Edgar Filing: KILROY REALTY CORP

6.30.15 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 June 30, 2015



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 July 24, 2015, 92,207,367 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, 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 June 30, 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;


◦	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.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015

TABLE OF CONTENTS



		Page
	PART I – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION	1
	Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	1
	Consolidated Statements of Operations for the Three and Six Months ended June 30, 2015 and 2014 (unaudited)	2
	Consolidated Statements of Equity for the Six Months ended June 30, 2015 and 2014 (unaudited)	3
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2015 and 2014 (unaudited)	4
Item 1.	FINANCIAL STATEMENTS OF KILROY REALTY, L.P.	6
	Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014	6
	Consolidated Statements of Operations for the Three and Six Months ended June 30, 2015 and 2014 (unaudited)	7
	Consolidated Statements of Capital for the Six Months ended June 30, 2015 and 2014 (unaudited)	8
	Consolidated Statements of Cash Flows for the Six Months ended June 30, 2015 and 2014 (unaudited)	9
	Notes to Unaudited Consolidated Financial Statements	11
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	28
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55
Item 4.	CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P.)	55
	PART II – OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	56
Item 1A.	RISK FACTORS	56
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	56
Item 3.	DEFAULTS UPON SENIOR SECURITIES	56
Item 4.	MINE SAFETY DISCLOSURES	56
Item 5.	OTHER INFORMATION	56
Item 6.	EXHIBITS	57
SIGNATURES		58

PART I – FINANCIAL INFORMATION

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

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	June 30, 2015			December 31, 2014
ASSETS	(unaudited)
REAL ESTATE ASSETS:
Land and improvements	$	839,072		$	877,633
Buildings and improvements	3,906,860			4,059,639
Undeveloped land and construction in progress (Note 2)	1,363,252			1,120,660
Total real estate assets held for investment	6,109,184			6,057,932
Accumulated depreciation and amortization	(960,816		)	(947,664		)
Total real estate assets held for investment, net ($180,488 and $211,755 of VIE, respectively, Note 1)	5,148,368			5,110,268
REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 3)	81,699			8,211
CASH AND CASH EQUIVALENTS	28,142			23,781
RESTRICTED CASH (Note 1)	7,462			75,185
MARKETABLE SECURITIES (Note 12)	13,803			11,971
CURRENT RECEIVABLES, NET (Note 5)	8,956			7,229
DEFERRED RENT RECEIVABLES, NET (Note 5)	176,493			156,416
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 4)	174,387			201,926
DEFERRED FINANCING COSTS, NET	16,324			18,374
PREPAID EXPENSES AND OTHER ASSETS, NET	31,291			20,375
TOTAL ASSETS	$	5,686,925		$	5,633,736
LIABILITIES AND EQUITY
LIABILITIES:
Secured debt (Notes 6 and 12)	$	479,368		$	546,292
Unsecured debt, net (Notes 6 and 12)	1,783,438			1,783,121
Unsecured line of credit (Notes 6 and 12)	100,000			140,000
Accounts payable, accrued expenses and other liabilities	199,005			225,830
Accrued distributions (Note 15)	33,670			32,899
Deferred revenue and acquisition-related intangible liabilities, net (Note 4)	123,819			132,239
Rents received in advance and tenant security deposits	47,434			49,363
Liabilities of real estate assets held for sale (Note 3)	7,086			56
Total liabilities	2,773,820			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, 88,405,632 and 86,259,684 shares issued and outstanding, respectively	884			863
Additional paid-in capital	2,791,226			2,635,900
Distributions in excess of earnings	(131,569		)	(162,964		)
Total stockholders’ equity	2,852,952			2,666,210
Noncontrolling Interests:
Common units of the Operating Partnership (Note 7)	54,088			51,864
Noncontrolling interest in consolidated subsidiary (Note 1)	6,065			5,862
Total noncontrolling interests	60,153			57,726
Total equity	2,913,105			2,723,936
TOTAL LIABILITIES AND EQUITY	$	5,686,925		$	5,633,736

