Edgar Filing: KILROY REALTY CORP

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended September 30, 2016



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

For the transition period from to

Commission File Number: 1-12675 (Kilroy Realty Corporation)

Commission File Number: 000-54005 (Kilroy Realty, L.P.)

KILROY REALTY CORPORATION

KILROY REALTY, L.P.

(Exact name of registrant as specified in its charter)




Kilroy Realty Corporation	Maryland	95-4598246
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Kilroy Realty, L.P.	Delaware	95-4612685
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)

(310) 481-8400
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Kilroy Realty Corporation Yes þ No o

Kilroy Realty, L.P. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Kilroy Realty Corporation Yes þ No o

Kilroy Realty, L.P. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



Kilroy Realty Corporation
Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

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

Kilroy Realty Corporation Yes o No þ

Kilroy Realty, L.P. Yes o No þ

As of October 21, 2016, 92,272,492 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended September 30, 2016 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty, L.P., a Delaware limited partnership and its controlled and consolidated subsidiaries.

The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of September 30, 2016, the Company owned an approximate 97.2% common general partnership interest in the Operating Partnership. The remaining approximate 2.8% 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 7, Noncontrolling Interests on the Company’s Consolidated Financial Statements;


◦	Note 8, Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements;


◦	Note 9, Stockholders’ Equity of the Company;


◦	Note 10, Partners’ Capital of the Operating Partnership;


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


◦	Note 16, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;


◦	Note 17, Supplemental Cash Flow Information of the Company; and


◦	Note 18, Supplemental Cash Flow Information 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 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 NINE MONTHS ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS



		Page
	PART I – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION	1
	Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	1
	Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2016 and 2015 (unaudited)	2
	Consolidated Statements of Equity for the Nine Months ended September 30, 2016 and 2015 (unaudited)	3
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015 (unaudited)	4
Item 1.	FINANCIAL STATEMENTS OF KILROY REALTY, L.P.	5
	Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015	5
	Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2016 and 2015 (unaudited)	6
	Consolidated Statements of Capital for the Nine Months ended September 30, 2016 and 2015 (unaudited)	7
	Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2015 (unaudited)	8
	Notes to Unaudited Consolidated Financial Statements	9
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	29
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	56
Item 4.	CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P.)	57
	PART II – OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	58
Item 1A.	RISK FACTORS	58
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	58
Item 3.	DEFAULTS UPON SENIOR SECURITIES	58
Item 4.	MINE SAFETY DISCLOSURES	58
Item 5.	OTHER INFORMATION	59
Item 6.	EXHIBITS	59
SIGNATURES		60

PART I – FINANCIAL INFORMATION

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

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



	September 30, 2016			December 31, 2015
ASSETS	(unaudited)
REAL ESTATE ASSETS (Note 2):
Land and improvements	$	1,017,591		$	875,794
Buildings and improvements	4,669,442			4,091,012
Undeveloped land and construction in progress	945,805			1,361,340
Total real estate assets held for investment	6,632,838			6,328,146
Accumulated depreciation and amortization	(1,095,562		)	(994,241		)
Total real estate assets held for investment, net	5,537,276			5,333,905
REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 3)	9,440			117,666
CASH AND CASH EQUIVALENTS (Notes 3 and 7)	250,523			56,508
RESTRICTED CASH (Notes 1 and 3)	57,501			696
MARKETABLE SECURITIES (Note 13)	14,121			12,882
CURRENT RECEIVABLES, NET (Note 5)	9,709			11,153
DEFERRED RENT RECEIVABLES, NET (Note 5)	212,204			189,704
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 4)	180,613			176,683
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 1)	60,752			27,233
TOTAL ASSETS	$	6,332,139		$	5,926,430
LIABILITIES AND EQUITY
LIABILITIES:
Secured debt, net (Notes 1, 6 and 13)	$	370,666		$	380,835
Unsecured debt, net (Notes 1, 6 and 13)	1,846,672			1,844,634
Accounts payable, accrued expenses and other liabilities	252,122			246,323
Accrued dividends and distributions (Note 19)	37,749			34,992
Deferred revenue and acquisition-related intangible liabilities, net (Note 4)	134,436			128,156
Rents received in advance and tenant security deposits	48,518			49,361
Liabilities and deferred revenue of real estate assets held for sale (Note 3)	74			7,543
Total liabilities	2,690,237			2,691,844
COMMITMENTS AND CONTINGENCIES (Note 12)
EQUITY:
Stockholders’ Equity (Note 9):
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, 92,272,492 and 92,258,690 shares issued and outstanding, respectively	923			923
Additional paid-in capital	3,191,718			3,047,894
Retained earnings/(distributions in excess of earnings)	78,107			(70,262		)
Total stockholders’ equity	3,463,159			3,170,966
Noncontrolling Interests:
Common units of the Operating Partnership (Note 7)	93,270			57,100
Noncontrolling interests in consolidated property partnerships (Notes 1 and 7)	85,473			6,520
Total noncontrolling interests	178,743			63,620
Total equity	3,641,902			3,234,586
TOTAL LIABILITIES AND EQUITY	$	6,332,139		$	5,926,430

