3.31.15 KRC & KRLP 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 1-12675 (Kilroy Realty Corporation)
Commission File Number: 000-54005 (Kilroy Realty, L.P.)
KILROY REALTY CORPORATION
KILROY REALTY, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
Kilroy Realty Corporation
Maryland
95-4598246
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
Kilroy Realty, L.P.
Delaware
95-4612685
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
 
(310) 481-8400
(Registrant's telephone number, including area code)
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Kilroy Realty Corporation    Yes  þ    No   o
Kilroy Realty, L. P.         Yes  þ    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Kilroy Realty Corporation     Yes  þ    No   o
Kilroy Realty, L.P.         Yes  þ    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Kilroy Realty Corporation
 
 
 
Large accelerated filer     þ
Accelerated filer     o 
Non-accelerated filer     o
Smaller reporting company     o
(Do not check if a smaller reporting company)
 
 
 
 
Kilroy Realty, L.P.
 
 
 
Large accelerated filer     o
Accelerated filer     o 
Non-accelerated filer     þ
Smaller reporting company     o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Kilroy Realty Corporation Yes  o     No   þ
Kilroy Realty, L.P. Yes  o     No   þ
As of April 24, 2015, 88,052,069 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
 


EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2015 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty, L.P., a Delaware limited partnership, and its controlled and consolidated subsidiaries.
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of March 31, 2015, 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-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated, consolidated company. The Company is a REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company generally 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, and in the Operating Partnership’s noncontrolling interest in the Finance Partnership.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
•
Combined reports better reflect how management and the analyst community view the business as a single operating unit;
•
Combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
•
Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
•
Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
•
consolidated financial statements;
•
the following notes to the consolidated financial statements:
◦
Note 8, Stockholders’ Equity of the Company;
◦
Note 9, Partners’ Capital of the Operating Partnership;

i

◦
Note 13, Net Income Available to Common Stockholders Per Share of the Company; and
◦
Note 14, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;
•
“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
◦
—Liquidity and Capital Resources of the Company;” and
◦
—Liquidity and Capital Resources of the Operating Partnership.”
This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.


ii

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2015
TABLE OF CONTENTS
 
 
 
 
Page
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
  
 
  
 
  
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
  
Item 3.
 
Item 4.
 
 
 
PART II – OTHER INFORMATION
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY CORPORATION

KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31, 2015
 
December 31, 2014
ASSETS
(unaudited)
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements
$
838,927

 
$
877,633

Buildings and improvements
3,880,883

 
4,059,639

Undeveloped land and construction in progress (Note 2)
1,265,659

 
1,120,660

Total real estate assets held for investment
5,985,469

 
6,057,932

Accumulated depreciation and amortization
(921,279
)
 
(947,664
)
Total real estate assets held for investment, net ($171,120 and $211,755 of VIE, respectively, Note 1)
5,064,190

 
5,110,268

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 3)
190,751

 
8,211

CASH AND CASH EQUIVALENTS
50,181

 
23,781

RESTRICTED CASH (Note 1)
8,287

 
75,185

MARKETABLE SECURITIES (Note 12)
13,337

 
11,971

CURRENT RECEIVABLES, NET (Note 5)
8,122

 
7,229

DEFERRED RENT RECEIVABLES, NET (Note 5)
168,581

 
156,416

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 4)
182,251

 
201,926

DEFERRED FINANCING COSTS, NET
17,346

 
18,374

PREPAID EXPENSES AND OTHER ASSETS, NET
22,434

 
20,375

TOTAL ASSETS
$
5,725,480

 
$
5,633,736

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt (Notes 6 and 12)
$
516,725

 
$
546,292

Unsecured debt, net (Notes 6 and 12)
1,783,280

 
1,783,121

Unsecured line of credit (Notes 6 and 12)
130,000

 
140,000

Accounts payable, accrued expenses and other liabilities
217,352

 
225,830

Accrued distributions (Note 15)
33,532

 
32,899

Deferred revenue and acquisition-related intangible liabilities, net (Note 4)
128,730

 
132,239

Rents received in advance and tenant security deposits
46,887

 
49,363

Liabilities of real estate assets held for sale (Note 3)
9,768

 
56

Total liabilities
2,866,274

 
2,909,800

COMMITMENTS AND CONTINGENCIES (Note 11)

 

EQUITY:
 
 
 
Stockholders’ Equity (Note 8):
 
 
 
Preferred stock, $.01 par value, 30,000,000 shares authorized:
 
 
 
6.875% Series G Cumulative Redeemable Preferred stock, $.01 par value, 4,600,000 shares authorized, 4,000,000 shares issued and outstanding ($100,000 liquidation preference)
96,155

 
96,155

6.375% Series H Cumulative Redeemable Preferred stock, $.01 par value, 4,000,000 shares authorized, issued and outstanding ($100,000 liquidation preference)
96,256

 
96,256

Common stock, $.01 par value, 150,000,000 shares authorized, 88,031,377 and 86,259,684 shares issued and outstanding, respectively
880

 
863

Additional paid-in capital
2,761,176

 
2,635,900

Distributions in excess of earnings
(154,355
)
 
(162,964
)
Total stockholders’ equity
2,800,112

 
2,666,210

Noncontrolling Interests:
 
 
 
Common units of the Operating Partnership (Note 7)
53,232

 
51,864

Noncontrolling interest in consolidated subsidiary (Note 1)
5,862

 
5,862

Total noncontrolling interests
59,094

 
57,726

Total equity
2,859,206

 
2,723,936

TOTAL LIABILITIES AND EQUITY
$
5,725,480

 
$
5,633,736


See accompanying notes to consolidated financial statements.