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except share and per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
REVENUES
Rental income	$	131,450		$	113,592		$	262,382		$	223,690
Tenant reimbursements	14,174			10,534			28,599			22,053
Other property income	603			3,052			1,328			5,193
Total revenues	146,227			127,178			292,309			250,936
EXPENSES
Property expenses	26,866			25,164			51,580			49,647
Real estate taxes	12,430			10,731			25,145			21,720
Provision for bad debts	47			—			289			—
Ground leases	813			773			1,589			1,535
General and administrative expenses	12,633			11,857			25,401			22,668
Acquisition-related expenses	265			609			393			837
Depreciation and amortization	51,658			50,079			103,145			98,615
Total expenses	104,712			99,213			207,542			195,022
OTHER (EXPENSES) INCOME
Interest income and other net investment gain (Note 12)	511			419			871			596
Interest expense (Note 6)	(14,864		)	(16,020		)	(31,742		)	(33,272		)
Total other (expenses) income	(14,353		)	(15,601		)	(30,871		)	(32,676		)
INCOME FROM CONTINUING OPERATIONS BEFORE GAINS ON SALE OF REAL ESTATE	27,162			12,364			53,896			23,238
Gain on sale of land (Note 3)	—			3,490			17,268			3,490
Gains on sales of depreciable operating properties (Note 3)	31,428			—			31,428			—
INCOME FROM CONTINUING OPERATIONS	58,590			15,854			102,592			26,728
DISCONTINUED OPERATIONS (Note 1)
Income from discontinued operations	—			600			—			1,543
Gains on dispositions of discontinued operations	—			14,689			—			104,804
Total income from discontinued operations	—			15,289			—			106,347
NET INCOME	58,590			31,143			102,592			133,075
Net income attributable to noncontrolling common units of the Operating Partnership	(1,090		)	(603		)	(1,905		)	(2,690		)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION	57,500			30,540			100,687			130,385
PREFERRED DIVIDENDS	(3,312		)	(3,312		)	(6,625		)	(6,625		)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	54,188		$	27,228		$	94,062		$	123,760
Income from continuing operations available to common stockholders per common share – basic (Note 13)	$	0.61		$	0.14		$	1.07		$	0.23
Income from continuing operations available to common stockholders per common share – diluted (Note 13)	$	0.61		$	0.14		$	1.06		$	0.22
Net income available to common stockholders per share – basic (Note 13)	$	0.61		$	0.33		$	1.07		$	1.49
Net income available to common stockholders per share – diluted (Note 13)	$	0.61		$	0.32		$	1.06		$	1.46
Weighted average common shares outstanding – basic (Note 13)	88,126,187			82,277,845			87,514,878			82,201,615
Weighted average common shares outstanding – diluted (Note 13)	88,645,868			84,602,332			88,044,292			84,375,255
Dividends declared per common share	$	0.35		$	0.35		$	0.70		$	0.70

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(Unaudited; in thousands, except share and per share/unit data)



			Common Stock										Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
	Preferred Stock		Number of Shares		Common Stock		Additional Paid-in Capital			Distributions in Excess of Earnings			Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
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										130,385			130,385			2,690			133,075
Issuance of common stock			370,700		4		22,132						22,136						22,136
Issuance of share-based compensation awards							873						873						873
Noncash amortization of share-based compensation							6,384						6,384						6,384
Repurchase of common stock, stock options and restricted stock units			(42,763	)			(2,532		)				(2,532		)				(2,532		)
Settlement of restricted stock units for shares of common stock			108,529				—						—						—
Exercise of stock options			325,000		3		13,843						13,846						13,846
Exchange of common units of the Operating Partnership			1,000				28						28			(28		)	—
Adjustment for noncontrolling interest							(435		)				(435		)	435			—
Preferred dividends										(6,625		)	(6,625		)				(6,625		)
Dividends declared per common share and common unit ($0.70 per share/unit)										(58,715		)	(58,715		)	(1,262		)	(59,977		)
BALANCE AS OF JUNE 30, 2014	$	192,411	82,916,410		$	829	$	2,519,268		$	(145,851	)	$	2,566,657		$	56,683		$	2,623,340