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
REVENUES
Rental income	$	146,539		$	129,510		$	423,947		$	391,892
Tenant reimbursements	16,406			11,681			43,948			40,280
Other property income (Note 14)	5,403			362			6,032			1,690
Total revenues	168,348			141,553			473,927			433,862
EXPENSES
Property expenses	30,050			26,684			85,236			78,264
Real estate taxes	14,501			12,087			39,378			37,232
Provision for bad debts	—			—			—			289
Ground leases	909			862			2,506			2,451
General and administrative expenses	13,533			10,799			40,949			36,200
Acquisition-related expenses	188			4			964			397
Depreciation and amortization	56,666			49,422			160,452			152,567
Total expenses	115,847			99,858			329,485			307,400
OTHER (EXPENSES) INCOME
Interest income and other net investment gains (losses) (Note 13)	538			(694		)	1,120			177
Interest expense (Note 6)	(14,976		)	(12,819		)	(41,189		)	(44,561		)
Total other (expenses) income	(14,438		)	(13,513		)	(40,069		)	(44,384		)
INCOME FROM OPERATIONS BEFORE GAINS (LOSSES) ON SALES OF REAL ESTATE	38,063			28,182			104,373			82,078
Net (loss) gain on sales of land (Note 3)	—			—			(295		)	17,268
Gains on sales of depreciable operating properties (Note 3)	18,312			78,522			164,302			109,950
NET INCOME	56,375			106,704			268,380			209,296
Net income attributable to noncontrolling common units of the Operating Partnership (Note 7)	(1,453		)	(1,945		)	(5,892		)	(3,850		)
Net income attributable to noncontrolling interests in consolidated property partnerships (Note 7)	(1,027		)	—			(1,438		)	—
Total income attributable to noncontrolling interests	(2,480		)	(1,945		)	(7,330		)	(3,850		)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION	53,895			104,759			261,050			205,446
PREFERRED DIVIDENDS	(3,313		)	(3,313		)	(9,938		)	(9,938		)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	50,582		$	101,446		$	251,112		$	195,508
Net income available to common stockholders per share – basic (Note 15)	$	0.54		$	1.10		$	2.71		$	2.18
Net income available to common stockholders per share – diluted (Note 15)	$	0.54		$	1.09		$	2.69		$	2.17
Weighted average common shares outstanding – basic (Note 15)	92,227,016			92,150,341			92,220,522			89,077,012
Weighted average common shares outstanding – diluted (Note 15)	92,920,406			92,639,065			92,831,538			89,593,261
Dividends declared per common share	$	0.375		$	0.350		$	1.100		$	1.050

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
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										205,446			205,446			3,850			209,296
Issuance of common stock			5,640,033		56		387,453						387,509						387,509
Issuance of share-based compensation awards							1,268						1,268						1,268
Non-cash amortization of share-based compensation							13,621						13,621						13,621
Exercise of stock options			265,000		3		11,289						11,292						11,292
Repurchase of common stock, stock options and restricted stock units			(39,317	)			(3,121		)				(3,121		)				(3,121		)
Settlement of restricted stock units for shares of common stock			78,937				—						—						—
Exchange of common units of the Operating Partnership			16,030				467						467			(467		)	—
Adjustment for noncontrolling interest							(4,547		)				(4,547		)	4,547			—
Contribution from noncontrolling interest in consolidated property partnership																474			474
Preferred dividends										(9,938		)	(9,938		)				(9,938		)
Dividends declared per common share and common unit ($1.05 per share/unit)										(95,394		)	(95,394		)	(1,881		)	(97,275		)
BALANCE AS OF SEPTEMBER 30, 2015	$	192,411	92,220,367		$	922	$	3,042,330		$	(62,850	)	$	3,172,813		$	64,249		$	3,237,062