1

KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share data)
 
 
Three Months Ended March 31,
 
2015
 
2014
REVENUES
 
 
 
Rental income
$
130,932

 
$
110,098

Tenant reimbursements
14,425

 
11,519

Other property income
725

 
2,141

Total revenues
146,082

 
123,758

EXPENSES
 
 
 
Property expenses
24,714

 
24,483

Real estate taxes
12,715

 
10,989

Provision for bad debts
242

 
—

Ground leases
776

 
762

General and administrative expenses
12,768

 
10,811

Acquisition-related expenses
128

 
228

Depreciation and amortization
51,487

 
48,536

Total expenses
102,830

 
95,809

OTHER (EXPENSES) INCOME
 
 
 
Interest income and other net investment gains (Note 12)
360

 
177

Interest expense (Note 6)
(16,878
)
 
(17,252
)
Total other (expenses) income
(16,518
)
 
(17,075
)
INCOME FROM CONTINUING OPERATIONS BEFORE GAINS ON SALE OF REAL ESTATE
26,734

 
10,874

Gain on sale of land (Note 3)
17,268

 
—

INCOME FROM CONTINUING OPERATIONS
44,002

 
10,874

DISCONTINUED OPERATIONS (Note 1)
 
 
 
Income from discontinued operations
—

 
943

Gains on dispositions of discontinued operations
—

 
90,115

Total income from discontinued operations
—

 
91,058

NET INCOME
44,002

 
101,932

Net income attributable to noncontrolling common units of the Operating Partnership
(815
)
 
(2,087
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
43,187

 
99,845

PREFERRED DIVIDENDS
(3,313
)
 
(3,313
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
39,874

 
$
96,532

Income from continuing operations available to common stockholders per common share – basic (Note 13)
$
0.45

 
$
0.08

Income from continuing operations available to common stockholders per common share – diluted (Note 13)
$
0.45

 
$
0.08

Net income available to common stockholders per share – basic (Note 13)
$
0.45

 
$
1.17

Net income available to common stockholders per share – diluted (Note 13)
$
0.45

 
$
1.14

Weighted average common shares outstanding – basic (Note 13)
86,896,776

 
82,124,538

Weighted average common shares outstanding – diluted (Note 13)
87,434,366

 
84,140,070

Dividends declared per common share
$
0.35

 
$
0.35














See accompanying notes to consolidated financial statements.

2

KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; in thousands, except share and per share/unit data)
 
 
 
 
Common Stock
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interests
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2013
$
192,411

 
82,153,944

 
$
822

 
$
2,478,975

 
$
(210,896
)
 
$
2,461,312

 
$
54,848

 
$
2,516,160

Net income
 
 
 
 
 
 
 
 
99,845

 
99,845

 
2,087

 
101,932

Noncash amortization of share-based compensation
 
 
 
 
 
 
2,233

 
 
 
2,233

 
 
 
2,233

Repurchase of common stock, stock options and restricted stock units
 
 
(26,074
)
 
 
 
(1,517
)
 
 
 
(1,517
)
 
 
 
(1,517
)
Settlement of restricted stock units for shares of common stock
 
 
88,962

 
 
 
—

 
 
 
—

 
 
 
—

Exercise of stock options
 
 
500

 
 
 
21

 
 
 
21

 
 
 
21

Exchange of common units of the Operating Partnership
 
 
1,000

 
 
 
28

 
 
 
28

 
(28
)
 
—

Preferred dividends
 
 
 
 
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Dividends declared per common share and common unit ($0.35 per share/unit)
 
 
 
 
 
 
 
 
(29,272
)
 
(29,272
)
 
(634
)
 
(29,906
)
BALANCE AS OF MARCH 31, 2014
$
192,411

 
82,218,332

 
$
822

 
$
2,479,740

 
$
(143,636
)
 
$
2,529,337

 
$
56,273

 
$
2,585,610

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
Common Stock
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interests
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2014
$
192,411

 
86,259,684

 
$
863

 
$
2,635,900

 
$
(162,964
)
 
$
2,666,210

 
$
57,726

 
$
2,723,936

Net income
 
 
 
 
 
 
 
 
43,187

 
43,187

 
815

 
44,002

Issuance of common stock (Note 8)
 
 
1,507,393

 
15

 
113,082

 
 
 
113,097

 
 
 
113,097

Issuance of share-based compensation awards
 
 

 
 
 
413

 
 
 
413

 
 
 
413

Noncash amortization of share-based compensation
 
 
 
 
 
 
4,302

 
 
 
4,302

 
 
 
4,302

Repurchase of common stock, stock options and restricted stock units
 
 
(20,429
)
 
 
 
(1,821
)
 
 
 
(1,821
)
 
 
 
(1,821
)
Settlement of restricted stock units for shares of common stock
 
 
36,699

 
 
 
—

 
 
 
—

 
 
 
—

Exercise of stock options (Note 10)
 
 
237,000

 
2

 
10,480

 
 
 
10,482

 
 
 
10,482

Exchange of common units of the Operating Partnership
 
 
11,030

 
 
 
316

 
 
 
316

 
(316
)
 
—

Adjustment for noncontrolling interest
 
 
 
 
 
 
(1,496
)
 
 
 
(1,496
)
 
1,496

 
—

Preferred dividends
 
 
 
 
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Dividends declared per common share and common unit ($0.35 per share/unit)
 
 
 
 
 
 
 
 
(31,265
)
 
(31,265
)
 
(627
)
 
(31,892
)
BALANCE AS OF MARCH 31, 2015
$
192,411

 
88,031,377

 
$
880

 
$
2,761,176

 
$
(154,355
)
 
$
2,800,112

 
$
59,094

 
$
2,859,206













See accompanying notes to consolidated financial statements.