			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			Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
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											100,687			100,687			1,905			102,592
Issuance of common stock (Note 8)				1,866,267		18		137,906						137,924						137,924
Issuance of share-based compensation awards								844						844						844
Noncash amortization of share-based compensation								9,251						9,251						9,251
Repurchase of common stock, stock options and restricted stock units				(20,752	)			(1,836		)				(1,836		)				(1,836		)
Settlement of restricted stock units for shares of common stock				37,403				—						—						—
Exercise of stock options (Note 10)				252,000		3		10,735						10,738						10,738
Exchange of common units of the Operating Partnership				11,030				316						316			(316		)	—
Adjustment for noncontrolling interest								(1,890		)				(1,890		)	1,890			—
Contribution by noncontrolling interest in consolidated subsidiary																	203			203
Preferred dividends											(6,625		)	(6,625		)				(6,625		)
Dividends declared per common share and common unit ($0.70 per share/unit)											(62,667		)	(62,667		)	(1,255		)	(63,922		)
BALANCE AS OF JUNE 30, 2015	$	192,411		88,405,632		$	884	$	2,791,226		$	(131,569	)	$	2,852,952		$	60,153		$	2,913,105

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	Six Months Ended June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	102,592		$	133,075
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	101,812			98,882
Increase in provision for bad debts	289			—
Depreciation of furniture, fixtures and equipment	1,333			1,087
Noncash amortization of share-based compensation awards	7,650			5,445
Noncash amortization of deferred financing costs and debt discounts and premiums	889			2,437
Noncash amortization of net below market rents (Note 4)	(5,029		)	(4,450		)
Gain on sale of land (Note 3)	(17,268		)	(3,490		)
Gains on sales of depreciable operating properties (Note 3)	(31,428		)	—
Gains on dispositions of discontinued operations (Note 1)	—			(104,804		)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements	(6,304		)	(5,017		)
Straight-line rents	(28,575		)	(7,793		)
Net change in other operating assets	(9,100		)	(5,049		)
Net change in other operating liabilities	(33		)	(3,461		)
Net cash provided by operating activities	116,828			106,862
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development and redevelopment properties and undeveloped land	(199,358		)	(161,802		)
Expenditures for acquisition of development properties (Note 2)	(52,134		)	(96,853		)
Expenditures for operating properties	(50,969		)	(66,923		)
Expenditures for acquisition of operating properties	—			(106,125		)
Net proceeds received from dispositions of land and operating properties (Note 3)	165,797			353,581
Increase in acquisition-related deposits	(6,800		)	—
Decrease (increase) in restricted cash (Note 1)	58,444			(43,742		)
Net cash used in investing activities	(85,020		)	(121,864		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock (Note 8)	137,924			22,136
Borrowings on unsecured line of credit	250,000			205,000
Repayments on unsecured line of credit	(290,000		)	(160,000		)
Principal payments on secured debt (Note 6)	(64,771		)	(4,859		)
Financing costs	(769		)	(3,906		)
Repurchase of common stock and restricted stock units	(1,836		)	(2,532		)
Proceeds from exercise of stock options (Note 10)	10,738			13,846
Contributions from noncontrolling interests in consolidated subsidiary	203			—
Dividends and distributions paid to common stockholders and common unitholders	(62,311		)	(58,864		)
Dividends and distributions paid to preferred stockholders and preferred unitholders	(6,625		)	(6,625		)
Net cash (used in) provided by financing activities	(27,447		)	4,196
Net increase in cash and cash equivalents	4,361			(10,806		)
Cash and cash equivalents, beginning of period	23,781			35,377
Cash and cash equivalents, end of period	$	28,142		$	24,571

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Unaudited; in thousands)



	Six Months Ended June 30,
	2015		2014
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of capitalized interest of $22,753 and $20,976 as of June 30, 2015 and 2014, respectively	$	31,846	$	31,178
NONCASH INVESTING TRANSACTIONS:
Accrual for expenditures for operating properties and development and redevelopment properties	$	65,752	$	95,462
Tenant improvements funded directly by tenants	$	13,036	$	16,037
Assumption of other liabilities in connection with development acquisitions	$	1,478	$	2,300
Release of holdback funds to third party	$	9,279	$	—
NONCASH FINANCING TRANSACTIONS:
Accrual of dividends and distributions payable to common stockholders and common unitholders	$	32,030	$	30,090
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)	$	20,224	$	17,703
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.