			Common Stock												Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
	Preferred Stock			Number of Shares		Common Stock			Additional Paid-in Capital			Retained Earnings /(Distributions in Excess of Earnings)
BALANCE AS OF DECEMBER 31, 2015	$	192,411		92,258,690		$	923		$	3,047,894		$	(70,262	)	$	3,170,966		$	63,620		$	3,234,586
Net income												261,050			261,050			7,330			268,380
Issuance of share-based compensation awards									1,339						1,339						1,339
Non-cash amortization of share-based compensation									19,303						19,303						19,303
Exercise of stock options				51,000					2,173						2,173						2,173
Repurchase of common stock, stock options and restricted stock units				(110,528	)	(1		)	(6,873		)				(6,874		)				(6,874		)
Settlement of restricted stock units for shares of common stock				72,130		1			(1		)				—						—
Issuance of common units in connection with acquisition (Note 2)																		48,033			48,033
Exchange of common units of the Operating Partnership				1,200					39						39			(39		)	—
Initial contribution from noncontrolling interest in consolidated property partnership, net of transaction costs (Note 7)									113,022						113,022			78,654			191,676
Distribution to noncontrolling interests in consolidated property partnerships																		(1,139		)	(1,139		)
Adjustment for noncontrolling interest									14,822						14,822			(14,822		)	—
Preferred dividends												(9,938		)	(9,938		)				(9,938		)
Dividends declared per common share and common unit ($1.10 per share/unit)												(102,743		)	(102,743		)	(2,894		)	(105,637		)
BALANCE AS OF SEPTEMBER 30, 2016	$	192,411		92,272,492		$	923		$	3,191,718		$	78,107		$	3,463,159		$	178,743		$	3,641,902

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	Nine Months Ended September 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	268,380		$	209,296
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate assets and leasing costs	157,587			150,531
Depreciation of non-real estate furniture, fixtures and equipment	2,865			2,036
Increase in provision for bad debts	—			289
Non-cash amortization of share-based compensation awards	15,263			11,272
Non-cash amortization of deferred financing costs and debt discounts and premiums	2,020			1,412
Non-cash amortization of net below market rents (Note 4)	(5,128		)	(6,769		)
Gains on sales of depreciable operating properties (Note 3)	(164,302		)	(109,950		)
Loss (gain) on sales of land (Note 3)	295			(17,268		)
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements	(9,700		)	(9,957		)
Straight-line rents	(22,856		)	(35,530		)
Net change in other operating assets	(7,263		)	(9,356		)
Net change in other operating liabilities	15,444			16,606
Net cash provided by operating activities	252,605			202,612
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development properties and undeveloped land	(222,719		)	(311,916		)
Expenditures for acquisition of undeveloped land (Note 2)	(33,513		)	(130,609		)
Expenditures for acquisition of operating properties (Note 2)	(55,415		)	—
Expenditures for operating properties and other capital assets	(81,688		)	(71,756		)
Net proceeds received from dispositions (Note 3)	325,031			319,639
(Increase) decrease in restricted cash (Note 3)	(56,805		)	57,776
Decrease in acquisition-related deposits	1,902			3,200
Increase in note receivable	(1,000		)	(3,000		)
Net cash used in investing activities	(124,207		)	(136,666		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on unsecured revolving credit facility	305,000			250,000
Repayments on unsecured revolving credit facility	(305,000		)	(390,000		)
Principal payments on secured debt	(7,254		)	(67,335		)
Net proceeds from the issuance of unsecured debt (Note 6)	—			397,776
Financing costs	(1,485		)	(4,534		)
Net proceeds from issuance of common stock	—			387,509
Repurchase of common stock and restricted stock units	(6,874		)	(3,121		)
Proceeds from exercise of stock options	2,173			11,292
Contributions from noncontrolling interests in consolidated property partnerships (Note 7)	191,676			474
Distributions to noncontrolling interests in consolidated property partnerships	(1,139		)	—
Dividends and distributions paid to common stockholders and common unitholders	(101,542		)	(93,910		)
Dividends and distributions paid to preferred stockholders and preferred unitholders	(9,938		)	(9,938		)
Net cash provided by financing activities	65,617			478,213
Net increase in cash and cash equivalents	194,015			544,159
Cash and cash equivalents, beginning of period	56,508			23,781
Cash and cash equivalents, end of period	$	250,523		$	567,940

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)



	September 30, 2016			December 31, 2015
ASSETS	(unaudited)
REAL ESTATE ASSETS (Note 2):
Land and improvements	$	1,017,591		$	875,794
Buildings and improvements	4,669,442			4,091,012
Undeveloped land and construction in progress	945,805			1,361,340
Total real estate assets held for investment	6,632,838			6,328,146
Accumulated depreciation and amortization	(1,095,562		)	(994,241		)
Total real estate assets held for investment, net	5,537,276			5,333,905
REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 3)	9,440			117,666
CASH AND CASH EQUIVALENTS (Notes 3 and 8)	250,523			56,508
RESTRICTED CASH (Notes 1 and 3)	57,501			696
MARKETABLE SECURITIES (Note 13)	14,121			12,882
CURRENT RECEIVABLES, NET (Note 5)	9,709			11,153
DEFERRED RENT RECEIVABLES, NET (Note 5)	212,204			189,704
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 4)	180,613			176,683
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 1)	60,752			27,233
TOTAL ASSETS	$	6,332,139		$	5,926,430
LIABILITIES AND CAPITAL
LIABILITIES:
Secured debt, net (Notes 1, 6 and 13)	$	370,666		$	380,835
Unsecured debt, net (Notes 1, 6 and 13)	1,846,672			1,844,634
Accounts payable, accrued expenses and other liabilities	252,122			246,323
Accrued distributions (Note 19)	37,749			34,992
Deferred revenue and acquisition-related intangible liabilities, net (Note 4)	134,436			128,156
Rents received in advance and tenant security deposits	48,518			49,361
Liabilities and deferred revenue of real estate assets held for sale (Note 3)	74			7,543
Total liabilities	2,690,237			2,691,844
COMMITMENTS AND CONTINGENCIES (Note 12)
CAPITAL:
Partners’ Capital (Note 10):
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, 92,272,492 and 92,258,690 held by the general partner and 2,631,276 and 1,764,775 held by common limited partners issued and outstanding, respectively	3,359,707			3,031,609
Total partners’ capital	3,552,118			3,224,020
Noncontrolling interests in consolidated property partnerships and subsidiaries (Notes 1 and 8)	89,784			10,566
Total capital	3,641,902			3,234,586
TOTAL LIABILITIES AND CAPITAL	$	6,332,139		$	5,926,430