3

KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
44,002

 
$
101,932

Adjustments to reconcile net income to net cash provided by operating activities
(including discontinued operations):
 
 
 
Depreciation and amortization of building and improvements and leasing costs
50,843

 
48,717

Increase in provision for bad debts
242

 
—

Depreciation of furniture, fixtures and equipment
644

 
485

Noncash amortization of share-based compensation awards
3,571

 
2,502

Noncash amortization of deferred financing costs and debt discounts and premiums
454

 
1,256

Noncash amortization of net below market rents (Note 4)
(1,928
)
 
(1,734
)
Gain on sale of land (Note 3)
(17,268
)
 
—

Gains on dispositions of discontinued operations
—

 
(90,115
)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(3,013
)
 
(2,353
)
Straight-line rents
(19,692
)
 
(3,959
)
Net change in other operating assets
(8,421
)
 
(5,949
)
Net change in other operating liabilities
5,545

 
(5,701
)
Net cash provided by operating activities
54,979

 
45,081

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for development and redevelopment properties and undeveloped land
(89,810
)
 
(73,626
)
Expenditures for acquisition of development properties (Note 2)
(50,435
)
 
—

Expenditures for operating properties
(24,345
)
 
(32,016
)
Expenditures for acquisition of operating properties
—

 
(106,125
)
Net proceeds received from dispositions of land and operating properties (Note 3)
25,563

 
309,824

Decrease in acquisition-related deposits
3,099

 
—

Decrease (increase) in restricted cash (Note 1)
58,619

 
(779
)
Net cash (used in) provided by investing activities
(77,309
)
 
97,278

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common stock (Note 8)
113,097

 
—

Borrowings on unsecured line of credit
150,000

 
90,000

Repayments on unsecured line of credit
(160,000
)
 
(135,000
)
Principal payments on secured debt
(28,472
)
 
(2,414
)
Financing costs
(397
)
 
(418
)
Repurchase of common stock and restricted stock units
(1,821
)
 
(1,517
)
Proceeds from exercise of stock options (Note 10)
10,482

 
21

Dividends and distributions paid to common stockholders and common unitholders
(30,846
)
 
(29,561
)
Dividends and distributions paid to preferred stockholders and preferred unitholders
(3,313
)
 
(3,313
)
Net cash provided by (used in) financing activities
48,730

 
(82,202
)
Net increase in cash and cash equivalents
26,400

 
60,157

Cash and cash equivalents, beginning of period
23,781

 
35,377

Cash and cash equivalents, end of period
$
50,181

 
$
95,534


4

KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited; in thousands)

 
Three Months Ended March 31,
 
2015
 
2014
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of capitalized interest of $10,669 and $10,042 as of March 31, 2015 and 2014, respectively
$
19,814

 
$
14,106

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
85,656

 
$
64,709

Tenant improvements funded directly by tenants
$
231

 
$
4,470

Assumption of other liabilities in connection with development acquisitions
$
1,478

 
$
—

Release of holdback funds to third party
$
8,279

 
$
—

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of dividends and distributions payable to common stockholders and common unitholders
$
31,892

 
$
29,906

Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders
$
1,656

 
$
1,656

Fair value of share-based compensation awards at equity classification date (Note 10)
$
16,920

 
$
—

Exchange of common units of the Operating Partnership into shares of the Company’s common stock
$
316

 
$
28






































See accompanying notes to consolidated financial statements.

5




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

KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
 
March 31, 2015
 
December 31, 2014
ASSETS 
(unaudited)
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements
$
838,927

 
$
877,633

Buildings and improvements
3,880,883

 
4,059,639

Undeveloped land and construction in progress (Note 2)
1,265,659

 
1,120,660

Total real estate assets held for investment
5,985,469

 
6,057,932

Accumulated depreciation and amortization
(921,279
)
 
(947,664
)
Total real estate assets held for investment, net ($171,120 and $211,755 of VIE, respectively, Note 1)
5,064,190

 
5,110,268

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 3)
190,751

 
8,211

CASH AND CASH EQUIVALENTS
50,181

 
23,781

RESTRICTED CASH (Note 1)
8,287

 
75,185

MARKETABLE SECURITIES (Note 12)
13,337

 
11,971

CURRENT RECEIVABLES, NET (Note 5)
8,122

 
7,229

DEFERRED RENT RECEIVABLES, NET (Note 5)
168,581

 
156,416

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 4)
182,251

 
201,926

DEFERRED FINANCING COSTS, NET
17,346

 
18,374

PREPAID EXPENSES AND OTHER ASSETS, NET
22,434

 
20,375

TOTAL ASSETS
$
5,725,480

 
$
5,633,736

LIABILITIES AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt (Notes 6 and 12)
$
516,725

 
$
546,292

Unsecured debt, net (Notes 6 and 12)
1,783,280

 
1,783,121

Unsecured line of credit (Notes 6 and 12)
130,000

 
140,000

Accounts payable, accrued expenses and other liabilities
217,352

 
225,830

Accrued distributions (Note 15)
33,532

 
32,899

Deferred revenue and acquisition-related intangible liabilities, net (Note 4)
128,730

 
132,239

Rents received in advance and tenant security deposits
46,887

 
49,363

Liabilities of real estate assets held for sale (Note 3)
9,768

 
56

Total liabilities
2,866,274

 
2,909,800

COMMITMENTS AND CONTINGENCIES (Note 11)
 
 
 
CAPITAL:
 
 
 
Partners’ Capital (Note 9):
 
 
 
6.875% Series G Cumulative Redeemable Preferred units, 4,000,000 units issued and
outstanding ($100,000 liquidation preference)
96,155

 
96,155

6.375% Series H Cumulative Redeemable Preferred units, 4,000,000 units issued and
outstanding ($100,000 liquidation preference)
96,256

 
96,256

Common units, 88,031,377 and 86,259,684 held by the general partner and 1,793,170 and 1,804,200
held by common limited partners issued and outstanding, respectively
2,657,095


2,521,900

Total partners’ capital
2,849,506

 
2,714,311

Noncontrolling interests in consolidated subsidiaries (Note 1)
9,700


9,625

Total capital
2,859,206


2,723,936

TOTAL LIABILITIES AND CAPITAL
$
5,725,480


$
5,633,736





See accompanying notes to consolidated financial statements.