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

KILROY REALTY, L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands, except unit data)



	June 30, 2015			December 31, 2014
ASSETS	(unaudited)
REAL ESTATE ASSETS:
Land and improvements	$	839,072		$	877,633
Buildings and improvements	3,906,860			4,059,639
Undeveloped land and construction in progress (Note 2)	1,363,252			1,120,660
Total real estate assets held for investment	6,109,184			6,057,932
Accumulated depreciation and amortization	(960,816		)	(947,664		)
Total real estate assets held for investment, net ($180,488 and $211,755 of VIE, respectively, Note 1)	5,148,368			5,110,268
REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 3)	81,699			8,211
CASH AND CASH EQUIVALENTS	28,142			23,781
RESTRICTED CASH (Note 1)	7,462			75,185
MARKETABLE SECURITIES (Note 12)	13,803			11,971
CURRENT RECEIVABLES, NET (Note 5)	8,956			7,229
DEFERRED RENT RECEIVABLES, NET (Note 5)	176,493			156,416
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 4)	174,387			201,926
DEFERRED FINANCING COSTS, NET	16,324			18,374
PREPAID EXPENSES AND OTHER ASSETS, NET	31,291			20,375
TOTAL ASSETS	$	5,686,925		$	5,633,736
LIABILITIES AND CAPITAL
LIABILITIES:
Secured debt (Notes 6 and 12)	$	479,368		$	546,292
Unsecured debt, net (Notes 6 and 12)	1,783,438			1,783,121
Unsecured line of credit (Notes 6 and 12)	100,000			140,000
Accounts payable, accrued expenses and other liabilities	199,005			225,830
Accrued distributions (Note 15)	33,670			32,899
Deferred revenue and acquisition-related intangible liabilities, net (Note 4)	123,819			132,239
Rents received in advance and tenant security deposits	47,434			49,363
Liabilities of real estate assets held for sale (Note 3)	7,086			56
Total liabilities	2,773,820			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, 88,405,632 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	2,710,719			2,521,900
Total partners’ capital	2,903,130			2,714,311
Noncontrolling interests in consolidated subsidiaries (Note 1)	9,975			9,625
Total capital	2,913,105			2,723,936
TOTAL LIABILITIES AND CAPITAL	$	5,686,925		$	5,633,736

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except unit and per unit data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
REVENUES
Rental income	$	131,450		$	113,592		$	262,382		$	223,690
Tenant reimbursements	14,174			10,534			28,599			22,053
Other property income	603			3,052			1,328			5,193
Total revenues	146,227			127,178			292,309			250,936
EXPENSES
Property expenses	26,866			25,164			51,580			49,647
Real estate taxes	12,430			10,731			25,145			21,720
Provision for bad debts	47			—			289			—
Ground leases	813			773			1,589			1,535
General and administrative expenses	12,633			11,857			25,401			22,668
Acquisition-related expenses	265			609			393			837
Depreciation and amortization	51,658			50,079			103,145			98,615
Total expenses	104,712			99,213			207,542			195,022
OTHER (EXPENSES) INCOME
Interest income and other net investment gain (Note 12)	511			419			871			596
Interest expense (Note 6)	(14,864		)	(16,020		)	(31,742		)	(33,272		)
Total other (expenses) income	(14,353		)	(15,601		)	(30,871		)	(32,676		)
INCOME FROM CONTINUING OPERATIONS BEFORE GAINS ON SALE OF REAL ESTATE	27,162			12,364			53,896			23,238
Gain on sale of land (Note 3)	—			3,490			17,268			3,490
Gains on sales of depreciable operating properties (Note 3)	31,428			—			31,428			—
INCOME FROM CONTINUING OPERATIONS	58,590			15,854			102,592			26,728
DISCONTINUED OPERATIONS (Note 1)
Income from discontinued operations	—			600			—			1,543
Gains on dispositions of discontinued operations	—			14,689			—			104,804
Total income from discontinued operations	—			15,289			—			106,347
NET INCOME	58,590			31,143			102,592			133,075
Net income attributable to noncontrolling interests in consolidated subsidiaries	(72		)	(77		)	(147		)	(142		)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.	58,518			31,066			102,445			132,933
PREFERRED DISTRIBUTIONS	(3,312		)	(3,312		)	(6,625		)	(6,625		)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS	$	55,206		$	27,754		$	95,820		$	126,308
Income from continuing operations available to common unitholders per unit – basic (Note 14)	$	0.61		$	0.14		$	1.06		$	0.23
Income from continuing operations available to common unitholders per unit – diluted (Note 14)	$	0.61		$	0.14		$	1.06		$	0.22
Net income available to common unitholders per unit – basic (Note 14)	$	0.61		$	0.33		$	1.06		$	1.49
Net income available to common unitholders per unit – diluted (Note 14)	$	0.61		$	0.32		$	1.06		$	1.46
Weighted average common units outstanding – basic (Note 14)	89,919,357			84,082,045			89,309,718			84,005,942
Weighted average common units outstanding – diluted (Note 14)	90,439,038			86,406,532			89,839,132			86,179,582
Dividends declared per common unit	$	0.35		$	0.35		$	0.70		$	0.70