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
REVENUES
Rental income	$	146,539		$	129,510		$	423,947		$	391,892
Tenant reimbursements	16,406			11,681			43,948			40,280
Other property income (Note 14)	5,403			362			6,032			1,690
Total revenues	168,348			141,553			473,927			433,862
EXPENSES
Property expenses	30,050			26,684			85,236			78,264
Real estate taxes	14,501			12,087			39,378			37,232
Provision for bad debts	—			—			—			289
Ground leases	909			862			2,506			2,451
General and administrative expenses	13,533			10,799			40,949			36,200
Acquisition-related expenses	188			4			964			397
Depreciation and amortization	56,666			49,422			160,452			152,567
Total expenses	115,847			99,858			329,485			307,400
OTHER (EXPENSES) INCOME
Interest income and other net investment gains (losses) (Note 13)	538			(694		)	1,120			177
Interest expense (Note 6)	(14,976		)	(12,819		)	(41,189		)	(44,561		)
Total other (expenses) income	(14,438		)	(13,513		)	(40,069		)	(44,384		)
INCOME FROM OPERATIONS BEFORE GAINS (LOSSES) ON SALES OF REAL ESTATE	38,063			28,182			104,373			82,078
Net (loss) gain on sales of land (Note 3)	—			—			(295		)	17,268
Gains on sales of depreciable operating properties (Note 3)	18,312			78,522			164,302			109,950
NET INCOME	56,375			106,704			268,380			209,296
Net income attributable to noncontrolling interests in consolidated property partnerships and subsidiaries (Notes 1 and 8)	(1,121		)	(64		)	(1,703		)	(211		)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.	55,254			106,640			266,677			209,085
PREFERRED DISTRIBUTIONS	(3,313		)	(3,313		)	(9,938		)	(9,938		)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS	$	51,941		$	103,327		$	256,739		$	199,147
Net income available to common unitholders per unit – basic (Note 16)	$	0.54		$	1.10		$	2.70		$	2.18
Net income available to common unitholders per unit – diluted (Note 16)	$	0.54		$	1.09		$	2.68		$	2.17
Weighted average common units outstanding – basic (Note 16)	94,858,292			93,938,783			94,630,183			90,869,696
Weighted average common units outstanding – diluted (Note 16)	95,551,682			94,427,507			95,241,199			91,385,945
Dividends declared per common unit	$	0.375		$	0.350		$	1.100		$	1.050

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 Property Partnerships and Subsidiaries
	Preferred Units		Number of Common Units		Common Units			Total Partners’ Capital					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					209,085			209,085			211		209,296
Issuance of common units			5,640,033		387,509			387,509					387,509
Issuance of share-based compensation awards					1,268			1,268					1,268
Non-cash amortization of share-based compensation					13,621			13,621					13,621
Exercise of stock options			265,000		11,292			11,292					11,292
Repurchase of common units, stock options and restricted stock units			(39,317	)	(3,121		)	(3,121		)			(3,121		)
Settlement of restricted stock units			78,937		—			—					—
Contribution from noncontrolling interest in consolidated property partnership											474		474
Preferred distributions					(9,938		)	(9,938		)			(9,938		)
Distributions declared per common unit ($1.05 per unit)					(97,275		)	(97,275		)			(97,275		)
BALANCE AS OF SEPTEMBER 30, 2015	$	192,411	94,008,537		$	3,034,341		$	3,226,752		$	10,310	$	3,237,062