6

KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except unit and per unit data)

 
Three Months Ended March 31,
 
2015
 
2014
REVENUES
 
 
 
Rental income
$
130,932

 
$
110,098

Tenant reimbursements
14,425

 
11,519

Other property income
725

 
2,141

Total revenues
146,082

 
123,758

EXPENSES
 
 
 
Property expenses
24,714

 
24,483

Real estate taxes
12,715

 
10,989

Provision for bad debts
242

 
—

Ground leases
776

 
762

General and administrative expenses
12,768

 
10,811

Acquisition-related expenses
128

 
228

Depreciation and amortization
51,487

 
48,536

Total expenses
102,830

 
95,809

OTHER (EXPENSES) INCOME
 
 
 
Interest income and other net investment gains (Note 12)
360

 
177

Interest expense (Note 6)
(16,878
)
 
(17,252
)
Total other (expenses) income
(16,518
)
 
(17,075
)
INCOME FROM CONTINUING OPERATIONS BEFORE GAINS ON SALE OF REAL ESTATE
26,734

 
10,874

Gain on sale of land (Note 3)
17,268

 
—

INCOME FROM CONTINUING OPERATIONS
44,002

 
10,874

DISCONTINUED OPERATIONS (Note 1)
 
 
 
Income from discontinued operations
—

 
943

Gains on dispositions of discontinued operations
—

 
90,115

Total income from discontinued operations
—

 
91,058

NET INCOME
44,002

 
101,932

Net income attributable to noncontrolling interests in consolidated subsidiaries
(75
)
 
(65
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
43,927

 
101,867

PREFERRED DISTRIBUTIONS
(3,313
)
 
(3,313
)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS
$
40,614

 
$
98,554

Income from continuing operations available to common unitholders per unit – basic (Note 14)
$
0.45

 
$
0.08

Income from continuing operations available to common unitholders per unit – diluted (Note 14)
$
0.45

 
$
0.08

Net income available to common unitholders per unit – basic (Note 14)
$
0.45

 
$
1.17

Net income available to common unitholders per unit – diluted (Note 14)
$
0.45

 
$
1.14

Weighted average common units outstanding – basic (Note 14)
88,693,306

 
83,928,993

Weighted average common units outstanding – diluted (Note 14)
89,230,896

 
85,944,525

Dividends declared per common unit
$
0.35

 
$
0.35













See accompanying notes to consolidated financial statements.

7

KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(Unaudited; in thousands, except unit and per unit data)
 
 
Partners’ Capital
 
Total
Partners’ 
Capital
 
Noncontrolling Interests in Consolidated Subsidiaries
 
 
 
Preferred
Units
 
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2013
$
192,411

 
83,959,144

 
$
2,315,361

 
$
2,507,772

 
$
8,388

 
$
2,516,160

Net income
 
 
 
 
101,867

 
101,867

 
65

 
101,932

Noncash amortization of share-based compensation
 
 
 
 
2,233

 
2,233

 
 
 
2,233

Repurchase of common units, stock options and restricted stock units
 
 
(26,074
)
 
(1,517
)
 
(1,517
)
 
 
 
(1,517
)
Settlement of restricted stock units
 
 
88,962

 
—

 
—

 
 
 
—

Exercise of stock options
 
 
500

 
21

 
21

 
 
 
21

Preferred distributions
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Distributions declared per common unit ($0.35 per unit)
 
 
 
 
(29,906
)
 
(29,906
)
 
 
 
(29,906
)
BALANCE AS OF MARCH 31, 2014
$
192,411

 
84,022,532

 
$
2,384,746

 
$
2,577,157

 
$
8,453

 
$
2,585,610

 
 
 
 
 
 
 
 
 
 
 
 




 
Partners’ Capital
 
Total
Partners’ 
Capital
 
Noncontrolling Interests in Consolidated Subsidiaries
 
 
 
Preferred
Units
 
Number of
Common
Units
 
Common
Units
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2014
$
192,411

 
88,063,884

 
$
2,521,900

 
$
2,714,311

 
$
9,625

 
$
2,723,936

Net income
 
 
 
 
43,927

 
43,927

 
75

 
44,002

Issuance of common units (Note 9)
 
 
1,507,393

 
113,097

 
113,097

 
 
 
113,097

Issuance of share-based compensation awards
 
 
 
 
413

 
413

 
 
 
413

Noncash amortization of share-based compensation
 
 
 
 
4,302

 
4,302

 
 
 
4,302

Repurchase of common units, stock options and restricted stock units
 
 
(20,429
)
 
(1,821
)
 
(1,821
)
 
 
 
(1,821
)
Settlement of restricted stock units
 
 
36,699

 
—

 
—

 
 
 
—

Exercise of stock options (Note 10)
 
 
237,000

 
10,482

 
10,482

 
 
 
10,482

Preferred distributions
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Distributions declared per common unit ($0.35 per unit)
 
 
 
 
(31,892
)
 
(31,892
)
 
 
 
(31,892
)
BALANCE AS OF MARCH 31, 2015
$
192,411

 
89,824,547

 
$
2,657,095

 
$
2,849,506

 
$
9,700

 
$
2,859,206



















See accompanying notes to consolidated financial statements.

8

KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)

 
Three Months Ended March 31,
 
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
44,002

 
$
101,932

Adjustments to reconcile net income to net cash provided by operating activities
 (including discontinued operations):
 
 
 
Depreciation and amortization of building and improvements and leasing costs
50,843

 
48,717

Increase in provision for bad debts
242

 
—

Depreciation of furniture, fixtures and equipment
644

 
485

Noncash amortization of share-based compensation awards
3,571

 
2,502

Noncash amortization of deferred financing costs and debt discounts and premiums
454

 
1,256

Noncash amortization of net below market rents (Note 4)
(1,928
)
 
(1,734
)
Gain on sale of land (Note 3)
(17,268
)
 
—

Gains on dispositions of discontinued operations
—

 
(90,115
)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(3,013
)
 
(2,353
)
Straight-line rents
(19,692
)
 
(3,959
)
Net change in other operating assets
(8,421
)
 
(5,949
)
Net change in other operating liabilities
5,545

 
(5,701
)
Net cash provided by operating activities
54,979

 
45,081

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for development and redevelopment properties and undeveloped land
(89,810
)
 
(73,626
)
Expenditures for acquisition of development properties (Note 2)
(50,435
)
 
—

Expenditures for operating properties
(24,345
)
 
(32,016
)
Expenditures for acquisition of operating properties
—

 
(106,125
)
Net proceeds received from dispositions of land and operating properties (Note 3)
25,563

 
309,824

Decrease in acquisition-related deposits
3,099

 
—

Decrease (increase) in restricted cash (Note 1)
58,619

 
(779
)
Net cash (used in) provided by investing activities
(77,309
)
 
