are written on a full service gross basis and approximately 7,000 rentable square feet is written on a triple net basis.


(20)	For this property, leases of approximately 389,000 rentable square feet are written on a modified gross basis and approximately 37,000 rentable square feet are written on a full service gross basis.


(21)	As of the date of this report this building is 100% occupied.

Completed Development and Redevelopment Projects

During the year ended December 31, 2014, we completed the following development projects, which were added to our stabilized portfolio of operating properties:



	Construction Period
Completed Development Project	Start Date	Completion / Stabilization Date	Rentable Square Feet	% Occupied
505, 555 and 605 N. Mathilda Avenue Sunnyvale, California	4Q 2012	3Q 2014	587,429	100.0	%
680 and 690 E. Middlefield Road Mountain View, California	2Q 2012	4Q 2014	340,913	100.0	%

During the year ended December 31, 2014, we also stabilized the following redevelopment project, which was added to our stabilized portfolio of operating properties:

Construction Period

Completed Redevelopment Project

Start Date

Completion
Date

Stabilization Date

Rentable Square Feet

% Occupied

360 Third Street

San Francisco, California

4Q 2011

1Q 2013

1Q 2014

429,996

99.2

In-Process and Future Development Pipeline

The following table sets forth certain information relating to our in-process development pipeline as of December 31, 2014.



	Estimated Construction Period		Estimated Stabilization Date	Estimated Rentable Square Feet	Office % Leased
In-Process Development Projects	Start Date	Completion Date	Estimated Stabilization Date	Estimated Rentable Square Feet	Office % Leased

UNDER CONSTRUCTION:
San Francisco Bay Area, California
350 Mission Street, San Francisco	4Q 2012	4Q 2015	4Q 2015	450,000	100%
333 Brannan Street, San Francisco	4Q 2013	4Q 2015	4Q 2015	185,000	100%
Crossing/900, Redwood City ⁽¹⁾	4Q 2013	4Q 2015	1Q 2017	339,000	100%

Los Angeles, California
Columbia Square Office and Historic ⁽²⁾	2Q 2013 – 3Q 2013	2Q 2015 – 1Q 2016	2Q 2015 – 1Q 2017	480,000	59%
Columbia Square Residential ⁽²⁾	3Q 2013	1Q 2016	1Q 2017	205,000	—%
San Diego, California
The Heights at Del Mar	4Q 2014	4Q 2015	4Q 2016	73,000	—%
SUBTOTAL:				1,732,000	82%

_______________________


(1)	The Company anticipates the first building, totaling approximately 226,000 square feet, to be completed in the fourth quarter of 2015 and the second building, totaling approximately 113,000 square feet, to be completed in the first quarter of 2017.

(2)

In the second quarter of 2013, the Company commenced redevelopment of Phase I comprised of the historical buildings encompassing approximately 110,000 rentable square feet. In the fourth quarter of 2013, the Company commenced development of Phase II comprised of approximately 370,000 rentable square feet for the office component and development of Phase III comprised of approximately 205,000 rentable square feet for the residential component.

The following table sets forth certain information relating to our future development pipeline as of December 31, 2014.



Location		Estimated Rentable Square Feet
FUTURE DEVELOPMENT PIPELINE:
San Francisco Bay Area, California
The Exchange on 16th ⁽¹⁾		645,000
Flower Mart ⁽²⁾		TBD
Los Angeles, California
Academy Project, Hollywood		475,000
San Diego, California
9455 Towne Centre Drive, San Diego ⁽³⁾		150,000
Carlsbad Oaks – Lots 4, 5, 7 & 8, Carlsbad		288,000
One Paseo, Del Mar ⁽⁴⁾		500,000
Pacific Corporate Center – Lot 8, Sorrento Mesa		170,000
Santa Fe Summit – Phase II and III, 56 Corridor		600,000
Sorrento Gateway – Lot 2, Sorrento Mesa		80,000

_______________________


(1)	In May 2014, the Company completed the acquisition of this undeveloped land for a total purchase price of $95.0 million (plus approximately $2.3 million in accrued liabilities, which are not included in this purchase price).


(2)	In the fourth quarter of 2014, the Company closed on two adjacent land sites in the Central SOMA district for a total purchase price of $71.0 million (plus approximately $13.4 million in transaction costs and accrued liabilities, net, which are not included in this purchase price).


(3)	The Company is planning to demolish the existing two-story 45,195 rentable square foot office building and is currently pursuing entitlements to build a new five-story 150,000 rentable square foot building.