	Partners’ Capital							Total Partners’ Capital			Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
	Preferred Units		Number of Common Units		Common Units			Total Partners’ Capital						Total Capital
BALANCE AS OF DECEMBER 31, 2015	$	192,411	94,023,465		$	3,031,609		$	3,224,020		$	10,566		$	3,234,586
Net income					266,677			266,677			1,703			268,380
Issuance of common units in connection with acquisition (Note 2)			867,701		48,033			48,033						48,033
Issuance of share-based compensation awards					1,339			1,339						1,339
Non-cash amortization of share-based compensation					19,303			19,303						19,303
Exercise of stock options			51,000		2,173			2,173						2,173
Repurchase of common units, stock options and restricted stock units			(110,528	)	(6,874		)	(6,874		)				(6,874		)
Settlement of restricted stock units			72,130		—			—						—
Initial contribution from noncontrolling interest in consolidated property partnership, net of transaction costs (Note 8)					113,022			113,022			78,654			191,676
Distribution to noncontrolling interests in consolidated property partnerships											(1,139		)	(1,139		)
Preferred distributions					(9,938		)	(9,938		)				(9,938		)
Distributions declared per common unit ($1.10 per unit)					(105,637		)	(105,637		)				(105,637		)
BALANCE AS OF SEPTEMBER 30, 2016	$	192,411	94,903,768		$	3,359,707		$	3,552,118		$	89,784		$	3,641,902

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)



	Nine Months Ended September 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	268,380		$	209,296
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate assets and leasing costs	157,587			150,531
Depreciation of non-real estate furniture, fixtures and equipment	2,865			2,036
Increase in provision for bad debts	—			289
Non-cash amortization of share-based compensation awards	15,263			11,272
Non-cash amortization of deferred financing costs and debt discounts and premiums	2,020			1,412
Non-cash amortization of net below market rents (Note 4)	(5,128		)	(6,769		)
Gains on sales of depreciable operating properties (Note 3)	(164,302		)	(109,950		)
Loss (gain) on sales of land (Note 3)	295			(17,268		)
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements	(9,700		)	(9,957		)
Straight-line rents	(22,856		)	(35,530		)
Net change in other operating assets	(7,263		)	(9,356		)
Net change in other operating liabilities	15,444			16,606
Net cash provided by operating activities	252,605			202,612
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development properties and undeveloped land	(222,719		)	(311,916		)
Expenditures for acquisition of undeveloped land (Note 2)	(33,513		)	(130,609		)
Expenditures for acquisition of operating properties (Note 2)	(55,415		)	—
Expenditures for operating properties and other capital assets	(81,688		)	(71,756		)
Net proceeds received from dispositions (Note 3)	325,031			319,639
(Increase) decrease in restricted cash (Note 3)	(56,805		)	57,776
Decrease in acquisition-related deposits	1,902			3,200
Increase in note receivable	(1,000		)	(3,000		)
Net cash used in investing activities	(124,207		)	(136,666		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on unsecured revolving credit facility	305,000			250,000
Repayments on unsecured revolving credit facility	(305,000		)	(390,000		)
Principal payments on secured debt	(7,254		)	(67,335		)
Net proceeds from the issuance of unsecured debt (Note 6)	—			397,776
Financing costs	(1,485		)	(4,534		)
Net proceeds from issuance of common stock	—			387,509
Repurchase of common stock and restricted stock units	(6,874		)	(3,121		)
Proceeds from exercise of stock options	2,173			11,292
Contributions from noncontrolling interests in consolidated property partnerships (Note 8)	191,676			474
Distributions to noncontrolling interests in consolidated property partnerships	(1,139		)	—
Dividends and distributions paid to common stockholders and common unitholders	(101,542		)	(93,910		)
Dividends and distributions paid to preferred stockholders and preferred unitholders	(9,938		)	(9,938		)
Net cash provided by financing activities	65,617			478,213
Net increase in cash and cash equivalents	194,015			544,159
Cash and cash equivalents, beginning of period	56,508			23,781
Cash and cash equivalents, end of period	$	250,523		$	567,940

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2016 and 2015

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 September 30, 2016:



	Number of Buildings	Rentable Square Feet	Number of Tenants	Percentage Occupied
Stabilized Office Properties	101	13,605,597	530	96.6	%

Our stabilized office 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, undeveloped land and our recently completed residential property. 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. We define “lease-up” properties as office properties we recently developed or redeveloped that have not yet reached 95% occupancy and are within one year following cessation of major construction activities.

During the nine months ended September 30, 2016, we stabilized two development projects consisting of 455,340 rentable square feet and 185,602 rentable square feet in San Francisco, California, which were included in our stabilized office portfolio as of September 30, 2016. As of September 30, 2016, the following properties, in addition to our recently completed residential property, were excluded from our stabilized office portfolio. We did not have any redevelopment properties at September 30, 2016.



	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾
Properties held for sale ⁽²⁾	1	67,995
Development projects in “lease-up”	2	450,000
Development projects under construction	1	700,000

________________________


(1)	Estimated rentable square feet upon completion.


(2)	See Note 3 “Dispositions and Real Estate Assets Held for Sale” for additional information.

Our stabilized office portfolio also excludes our near-term and future development pipeline, which as of September 30, 2016 was comprised of eight development sites, representing approximately 70 gross acres of undeveloped land.