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CAPITAL

(Unaudited; in thousands, except unit and per unit data)



	Partners’ Capital							Total Partners’ Capital			Noncontrolling Interests in Consolidated Subsidiaries
	Preferred Units		Number of Common Units		Common Units			Total Partners’ Capital			Noncontrolling Interests in Consolidated Subsidiaries		Total Capital
BALANCE AS OF DECEMBER 31, 2013	$	192,411	83,959,144		$	2,315,361		$	2,507,772		$	8,388	$	2,516,160
Net income					132,933			132,933			142		133,075
Issuance of common units			370,700		22,136			22,136					22,136
Issuance of share-based compensation awards					873			873					873
Noncash amortization of share-based compensation					6,384			6,384					6,384
Repurchase of common units, stock options and restricted stock units			(42,763	)	(2,532		)	(2,532		)			(2,532		)
Settlement of restricted stock units			108,529		—			—					—
Exercise of stock options			325,000		13,846			13,846					13,846
Preferred distributions					(6,625		)	(6,625		)			(6,625		)
Distributions declared per common unit ($0.70 per unit)					(59,977		)	(59,977		)			(59,977		)
BALANCE AS OF JUNE 30, 2014	$	192,411	84,720,610		$	2,422,399		$	2,614,810		$	8,530	$	2,623,340



	Partners’ Capital							Total Partners’ Capital			Noncontrolling Interests in Consolidated Subsidiaries
	Preferred Units		Number of Common Units		Common Units			Total Partners’ Capital			Noncontrolling Interests in Consolidated Subsidiaries		Total Capital
BALANCE AS OF DECEMBER 31, 2014	$	192,411	88,063,884		$	2,521,900		$	2,714,311		$	9,625	$	2,723,936
Net income					102,445			102,445			147		102,592
Issuance of common units (Note 9)			1,866,267		137,924			137,924					137,924
Issuance of share-based compensation awards					844			844					844
Noncash amortization of share-based compensation					9,251			9,251					9,251
Repurchase of common units, stock options and restricted stock units			(20,752	)	(1,836		)	(1,836		)			(1,836		)
Settlement of restricted stock units			37,403		—			—					—
Exercise of stock options (Note 10)			252,000		10,738			10,738					10,738
Contribution by noncontrolling interest in consolidated subsidiary											203		203
Preferred distributions					(6,625		)	(6,625		)			(6,625		)
Distributions declared per common unit ($0.70 per unit)					(63,922		)	(63,922		)			(63,922		)
BALANCE AS OF JUNE 30, 2015	$	192,411	90,198,802		$	2,710,719		$	2,903,130		$	9,975	$	2,913,105

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	Six Months Ended June 30,
	2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	102,592		$	133,075
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	101,812			98,882
Increase in provision for bad debts	289			—
Depreciation of furniture, fixtures and equipment	1,333			1,087
Noncash amortization of share-based compensation awards	7,650			5,445
Noncash amortization of deferred financing costs and debt discounts and premiums	889			2,437
Noncash amortization of net below market rents (Note 4)	(5,029		)	(4,450		)
Gain on sale of land (Note 3)	(17,268		)	(3,490		)
Gains on sales of depreciable operating properties (Note 3)	(31,428		)	—
Gains on dispositions of discontinued operations (Note 1)	—			(104,804		)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements	(6,304		)	(5,017		)
Straight-line rents	(28,575		)	(7,793		)
Net change in other operating assets	(9,100		)	(5,049		)
Net change in other operating liabilities	(33		)	(3,461		)
Net cash provided by operating activities	116,828			106,862
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development and redevelopment properties and undeveloped land	(199,358		)	(161,802		)
Expenditures for acquisition of development properties (Note 2)	(52,134		)	(96,853		)
Expenditures for operating properties	(50,969		)	(66,923		)
Expenditures for acquisition of operating properties	—			(106,125		)
Net proceeds received from dispositions of land and operating properties (Note 3)	165,797			353,581
Increase in acquisition-related deposits	(6,800		)	—
Decrease (increase) in restricted cash (Note 1)	58,444			(43,742		)
Net cash used in investing activities	(85,020		)	(121,864		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock (Note 8)	137,924			22,136
Borrowings on unsecured line of credit	250,000			205,000
Repayments on unsecured line of credit	(290,000		)	(160,000		)
Principal payments on secured debt (Note 6)	(64,771		)	(4,859		)
Financing costs	(769		)	(3,906		)
Repurchase of common stock and restricted stock units	(1,836		)	(2,532		)
Proceeds from exercise of stock options (Note 10)	10,738			13,846
Contributions from noncontrolling interests in consolidated subsidiary	203			—
Dividends and distributions paid to common unitholders	(62,311		)	(58,864		)
Dividends and distributions paid to preferred unitholders	(6,625		)	(6,625		)
Net cash (used in) provided by financing activities	(27,447		)	4,196
Net increase in cash and cash equivalents	4,361			(10,806		)
Cash and cash equivalents, beginning of period	23,781			35,377
Cash and cash equivalents, end of period	$	28,142		$	24,571