97,278

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common stock (Note 8)
113,097

 
—

Borrowings on unsecured line of credit
150,000

 
90,000

Repayments on unsecured line of credit
(160,000
)
 
(135,000
)
Principal payments on secured debt
(28,472
)
 
(2,414
)
Financing costs
(397
)
 
(418
)
Repurchase of common stock and restricted stock units
(1,821
)
 
(1,517
)
Proceeds from exercise of stock options (Note 10)
10,482

 
21

Dividends and distributions paid to common stockholders and common unitholders
(30,846
)
 
(29,561
)
Dividends and distributions paid to preferred stockholders and preferred unitholders
(3,313
)
 
(3,313
)
Net cash provided by (used in) financing activities
48,730

 
(82,202
)
Net increase in cash and cash equivalents
26,400

 
60,157

Cash and cash equivalents, beginning of period
23,781

 
35,377

Cash and cash equivalents, end of period
$
50,181

 
$
95,534

 

9

KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)
(Unaudited; in thousands)

 
Three Months Ended March 31,
 
2015
 
2014
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of capitalized interest of $10,669 and $10,042 as of March 31, 2015 and 2014, respectively
$
19,814

 
$
14,106

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
85,656

 
$
64,709

Tenant improvements funded directly by tenants
$
231

 
$
4,470

Assumption of other liabilities in connection with development acquisitions
$
1,478

 
$
—

Release of holdback funds to third party
$
8,279

 
$
—

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of dividends and distributions payable to common unitholders
$
31,892

 
$
29,906

Accrual of dividends and distributions payable to preferred unitholders
$
1,656

 
$
1,656

Fair value of share-based compensation awards at equity classification date (Note 10)
$
16,920

 
$
—









































See accompanying notes to consolidated financial statements.

10

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2015 and 2014

1.    Organization and Basis of Presentation

Organization

Kilroy Realty Corporation (the “Company”) is a self-administered real estate investment trust (“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 qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “KRC.”

We own our interests in all of our real estate assets through Kilroy Realty, L.P. (the “Operating Partnership”) and Kilroy Realty Finance Partnership, L.P. (the “Finance Partnership”). We generally conduct substantially all of our operations through the Operating Partnership. Unless stated otherwise or the context indicates otherwise, the terms “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” refer to Kilroy Realty Corporation and its consolidated subsidiaries and the term “Operating Partnership” refers to Kilroy Realty, L.P. and its consolidated subsidiaries. The descriptions of our business, employees, and properties apply to both the Company and the Operating Partnership.

Our stabilized portfolio of operating properties was comprised of the following office properties at March 31, 2015:

 
Number of
Buildings
 
Rentable
Square Feet
 
Number of
Tenants
 
Percentage 
Occupied
Stabilized Office Properties
101

 
13,047,720

 
515

 
96.1
%

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, real estate assets held for sale and undeveloped land. 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 March 31, 2015, 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 March 31, 2015.

As of March 31, 2015, the following properties were excluded from our stabilized portfolio:

 
Number of
Properties/Projects
 
Estimated Rentable
Square Feet
Properties held for sale (1)
10
 
1,044,844

Development projects under construction (2)
6
 
1,732,000

_______________
(1)
Includes one property located in Redmond, Washington and nine properties located in the Sorrento Mesa/UTC submarkets of San Diego, California. For additional information see Note 3.
(2)
Estimated rentable square feet upon completion.

Our stabilized portfolio also excludes our future development pipeline, which is comprised of ten potential development sites, representing approximately 106 gross acres of undeveloped land.

As of March 31, 2015, all of our stabilized portfolio properties and development projects were owned and all of our business was conducted in the state of California with the exception of twelve office properties and a recently acquired development opportunity 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 (“Redwood LLC”), a consolidated subsidiary (see Note 1) 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.

11

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



As of March 31, 2015, the Company owned an approximate 98.0% common general partnership interest in the Operating Partnership. The remaining approximate 2.0% common limited partnership interest in the Operating Partnership as of March 31, 2015 was owned by non-affiliated investors and certain of our executive officers and directors (see Note 7). Both the general and limited common partnership interests in the Operating Partnership are denominated in common units. Generally, the number of common units held by the Company is equivalent to the number of outstanding shares of the Company’s common stock, and the rights of all the common units to quarterly distributions and payments in liquidation mirror those of the Company’s common stockholders. The common limited partners have certain redemption rights as provided in the Operating Partnership’s Seventh Amended and Restated Agreement of Limited Partnership, as amended, the “Partnership Agreement” (see Note 7).

Kilroy Realty Finance, Inc., which is a wholly owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a 1.0% common general partnership interest in the Finance Partnership. The Operating Partnership owns the remaining 99.0% common limited partnership interest. Kilroy Services, LLC (“KSLLC”), which is a wholly owned subsidiary of the Operating Partnership, is the entity through which we generally conduct substantially all of our development activities. With the exception of the Operating Partnership and Redwood LLC, all of our subsidiaries are wholly owned.

Basis of Presentation

The consolidated financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating Partnership, the Finance Partnership, KSLLC, Redwood LLC and all of our wholly owned and controlled subsidiaries. The consolidated financial statements of the Operating Partnership include the consolidated financial position and results of operations of the Operating Partnership, the Finance Partnership, KSLLC, Redwood LLC and all wholly-owned and controlled subsidiaries of the Operating Partnership. All intercompany balances and transactions have been eliminated in the consolidated financial statements.

The accompanying interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The interim financial statements for the Company and the Operating Partnership should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2014.

Certain amounts in the consolidated statements of operations for prior periods have been reclassified to reflect the activity of discontinued operations disposed of prior to the Company's adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-08 (“ASU 2014-08”). Properties classified as held for sale and/or disposed of prior to January 1, 2015 are presented as discontinued operations for all periods presented.