As of September 30, 2016, we owned 100% of our properties and development projects, excluding three office properties owned by two consolidated property partnerships. One property partnership, 100 First Street Member, LLC (“100 First LLC”), owned one office property through a subsidiary REIT (see Notes 7 and 8 for additional information). The other property partnership,

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Redwood City Partners, LLC (“Redwood LLC”) owned two office properties. Both property partnerships are consolidated entities. As of September 30, 2016, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of twelve office properties and one future development project located in the state of Washington.

Ownership and 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, 100 First LLC, 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, 100 First 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.

As of September 30, 2016, the Company owned an approximate 97.2% common general partnership interest in the Operating Partnership. The remaining approximate 2.8% common limited partnership interest in the Operating Partnership as of September 30, 2016, 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. As of September 30, 2016, the Company owned an approximate 56% equity interest in 100 First LLC. The remaining interest was owned by an unrelated third party. As of September 30, 2016, the Company owned an approximate 93% equity interest in Redwood LLC. The remaining interest was owned by an unrelated third party. With the exception of the Operating Partnership, Redwood LLC and 100 First LLC, all of our subsidiaries are wholly-owned.

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, 2016. 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, 2015.

Adoption of New Accounting Pronouncements

Variable Interest Entities

Effective January 1, 2016, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2015-02 (“ASU 2015-02”), which amended certain guidance with respect to the evaluation of Variable Interest Entities (“VIEs”) and when a reporting entity is required to consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidation analysis of reporting entities that are involved with VIEs, and (iv) provide a scope exception for certain entities.

Under the new guidance, effective January 1, 2016, the Operating Partnership was determined to be a VIE of the Company as the Operating Partnership is a limited partnership in which the common limited partners do not have substantive kick-out rights or participating rights. However, given that the Company was deemed to be the primary beneficiary of the Operating Partnership because the Company has the ability to control the activities that most significantly impact the Operating Partnership's economic

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

performance, the adoption of this new guidance and the conclusion that the Operating Partnership was a VIE did not have any impact on our consolidated financial statements since the conclusion to consolidate the Operating Partnership still applied. The Operating Partnership was the only new VIE identified as part of the adoption of the guidance as of January 1, 2016.

At September 30, 2016, the consolidated financial statements of the Company included one VIE in addition to the Operating Partnership, 100 First LLC (see Note 7 for further discussion of the formation transaction for this VIE), and the consolidated financial statements of the Operating Partnership included only one VIE, 100 First LLC. The Operating Partnership was determined to be the primary beneficiary of 100 First LLC because it has the ability to control the activities that most significantly impact the VIE’s economic performance. As of September 30, 2016, the VIE’s total assets, liabilities and noncontrolling interest included on our consolidated balance sheet were approximately $191.3 million (of which $173.2 million related to real estate held for investment), approximately $11.8 million and approximately $79.0 million, respectively. Revenues, income and net assets generated by 100 First LLC may only be used to settle its contractual obligations, which primarily consist of operating expenses, capital expenditures and required distributions.

At December 31, 2015, the consolidated financial statements of the Company and the Operating Partnership included two VIEs in which we were deemed to be the primary beneficiary: Redwood LLC and one other VIE to facilitate a potential future Section 1031 Exchange to defer taxable gains on property dispositions for federal income tax purposes. At December 31, 2015, the impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests by approximately $203.3 million (of which $187.3 million related to real estate held for investment on our consolidated balance sheet), approximately $28.8 million and approximately $6.5 million, respectively. During the nine months ended September 30, 2016, Redwood LLC had a VIE reconsideration event and was determined to no longer be a VIE and the VIE to facilitate a potential future Section 1031 Exchange was terminated.

Reclassification of Debt Issuance Costs

Effective January 1, 2016, the Company adopted FASB ASU No. 2015-03 and No. 2015-15, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. However, for line-of-credit arrangements, entities may defer and present debt issuance costs as an asset and amortize the costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangement. As a result of our adoption of the guidance, $1.1 million of deferred financing costs as of December 31, 2015 were reclassified to reduce secured debt, net and $12.0 million of deferred financing costs as of December 31, 2015 were reclassified to reduce unsecured debt, net in the December 31, 2015 balances on our consolidated balance sheets. In addition, $4.6 million of deferred financing costs relating to our unsecured line of credit as of December 31, 2015 were reclassified to prepaid expenses and other assets, net in the December 31, 2015 balances on our consolidated balance sheets. The guidance did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements

On August 26, 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”) to provide guidance for areas where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.

On June 16, 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”) to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.

On May 9, 2016, the FASB issued ASU No. 2016-12, which clarifies and provides practical expedients for certain aspects 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, 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 and notes to our consolidated financial statements.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

On March 30, 2016, the FASB issued ASU No. 2016-09 (“ASU 2016-09”) to amend the accounting guidance for share-based payment accounting. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods and early adoption is permitted. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.

