10-Q 1 form10-q.htm 10-Q 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 1-12675 (Kilroy Realty Corporation)
Commission File Number: 000-54005 (Kilroy Realty, L.P.)
KILROY REALTY CORPORATION
KILROY REALTY, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
Kilroy Realty Corporation
Maryland
95-4598246
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
Kilroy Realty, L.P.
Delaware
95-4612685
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
 
(310) 481-8400
(Registrant's telephone number, including area code)
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Kilroy Realty Corporation    Yes  þ    No   o
Kilroy Realty, L. P.         Yes  þ    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Kilroy Realty Corporation     Yes  þ    No   o
Kilroy Realty, L.P.         Yes  þ    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Kilroy Realty Corporation
 
 
 
Large accelerated filer     þ
Accelerated filer     o 
Non-accelerated filer     o
Smaller reporting company     o
(Do not check if a smaller reporting company)
 
 
 
 
Kilroy Realty, L.P.
 
 
 
Large accelerated filer     o
Accelerated filer     o 
Non-accelerated filer     þ
Smaller reporting company     o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Kilroy Realty Corporation Yes  o     No   þ
Kilroy Realty, L.P. Yes  o     No   þ
As of April 22, 2016, 92,237,314 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
 



EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 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 March 31, 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 8, Stockholders’ Equity of the Company;
Note 9, Partners’ Capital of the Operating Partnership;

i


Note 13, Net Income Available to Common Stockholders Per Share of the Company;
Note 14, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;
Note 15, Supplemental Cash Flow Information of the Company; and
Note 16, 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 each of the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.


ii


KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2016
TABLE OF CONTENTS
 
 
 
 
Page
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
  
 
  
 
  
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
  
Item 3.
 
Item 4.
 
 
 
PART II – OTHER INFORMATION
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 




PART I – FINANCIAL INFORMATION

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

KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31, 2016
 
December 31, 2015
ASSETS
(unaudited)
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements
$
978,643

 
$
875,794

Buildings and improvements
4,501,062

 
4,091,012

Undeveloped land and construction in progress (Note 2)
1,018,738

 
1,361,340

Total real estate assets held for investment
6,498,443

 
6,328,146

Accumulated depreciation and amortization
(1,034,315
)
 
(994,241
)
Total real estate assets held for investment, net
5,464,128

 
5,333,905

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET

 
117,666

CASH AND CASH EQUIVALENTS
38,645

 
56,508

RESTRICTED CASH (Notes 1 and 3)
261,600

 
696

MARKETABLE SECURITIES (Note 12)
13,418

 
12,882

CURRENT RECEIVABLES, NET (Note 5)
9,540

 
11,153

DEFERRED RENT RECEIVABLES, NET (Note 5)
199,232

 
189,704

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 4)
186,271

 
176,683

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 1)
31,276

 
27,233

TOTAL ASSETS
$
6,204,110

 
$
5,926,430

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 1, 6 and 12)
$
378,080

 
$
380,835

Unsecured debt, net (Notes 1, 6 and 12)
1,845,313

 
1,844,634

Unsecured line of credit (Notes 6 and 12)
75,000

 

Accounts payable, accrued expenses and other liabilities
265,863

 
246,323

Accrued dividends and distributions (Note 17)
35,317

 
34,992

Deferred revenue and acquisition-related intangible liabilities, net (Note 4)
131,296

 
128,156

Rents received in advance and tenant security deposits
48,543

 
49,361

Liabilities of real estate assets held for sale

 
7,543

Total liabilities
2,779,412

 
2,691,844

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, 92,229,464 and 92,258,690 shares issued and outstanding, respectively
922

 
923

Additional paid-in capital
3,066,994

 
3,047,894

Retained earnings/(distributions in excess of earnings)
67,981

 
(70,262
)
Total stockholders’ equity
3,328,308

 
3,170,966

Noncontrolling Interests:
 
 
 
Common units of the Operating Partnership (Note 7)
89,675

 
57,100

Noncontrolling interest in consolidated subsidiary (Note 1)
6,715

 
6,520

Total noncontrolling interests
96,390

 
63,620

Total equity
3,424,698

 
3,234,586

TOTAL LIABILITIES AND EQUITY
$
6,204,110

 
$
5,926,430


See accompanying notes to consolidated financial statements.