Variable Interest Entities

At March 31, 2015, the consolidated financial statements of the Company and the Operating Partnership included two variable interest entities (“VIEs”), in which we were deemed to be the primary beneficiary. One VIE, Redwood LLC, was established in the second quarter of 2013 in connection with an undeveloped land acquisition. The other VIE was established during the first quarter of 2015 to facilitate potential future Section 1031 Exchanges to defer taxable gains on dispositions for federal and state income tax purposes. The impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests by approximately $173.0 million (of which $171.1 million related to real estate held for investment on our consolidated balance sheet), approximately $16.5 million and approximately $5.9 million, respectively, as of March 31, 2015.
As of December 31, 2014, the consolidated financial statements of the Company and the Operating Partnership included two VIEs, in which we were deemed to be the primary beneficiary. One of the VIEs was Redwood LLC and the remaining VIE was established during the fourth quarter of 2014 to facilitate potential Section 1031 Exchanges. During the three months ended March 31, 2015, the Section 1031 Exchange was successfully completed and the VIE was terminated. As a result, $59.2 million of our restricted cash balance at December 31, 2014, which related to prior period disposition proceeds that were set aside to facilitate the Section 1031 Exchange, was released from escrow. The impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests by approximately $219.6 million (of which $211.8 million related to real estate held for

12

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


investment on our consolidated balance sheet), approximately $23.4 million and approximately 5.9 million, respectively, as of December 31, 2014.

Adoption of New Accounting Pronouncements    
Effective January 1, 2015, the Company adopted FASB ASU 2014-08, which changed the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift that has (or will have) a major effect on an entity's operations and final results, such as a major line of business, a major geographical area or a major equity investment, should be presented as discontinued operations. The Company adopted and applied the new guidance on a prospective basis as required by ASU 2014-08. Therefore, real estate assets classified as held for sale and/or disposed of subsequent to January 1, 2015 that do not represent a strategic shift will be presented in continuing operations for all periods presented. Properties classified as held for sale and/or disposed of prior to January 1, 2015 will continue to be presented in discontinued operations for prior periods presented. In accordance with this guidance, the operations of the ten properties held for sale at March 31, 2015 are presented in continuing operations for the three months ended March 31, 2015. For the three months ended March 31, 2014, discontinued operations includes the income and gains on all of the properties sold in 2014.

Recently Issued Accounting Pronouncements    

On April 7, 2015 the FASB issued ASU No. 2015-03 (“ASU 2015-03”) to amend the accounting guidance for the presentation of debt issuance costs. The standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015 and retrospective application is required. Early adoption of the guidance is permitted. The Company expects to adopt the guidance effective January 1, 2016 and the guidance is not anticipated to have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
On April 1, 2015, the FASB voted to defer the effective date of ASU No. 2014-09, which outlines a single comprehensive model for entities to use in accounting for revenues arising from contracts with customers and notes that lease contracts with customers are a scope exception. Public business entities may elect to adopt the amendments as of the original effective date; however if the proposed deferral is approved, adoption is required for annual reporting periods beginning after December 15, 2017. The Company is currently assessing the impact of the guidance on our consolidated financial statements or notes to our consolidated financial statements.
On February 18, 2015 the FASB issued ASU No. 2015-02 (“ASU 2015-02”) to amend the accounting guidance for consolidation. The standard simplifies the current guidance for consolidation and reduces the number of consolidation models through the elimination of the indefinite deferral of Statement 167. Additionally, the standard places more emphasis on risk of loss when determining a controlling financial interest. ASU 2015-02 is effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015, and early adoption is permitted. The Company expects to adopt the guidance effective January 1, 2016 and the guidance is not anticipated to have a material impact on our consolidated financial statements or notes to our consolidated financial statements.



13

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


2.    Acquisitions

Development Project Acquisitions

During the three months ended March 31, 2015, we acquired the development opportunity listed below from an unrelated third party. The acquisition was funded with proceeds from the Company’s at-the-market stock offering program (see Note 8) and prior year disposition proceeds.

Project
 
Date of Acquisition
 
Type
 
Purchase Price
(in millions)
333 Dexter (1)(2)
 
February 13, 2015
 
Land
 
$
49.5

_______________
(1)
Acquisition comprised of four adjacent parcels in the South Lake Union submarket of Seattle, Washington located at 330 Dexter Avenue North, 333 Dexter Avenue North, 401 Dexter Avenue North, and 400 Aurora Avenue North.
(2)
In connection with this acquisition, we also assumed $2.4 million in accrued liabilities and acquisition costs which are not included in the purchase price above. As of March 31, 2015, the underlying assets were included as undeveloped land and construction in progress in our consolidated balance sheets.

3.    Real Estate Assets Held for Sale and Dispositions

Real Estate Assets Held for Sale

As of March 31, 2015, the following operating properties were classified as held for sale:
Location
 
City/Submarket
 
Property Type
 
Number of Buildings
 
Rentable Square Feet
15050 NE 36th Street
 
Redmond, WA
 
Office
 
1
 
122,103

San Diego Properties (1)
 
Sorrento Mesa, CA
 
Office
 
9
 
922,741

Total properties held for sale
 
 
 
 
 
10
 
1,044,844

________________________ 
(1)
The San Diego Properties include the following: 6260 Sequence Drive, 6290 Sequence Drive, 6310 Sequence Drive, 6340 Sequence Drive, 6350 Sequence Drive, 10770 Wateridge Circle, 4921 Directors Place, 6200 Greenwich Drive, and 6220 Greenwich Drive. The properties are being sold in two tranches. The Company completed the sale of the first tranche for gross proceeds of approximately $95.0 million on April 15, 2015.

The Company adopted ASU 2014-08 effective January 1, 2015 (see Note 1). As a result, the ten properties held for sale at March 31, 2015 are included in continuing operations for all periods presented.

The major classes of assets and liabilities of the properties held for sale as of March 31, 2015 were as follows:
Real estate assets and other assets held for sale
(in thousands)
Land and improvements
$
38,706

Buildings and improvements
198,125

Total real estate held for sale
236,831

Accumulated depreciation and amortization
(66,421
)
Total real estate held for sale, net
170,410

Current receivables, net
185

Deferred rent receivables, net
7,285

Deferred leasing costs and acquisition-related intangible assets, net
12,364

Prepaid expenses and other assets, net
507

Real estate and other assets held for sale, net
$
190,751

 
 
Liabilities and deferred revenue of real estate assets held for sale
 
Accounts payable, accrued expenses and other liabilities
$
7,376

Deferred revenue and acquisition-related intangible liabilities, net
1,367

Rents received in advance and tenant security deposits
1,025

Liabilities and deferred revenue of real estate assets held for sale
$
9,768


Land Disposition

During the three months ended March 31, 2015, the Company sold a land parcel located at 17150 Von Karman in Irvine, California for a gross sales price of $26.0 million, resulting in a gain on sale of $17.3 million.