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS – (Continued)

(Unaudited; in thousands)



	Six Months Ended June 30,
	2015		2014
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of capitalized interest of $22,753 and $20,976 as of June 30, 2015 and 2014, respectively	$	31,846	$	31,178
NONCASH INVESTING TRANSACTIONS:
Accrual for expenditures for operating properties and development and redevelopment properties	$	65,752	$	95,462
Tenant improvements funded directly by tenants	$	13,036	$	16,037
Assumption of other liabilities in connection with development acquisitions	$	1,478	$	2,300
Release of holdback funds to third party	$	9,279	$	—
NONCASH FINANCING TRANSACTIONS:
Accrual of dividends and distributions payable to common unitholders	$	32,030	$	30,090
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)	$	20,224	$	17,703

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended June 30, 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 June 30, 2015:



	Number of Buildings	Rentable Square Feet	Number of Tenants	Percentage Occupied
Stabilized Office Properties	101	13,050,947	518	96.7	%

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 June 30, 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 June 30, 2015.

As of June 30, 2015, the following properties were excluded from our stabilized portfolio:



	Number of Properties/Projects	Estimated Rentable Square Feet
Properties held for sale ⁽¹⁾	6	539,823
Development projects under construction ⁽²⁾	7	2,432,000

________________________


(1)	Includes six properties located in the Sorrento Mesa submarket of San Diego, California. For additional information see Note 3.


(2)	Estimated rentable square feet upon completion.

Our stabilized portfolio also excludes our near-term and future development pipeline, which as of June 30, 2015 was comprised of nine development sites, representing approximately 103 gross acres of undeveloped land. In addition, in July 2015, we acquired an additional future development opportunity in San Francisco, which was also excluded from our stabilized portfolio at June 30, 2015 (see Note 15).

As of June 30, 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

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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.

As of June 30, 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 June 30, 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 June 30, 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 $184.9 million (of which $180.5 million related to real estate held for investment on our consolidated balance sheet), approximately $13.8 million and approximately $6.1 million, respectively, as of June 30, 2015. During July 2015, the Company successfully completed the Section 1031 Exchange and the related VIE was terminated (see Note 15).

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

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

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 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 six properties held for sale at June 30, 2015 and the four properties sold during the six months ended June 30, 2015 are presented in continuing operations for the six months ended June 30, 2015. For the six months ended June 30, 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.

In February 2015, the FASB issued an update (“ASU 2015-02”) Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities. ASU 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently assessing the impact of the guidance on our consolidated financial statements or notes to our consolidated financial statements.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

2. Acquisitions

Development Project Acquisitions

During the six months ended June 30, 2015, we acquired the development opportunity listed below from an unrelated third party. The acquisition was funded with proceeds from various sources, including the Company’s unsecured revolving credit facility, 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 June 30, 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 June 30, 2015, the following operating properties were classified as held for sale:



Location	City/Submarket	Property Type	Number of Buildings	Rentable Square Feet
San Diego Properties - Tranche 2 ⁽¹⁾	Sorrento Mesa, CA	Office	6	539,823

________________________


(1)	The San Diego Properties - Tranche 2 include the following: 6260 Sequence Drive, 6290 Sequence Drive, 6310 Sequence Drive, 6340 Sequence Drive, 6350 Sequence Drive, and 4921 Directors Place.