On February 25, 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact of the guidance on our consolidated financial statements and notes to our consolidated financial statements.

On January 5, 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”) to amend the accounting guidance on the classification and measurement of financial instruments. The standard requires that all investments in equity securities, including other ownership interests, are carried at fair value through net income. This requirement does not apply to investments that qualify for equity method accounting or to those that result in consolidation of the investee or for which the entity has elected the predictability exception to fair value measurement. Additionally, the standard requires that the portion of the total fair value change caused by a change in instrument-specific credit risk for financial liabilities for which the fair value option has been elected would be recognized in other comprehensive income. Any accumulated amount remaining in other comprehensive income is reclassified to earnings when the liability is extinguished. ASU 2016-01 is effective for fiscal years beginning after December 15, 2017. The Company does not currently anticipate that the guidance will have a material impact on our consolidated financial statements or notes to our consolidated financial statements.

2. Acquisitions

Operating Property Acquisitions

During the nine months ended September 30, 2016, we acquired the one operating property listed below from an unrelated third party. The acquisition was funded with proceeds from the Company’s unsecured revolving credit facility as well as proceeds from our capital recycling program.



Property	Date of Acquisition	Number of Buildings	Rentable Square Feet (unaudited)	Purchase Price (in millions) ⁽¹⁾
1290-1300 Terra Bella Avenue, Mountain View, CA	June 8, 2016	1	114,175	$	55.4

________________________


(1)	In connection with this acquisition, we assumed $0.2 million in accrued liabilities that are not included in the purchase price above.

The related assets, liabilities and results of operations of the acquired property are included in the consolidated financial statements as of the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed as of the date of acquisition:

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



	Total 2016 Operating Property Acquisitions ⁽¹⁾

Assets
Land and improvements	$	28,730
Buildings and improvements ⁽²⁾	27,555
Deferred leasing costs and acquisition-related intangible assets ⁽³⁾	4,180
Total assets acquired	60,465
Liabilities
Accounts payable, accrued expenses and other liabilities	170
Deferred revenue and acquisition-related intangible liabilities ⁽⁴⁾	4,880
Total liabilities assumed	5,050
Net assets and liabilities acquired	$	55,415

________________________


(1)	The purchase price of the acquisition completed during the nine months ended September 30, 2016 was less than 5% of the Company’s total assets as of September 30, 2016.


(2)	Represents buildings, building improvements and tenant improvements.


(3)	Represents in-place leases (approximately $2.5 million with a weighted average amortization period of 3.6 years) and leasing commissions (approximately $1.7 million with a weighted average amortization period of 3.7 years).


(4)	Represents below-market leases (approximately $4.9 million with a weighted average amortization period of 3.4 years).

Development Project Acquisitions

On March 11, 2016, we acquired an approximately 1.75 acre development site located at 610-620 Brannan Street in San Francisco, California from an unrelated third party. This land parcel is immediately adjacent to our Flower Mart project in the SOMA submarket of San Francisco. The acquisition was funded through $31.0 million in cash and the issuance of 867,701 common units in the Operating Partnership valued at approximately $48.0 million (see Note 10). In addition, the Company paid $2.4 million in seller transaction costs and recorded $4.7 million in accrued liabilities in connection with this acquisition. As of September 30, 2016, the underlying assets were included as undeveloped land and construction in progress on our consolidated balance sheets.

3. Dispositions and Real Estate Assets Held for Sale

Operating Property Dispositions

The following table summarizes the operating properties sold during the nine months ended September 30, 2016.



Location	Property Type	Month of Disposition	Number of Buildings	Rentable Square Feet	Sales Price ⁽¹⁾ (in millions)
Torrey Santa Fe Properties⁽²⁾	Office	January	4	465,812	$	262.3
4930, 4939 & 4955 Directors Place, San Diego, CA ⁽³⁾	Office	July	2	136,908	49.0
Total Dispositions			6	602,720	$	311.3

________________________


(1)	Represents gross sales price before the impact of broker commissions and closing costs.


(2)	The Torrey Santa Fe Properties include the following: 7525 Torrey Santa Fe, 7535 Torrey Santa Fe, 7545 Torrey Santa Fe, and 7555 Torrey Santa Fe. These properties were classified as held for sale at December 31, 2015.


(3)	These properties include two operating properties totaling 136,908 rentable square feet and a 7.0 acre undeveloped land parcel.