14

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


4.    Deferred Leasing Costs and Acquisition-Related Intangible Assets and Liabilities, net

The following table summarizes our deferred leasing costs and acquisition-related intangible assets (acquired value of leasing costs, above-market operating leases, in-place leases and below-market ground lease obligation) and intangible liabilities (acquired value of below-market operating leases and above-market ground lease obligation) as of March 31, 2015 and December 31, 2014:

 
March 31, 2015
 
December 31, 2014
 
(in thousands)
Deferred Leasing Costs and Acquisition-Related Intangible Assets, net: (1)
 
 
 
Deferred leasing costs
$
201,548

 
$
216,102

Accumulated amortization
(74,864
)
 
(74,904
)
Deferred leasing costs, net
126,684

 
141,198

Above-market operating leases
19,194

 
20,734

Accumulated amortization
(13,323
)
 
(13,952
)
Above-market operating leases, net
5,871

 
6,782

In-place leases
93,222

 
97,250

Accumulated amortization
(43,993
)
 
(43,773
)
In-place leases, net
49,229

 
53,477

Below-market ground lease obligation
490

 
490

Accumulated amortization
(23
)
 
(21
)
Below-market ground lease obligation, net
467

 
469

Total deferred leasing costs and acquisition-related intangible assets, net
$
182,251

 
$
201,926

Acquisition-Related Intangible Liabilities, net: (1) (2)
 
 
 
Below-market operating leases
$
64,792

 
$
68,051

Accumulated amortization
(30,222
)
 
(30,620
)
Below-market operating leases, net
34,570

 
37,431

Above-market ground lease obligation
6,320

 
6,320

Accumulated amortization
(349
)
 
(324
)
Above-market ground lease obligation, net
5,971

 
5,996

Total acquisition-related intangible liabilities, net
$
40,541

 
$
43,427

_______________
(1)
Excludes deferred leasing costs and acquisition-related intangible assets and liabilities related to properties held for sale at March 31, 2015.
(2)
Included in deferred revenue and acquisition-related intangible liabilities, net in the consolidated balance sheets.


The following table sets forth amortization related to deferred leasing costs and acquisition-related intangibles, including amounts attributable to discontinued operations, for the three months ended March 31, 2015 and 2014:

 
Three Months Ended March 31,
 
2015
 
2014
 
(in thousands)
Deferred leasing costs (1)
$
6,822

 
$
6,780

Above-market operating leases (2)
911

 
1,490

In-place leases (1)
4,221

 
6,136

Below-market ground lease obligation (3)
2

 
—

Below-market operating leases (4)
(2,839
)
 
(3,093
)
Above-market ground lease obligation (5)
(25
)
 
(25
)
Total
$
9,092

 
$
11,288

_______________
(1)
The amortization of deferred leasing costs related to lease incentives is recorded to rental income and other deferred leasing costs and in-place leases is recorded to depreciation and amortization expense in the consolidated statements of operations for the periods presented.
(2)
The amortization of above-market operating leases is recorded as a decrease to rental income in the consolidated statements of operations for the periods presented.
(3)
The amortization of the below-market ground lease obligation is recorded as an increase to ground lease expense in the consolidated statements of operations for the periods presented.
(4)
The amortization of below-market operating leases is recorded as an increase to rental income in the consolidated statements of operations for the periods presented.
(5)
The amortization of the above-market ground lease obligation is recorded as a decrease to ground lease expense in the consolidated statements of operations for the periods presented.


15

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


The following table sets forth the estimated annual amortization expense related to deferred leasing costs and acquisition-related intangibles as of March 31, 2015 for future periods:

Year
Deferred Leasing Costs
 
Above-Market Operating Leases (1)
 
In-Place Leases
 
Below-Market Ground Lease Obligation (2)
 
Below-Market Operating Leases (3)
 
Above-Market Ground Lease Obligation (4)
 
(in thousands)
Remaining 2015
$
19,561

 
$
1,619

 
$
9,829

 
$
6

 
$
(7,239
)
 
$
(76
)
2016
23,763

 
1,503

 
10,741

 
8

 
(8,189
)
 
(101
)
2017
20,881

 
1,241

 
9,281

 
8

 
(7,337
)
 
(101
)
2018
17,275

 
831

 
6,373

 
8

 
(5,735
)
 
(101
)
2019
13,440

 
643

 
4,714

 
8

 
(3,597
)
 
(101
)
Thereafter
31,764

 
34

 
8,291

 
429

 
(2,473
)
 
(5,491
)
Total
$
126,684

 
$
5,871

 
$
49,229

 
$
467

 
$
(34,570
)
 
$
(5,971
)
_______________
(1)
Represents estimated annual amortization related to above-market operating leases. Amounts will be recorded as a decrease to rental income in the consolidated statements of operations.
(2)
Represents estimated annual amortization related to below-market ground lease obligations. Amounts will be recorded as an increase to ground lease expense in the consolidated statements of operations.
(3)
Represents estimated annual amortization related to below-market operating leases. Amounts will be recorded as an increase to rental income in the consolidated statements of operations.
(4)
Represents estimated annual amortization related to above-market ground lease obligations. Amounts will be recorded as a decrease to ground lease expense in the consolidated statements of operations.