(4)	Estimated rentable square feet reflects existing office entitlements. The Company is currently pursuing mixed-use entitlements for this project, which would increase the estimated rentable square feet.

Significant Tenants

The following table sets forth information about our 15 largest tenants based upon annualized base rental revenues, as defined below, as of December 31, 2014.



Tenant Name	Annualized Base Rental Revenue⁽¹⁾		Percentage of Total Annualized Base Rental Revenue⁽¹⁾	Lease Expiration Date
	(in thousands)
LinkedIn Corporation	$	28,344	6.0%	Various ⁽⁴⁾
DIRECTV, LLC	22,964		4.9%	September 2027
Synopsys, Inc.	15,364		3.3%	August 2030
Bridgepoint Education, Inc.	15,066		3.2%	Various ⁽⁵⁾
Intuit, Inc.	13,489		2.9%	August 2017
Delta Dental of California	10,718		2.3%	Various ⁽⁶⁾
AMN Healthcare, Inc.	9,001		1.9%	July 2027
Scan Group ⁽²⁾⁽³⁾	6,969		1.5%	Various ⁽⁷⁾
Concur Technologies	6,564		1.4%	December 2025
Group Health Cooperative	6,372		1.4%	September 2017
Neurocrine Biosciences, Inc.	6,366		1.4%	December 2019
Microsoft Corporation	6,250		1.3%	Various ⁽⁸⁾
Institute for Systems Biology	6,207		1.3%	March 2021
Fish & Richardson, P.C.	6,071		1.3%	October 2018
Pac-12 Enterprises, LLC	5,603		1.2%	Various ⁽⁹⁾
Total	$	165,348	35.3%

_______________________________________

(1)

Annualized base rental revenue includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases, and expense reimbursement revenue. Excludes month-to-month leases and vacant space as of December 31, 2014.


(2)	The Company has entered into leases with various affiliates of the tenant.


(3)	In December 2013, Scan Group renewed and expanded their lease at Kilroy Airport Center in Long Beach, California. As of December 31, 2014, revenue recognition had not commenced for the expansion premises. The annualized base rental revenue and rentable square feet

presented in this table include the projected annualized base rental revenue of approximately $1.6 million and rentable square feet of approximately 50,000 for the expansion premises.


(4)	The LinkedIn Corporation leases, which contribute $2.2 million and $26.1 million, expire in July 2019 and September 2026, respectively.


(5)	The Bridgepoint Education Inc. leases, which contribute $1.0 million, $6.3 million and $7.8 million, expire in February 2017, July 2018 and September 2018, respectively.


(6)	The Delta Dental leases, which contribute $0.4 million and $10.3 million, expire in May 2015 and May 2018, respectively.


(7)	The Scan Group leases, which contribute $0.3 million and $6.7 million, expire in June 2015 and April 2026, respectively.


(8)	The Microsoft Corporation leases, which contribute $3.1 million and $3.1 million, expire in February 2019 and December 2021, respectively.


(9)	The Pac-12 Enterprises leases, which contribute $0.1 million and $5.5 million, expire in October 2016 and July 2023, respectively.

The following pie chart sets forth the composition of our tenant base by industry and as a percentage of our annualized base rental revenue based on the North American Industry Classification System as of December 31, 2014.

Lease Expirations

The following table sets forth a summary of our lease expirations for each of the next ten years beginning with 2015, assuming that none of the tenants exercise renewal options or termination rights. See further discussion of our lease expirations under “Item 1A. Risk Factors”.

Lease Expirations



Year of Lease Expiration	# of Expiring Leases	Total Square Feet	% of Total Leased Square Feet		Annualized Base Rent (000’s)⁽¹⁾		% of Total Annualized Base Rent⁽¹⁾		Annualized Rent per Square Foot ⁽¹⁾
2015	109	1,124,952	8.7	%	$	34,948	7.5	%	$	31.07
2016	81	780,353	6.0	%	23,460		5.0	%	30.06
2017	107	1,812,670	14.0	%	60,573		12.8	%	33.42
2018	66	1,350,180	10.4	%	54,136		11.5	%	40.10
2019	80	1,486,088	11.4	%	54,028		11.5	%	36.36
2020	68	1,789,865	13.8	%	64,617		13.8	%	36.10
2021	21	617,215	4.8	%	28,770		6.1	%	46.61
2022	17	638,163	4.9	%	19,682		4.2	%	30.84
2023	12