The total gain on the six operating properties sold during the nine months ended September 30, 2016 was $164.3 million. During the three months ended September 30, 2016, $258.1 million of net proceeds related to January 2016 operating property disposition were released from qualified intermediaries. As of September 30, 2016, approximately $48.4 million of net proceeds related to operating property dispositions were temporarily being held at qualified intermediaries, at our direction, for the purpose of facilitating potential future Section 1031 Exchanges. The $48.4 million of cash proceeds are included in restricted cash on our consolidated balance sheets at September 30, 2016.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Land Dispositions

The following table summarizes the land dispositions completed during the nine months ended September 30, 2016:



Property	Submarket	Month of Disposition	Gross Site Acreage (unaudited)	Sales Price ⁽¹⁾ (in millions)
Carlsbad Oaks - Lot 7 ⁽²⁾	Carlsbad	January	7.6	$	4.5
Carlsbad Oaks - Lots 4 & 5	Carlsbad	June	11.2	6.0
Carlsbad Oaks - Lot 8	Carlsbad	June	13.2	8.9
Total Land Dispositions ⁽³⁾⁽⁴⁾			32.0	$	19.4

________________________


(1)	Represents gross sales price before the impact of broker commissions and closing costs.


(2)	This land parcel was classified as held for sale as of December 31, 2015.


(3)	In connection with these land dispositions, $2.3 million of secured debt was assumed by the buyers. See Note 6 “Secured and Unsecured Debt of the Operating Partnership” for additional information.


(4)	The Company also disposed of a 7.0 acre undeveloped land parcel in connection with the disposition of 4930, 4939 & 4955 Directors Place, San Diego, CA included in the operating property dispositions above.

The net loss on the undeveloped land parcels sold during the nine months ended September 30, 2016 was approximately $0.3 million.

Real Estate Assets Held for Sale

As of September 30, 2016, the following property was classified as held for sale:



Location	Submarket	Property Type	Number of Buildings	Rentable Square Feet
5717 Pacific Center Boulevard, San Diego, CA	Sorrento Mesa	Office	1	67,995

The sale of this property is scheduled to close in January of 2017. The major classes of assets and liabilities of the property held for sale as of September 30, 2016 were as follows:



Real estate assets and other assets held for sale	(in thousands)
Land and improvements	$	2,693
Buildings and improvements	10,500
Total real estate held for sale	13,193
Accumulated depreciation and amortization	(3,829		)
Total real estate held for sale, net	9,364
Prepaid expenses and other assets, net	76
Real estate and other assets held for sale, net	$	9,440
Liabilities of real estate assets held for sale
Accounts payable, accrued expenses and other liabilities	$	74
Liabilities of real estate assets held for sale	$	74

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 September 30, 2016 and December 31, 2015:



	September 30, 2016			December 31, 2015
	(in thousands)
Deferred Leasing Costs and Acquisition-Related Intangible Assets, net: ⁽¹⁾
Deferred leasing costs	$	229,252		$	205,888
Accumulated amortization	(85,154		)	(72,745		)
Deferred leasing costs, net	144,098			133,143
Above-market operating leases	10,209			10,989
Accumulated amortization	(7,111		)	(6,739		)
Above-market operating leases, net	3,098			4,250
In-place leases	72,084			72,639
Accumulated amortization	(39,121		)	(33,810		)
In-place leases, net	32,963			38,829
Below-market ground lease obligation	490			490
Accumulated amortization	(36		)	(29		)
Below-market ground lease obligation, net	454			461
Total deferred leasing costs and acquisition-related intangible assets, net	$	180,613		$	176,683
Acquisition-Related Intangible Liabilities, net: ⁽²⁾
Below-market operating leases	$	56,885		$	53,502
Accumulated amortization	(31,877		)	(27,074		)
Below-market operating leases, net	25,008			26,428
Above-market ground lease obligation	6,320			6,320
Accumulated amortization	(500		)	(424		)
Above-market ground lease obligation, net	5,820			5,896
Total acquisition-related intangible liabilities, net	$	30,828		$	32,324

________________________


(1)	Excludes deferred leasing costs and acquisition-related intangible assets, net related to properties held for sale as of December 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 for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)
Deferred leasing costs ⁽¹⁾	$	7,599		$	6,932		$	21,343		$	20,847
Above-market operating leases ⁽²⁾	376			487			1,152			2,135
In-place leases ⁽¹⁾	2,753			3,073			8,310			11,710
Below-market ground lease obligation ⁽³⁾	2			2			6			6
Below-market operating leases ⁽⁴⁾	(2,261		)	(2,228		)	(6,280		)	(8,905		)
Above-market ground lease obligation ⁽⁵⁾	(26		)	(26		)	(76		)	(76		)
Total	$	8,443		$	8,240		$	24,455		$	25,717

________________________


(1)	The amortization of 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 September 30, 2016 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 2016	$	7,258	$	349	$	2,697	$	2	$	(2,236	)	$	(25	)
2017	26,971		1,241		9,739		8		(8,438		)	(101		)
2018	23,649		831		6,998		8		(7,159		)	(101		)
2019	19,468		643		5,148		8		(4,581		)	(101		)
2020	15,174		16		2,923		8		(2,169		)	(101		)
Thereafter	51,578		18		5,458		420		(425		)	(5,391		)
Total	$	144,098	$	3,098	$	32,963	$	454	$	(25,008