5.    Receivables

Current Receivables, net

Current receivables, net is primarily comprised of contractual rents and other lease-related obligations due from tenants. The balance consisted of the following as of March 31, 2015 and December 31, 2014:

 
March 31, 2015
 
December 31, 2014
 
(in thousands)
Current receivables (1)
$
10,107

 
$
9,228

Allowance for uncollectible tenant receivables (1)
(1,985
)
 
(1,999
)
Current receivables, net (1)
$
8,122

 
$
7,229

______________
(1)
Excludes current receivables, net related to properties held for sale.

Deferred Rent Receivables, net

Deferred rent receivables, net consisted of the following as of March 31, 2015 and December 31, 2014:

 
March 31, 2015 (1)
 
December 31, 2014
 
(in thousands)
Deferred rent receivables
$
170,736

 
$
158,405

Allowance for deferred rent receivables
(2,155
)
 
(1,989
)
Deferred rent receivables, net
$
168,581

 
$
156,416

______________
(1)
Excludes deferred rent receivables, net related to properties held for sale as of March 31, 2015.


16

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


6.    Secured and Unsecured Debt of the Operating Partnership

Secured Debt

The following table sets forth the composition of our secured debt as of March 31, 2015 and December 31, 2014:

Type of Debt
Annual Stated Interest Rate (1)
 
GAAP
Effective Rate (1)(2)
 
Maturity Date
 
March 31, 2015 (3)
 
December 31, 2014 (3)
 
 
 
 
 
 
 
(in thousands)
Mortgage note payable
4.27%
 
4.27%
 
February 2018
 
$
130,164

 
$
130,767

Mortgage note payable (4)
4.48%
 
4.48%
 
July 2027
 
97,000

 
97,000

Mortgage note payable (4)
6.05%
 
3.50%
 
June 2019
 
88,411

 
89,242

Mortgage note payable
6.51%
 
6.51%
 
February 2017
 
66,383

 
66,647

Mortgage note payable (4)
5.23%
 
3.50%
 
January 2016
 
52,332

 
52,793

Mortgage note payable (4)
5.57%
 
3.25%
 
February 2016
 
39,895

 
40,258

Mortgage note payable (4)
5.09%
 
3.50%
 
August 2015
 
34,178

 
34,311

Mortgage note payable (5)
4.94%
 
4.00%
 
April 2015
 
—

 
26,285

Mortgage note payable
7.15%
 
7.15%
 
May 2017
 
5,940

 
6,568

Other
Various
 
Various
 
Various
 
2,422

 
2,421

Total
 
 
 
 
 
 
$
516,725

 
$
546,292

______________
(1)
All interest rates presented are fixed-rate interest rates.
(2)
This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of discounts/premiums, excluding debt issuance costs.
(3)
Amounts reported include the amounts of unamortized debt premiums of $9.2 million and $10.3 million as of March 31, 2015 and December 31, 2014, respectively.
(4)
The secured debt and the related properties that secure the debt are held in a special purpose entity and the properties are not available to satisfy the debts and other obligations of the Company or the Operating Partnership.
(5)
This mortgage note payable was repaid during the three months ended March 31, 2015 prior to maturity at par.

Although our mortgage loans are secured and non-recourse to the Company and the Operating Partnership, the Company provides limited customary secured debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments and environmental liabilities.

Unsecured Senior Notes

The following table summarizes the balance and significant terms of the registered unsecured senior notes issued by the Operating Partnership as of March 31, 2015 and December 31, 2014:

 
 
 
 
 
 
 
 
 
Principal Amount as of

 
Issuance date
 
Maturity date
 
Stated
coupon rate
 
Effective interest rate (1)
 
March 31,
2015
 
December 31,
2014
 
 
 
 
 
 
 
 
 
(in thousands)
4.250% Unsecured Senior Notes (2)
July 2014
 
August 2029
 
4.250%
 
4.350%
 
$
400,000

 
$
400,000

Unamortized discount
 
 
 
 
 
 
 
 
(4,273
)
 
(4,348
)
Net carrying amount
 
 
 
 
 
 
 
 
$
395,727

 
$
395,652

 
 
 
 
 
 
 
 
 
 
 
 
3.800% Unsecured Senior Notes (3)
January 2013
 
January 2023
 
3.800%
 
3.804%
 
$
300,000

 
$
300,000

Unamortized discount
 
 
 
 
 
 
 
 
(77
)
 
(79
)
Net carrying amount
 
 
 
 
 
 
 
 
$
299,923

 
$
299,921

 
4.800% Unsecured Senior Notes (3)
July 2011
 
July 2018
 
4.800%
 
4.827%
 
$
325,000

 
$
325,000

Unamortized discount
 
 
 
 
 
 
 
 
(246
)
 
(265
)
Net carrying amount
 
 
 
 
 
 
 
 
$
324,754

 
$
324,735

 
6.625% Unsecured Senior Notes (4)
May 2010
 
June 2020
 
6.625%
 
6.743%
 
$
250,000

 
$
250,000

Unamortized discount
 
 
 
 
 
 
 
 
(1,101
)
 
(1,154
)
Net carrying amount
 
 
 
 
 
 
 
 
$
248,899

 
$
248,846

 
5.000% Unsecured Senior Notes (5)
November 2010
 
November 2015
 
5.000%
 
5.014%
 
$
325,000

 
$
325,000

Unamortized discount
 
 
 
 
 
 
 
 
(23
)
 
(33
)
Net carrying amount
 
 
 
 
 
 
 
 
$
324,977

 
$
324,967

_______________________
(1)
This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of initial issuance discounts, excluding debt issuance costs.

17

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


(2)
Interest on these notes is payable semi-annually in arrears on February 15th and August 15th of each year.
(3)
Interest on these notes is payable semi-annually in arrears on January 15th and July 15th of each year.
(4)
Interest on these notes is payable semi-annually in arrears on June 1st and December 1st of each year.
(5)
Interest on these notes is payable semi-annually in arrears on May 3rd and November 3rd of each year.

Unsecured Revolving Credit Facility and Term Loan Facility

The following table summarizes the balance and terms of our unsecured revolving credit facility as of March 31, 2015 and December 31, 2014:
 
 
March 31, 2015
 
December 31, 2014
 
(in thousands)
Outstanding borrowings
$
130,000

 
$
140,000

Remaining borrowing capacity
470,000

 
460,000

Total borrowing capacity (1)
$
600,000

 
$
600,000

Interest rate (2)
1.43
%
 
1.41
%
Facility fee-annual rate (3)
0.250%
Maturity date