The Company adopted ASU 2014-08 effective January 1, 2015 (see Note 1). As a result, the six properties held for sale at June 30, 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 June 30, 2015 were as follows:



Real estate assets and other assets held for sale	(in thousands)
Land and improvements	$	19,738
Buildings and improvements	94,475
Total real estate held for sale	114,213
Accumulated depreciation and amortization	(38,667		)
Total real estate held for sale, net	75,546
Current receivables, net	76
Deferred rent receivables, net	2,845
Deferred leasing costs and acquisition-related intangible assets, net	3,040
Prepaid expenses and other assets, net	192
Real estate and other assets held for sale, net	$	81,699

Liabilities and deferred revenue of real estate assets held for sale
Accounts payable, accrued expenses and other liabilities	$	5,219
Deferred revenue and acquisition-related intangible liabilities, net	1,289
Rents received in advance and tenant security deposits	578
Liabilities and deferred revenue of real estate assets held for sale	$	7,086

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Operating Property Dispositions

The following table summarizes the operating properties sold during the six months ended June 30, 2015:



Location	Property Type	Month of Disposition	Number of Buildings	Rentable Square Feet
15050 NE 36th Street, Redmond, WA	Office	April	1	122,103
San Diego Properties - Tranche 1 ⁽¹⁾	Office	April	3	384,468
Total Dispositions			4	506,571

________________________


(1)	The San Diego Properties - Tranche 1 include the following: 10770 Wateridge Circle, 6200 Greenwich Drive, and 6220 Greenwich Drive.

The four buildings encompassing 506,571 rentable square feet were sold for a gross sales price of $146.2 million, resulting in a gain on sale of $31.4 million.

Land Disposition

During the six months ended June 30, 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.

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 June 30, 2015 and December 31, 2014:



	June 30, 2015			December 31, 2014
	(in thousands)
Deferred Leasing Costs and Acquisition-Related Intangible Assets, net: ⁽¹⁾
Deferred leasing costs	$	196,967		$	216,102
Accumulated amortization	(72,992		)	(74,904		)
Deferred leasing costs, net	123,975			141,198
Above-market operating leases	14,589			20,734
Accumulated amortization	(9,455		)	(13,952		)
Above-market operating leases, net	5,134			6,782
In-place leases	80,382			97,250
Accumulated amortization	(35,569		)	(43,773		)
In-place leases, net	44,813			53,477
Below-market ground lease obligation	490			490
Accumulated amortization	(25		)	(21		)
Below-market ground lease obligation, net	465			469
Total deferred leasing costs and acquisition-related intangible assets, net	$	174,387		$	201,926
Acquisition-Related Intangible Liabilities, net: ^{(1) (2)}
Below-market operating leases	$	59,663		$	68,051
Accumulated amortization	(28,931		)	(30,620		)
Below-market operating leases, net	30,732			37,431
Above-market ground lease obligation	6,320			6,320
Accumulated amortization	(374		)	(324		)
Above-market ground lease obligation, net	5,946			5,996
Total acquisition-related intangible liabilities, net	$	36,678		$	43,427

________________________


(1)	Excludes deferred leasing costs and acquisition-related intangible assets and liabilities related to properties held for sale at June 30, 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 and six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands)
Deferred leasing costs ⁽¹⁾	$	7,093		$	6,771		$	13,914		$	13,551
Above-market operating leases ⁽²⁾	737			1,435			1,648			2,925
In-place leases ⁽¹⁾	4,416			5,785			8,637			11,921
Below-market ground lease obligation ⁽³⁾	2			—			4			—
Below-market operating leases ⁽⁴⁾	(3,838		)	(4,021		)	(6,677		)	(7,114		)
Above-market ground lease obligation ⁽⁵⁾	(25		)	(25		)	(50		)	(50		)
Total	$	8,385		$	9,945		$	17,476		$	21,233

________________________


(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.

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 June 30, 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	$	12,781	$	884	$	5,872	$	4	$	(4,273	)	$	(50	)
2016	23,907		1,503		10,452		8		(7,638		)	(101		)
2017	21,021		1,241		9,112		8		(7,016		)	(101		)