1


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited; in thousands, except share and per share data)
 
 
Three Months Ended March 31,
 
2016
 
2015
REVENUES
 
 
 
Rental income
$
133,755

 
$
130,932

Tenant reimbursements
11,404

 
14,425

Other property income
287

 
725

Total revenues
145,446

 
146,082

EXPENSES
 
 
 
Property expenses
25,965

 
24,714

Real estate taxes
11,032

 
12,715

Provision for bad debts

 
242

Ground leases
829

 
776

General and administrative expenses
13,437

 
12,768

Acquisition-related expenses
62

 
128

Depreciation and amortization
50,440

 
51,487

Total expenses
101,765

 
102,830

OTHER (EXPENSES) INCOME
 
 
 
Interest income and other net investment gains (Note 12)
271

 
360

Interest expense (Note 6)
(11,829
)
 
(16,878
)
Total other (expenses) income
(11,558
)
 
(16,518
)
INCOME FROM OPERATIONS BEFORE GAINS ON SALES OF REAL ESTATE
32,123

 
26,734

Gains on sale of land

 
17,268

Gains on sale of depreciable operating properties (Note 3)
145,990

 

NET INCOME
178,113

 
44,002

Net income attributable to noncontrolling common units of the Operating Partnership
(3,610
)
 
(815
)
Net income attributable to noncontrolling interest in consolidated subsidiary
(195
)
 

Total income attributable to noncontrolling interest
(3,805
)
 
(815
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
174,308

 
43,187

PREFERRED DIVIDENDS
(3,313
)
 
(3,313
)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
170,995

 
$
39,874

Net income available to common stockholders per share – basic (Note 13)
$
1.85

 
$
0.45

Net income available to common stockholders per share – diluted (Note 13)
$
1.84

 
$
0.45

Weighted average common shares outstanding – basic (Note 13)
92,224,522

 
86,896,776

Weighted average common shares outstanding – diluted (Note 13)
92,734,543

 
87,434,366

Dividends declared per common share
$
0.35

 
$
0.35


















See accompanying notes to consolidated financial statements.

2


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited; in thousands, except share and per share/unit data)
 
 
 
 
Common Stock
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interests
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2014
$
192,411

 
86,259,684

 
$
863

 
$
2,635,900

 
$
(162,964
)
 
$
2,666,210

 
$
57,726

 
$
2,723,936

Net income
 
 
 
 
 
 
 
 
43,187

 
43,187

 
815

 
44,002

Issuance of common stock
 
 
1,507,393

 
15

 
113,082

 
 
 
113,097

 
 
 
113,097

Issuance of share-based compensation awards
 
 
 
 
 
 
413

 
 
 
413

 
 
 
413

Noncash amortization of share-based compensation
 
 
 
 
 
 
4,302

 
 
 
4,302

 
 
 
4,302

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

 
 
 

 
 
 

 
 
 

Exercise of stock options
 
 
237,000

 
2

 
10,480

 
 
 
10,482

 
 
 
10,482

Exchange of common units of the Operating Partnership
 
 
11,030

 
 
 
316

 
 
 
316

 
(316
)
 

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

 

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

 
88,031,377

 
$
880

 
$
2,761,176

 
$
(154,355
)
 
$
2,800,112

 
$
59,094

 
$
2,859,206

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 
 
 
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
 
 
 
 
 
 
 
 
174,308

 
174,308

 
3,805

 
178,113

Issuance of share-based compensation awards
 
 

 
 
 
404

 
 
 
404

 
 
 
404

Noncash amortization of share-based compensation
 
 
 
 
 
 
5,911

 
 
 
5,911

 
 
 
5,911

Exercise of stock options
 
 
6,000

 

 
256

 
 
 
256

 
 
 
256

Repurchase of common stock, stock options and restricted stock units
 
 
(92,089
)
 
(1
)
 
(5,618
)
 
 
 
(5,619
)
 
 
 
(5,619
)
Settlement of restricted stock units for shares of common stock
 
 
55,663

 

 
(1
)
 
 
 
(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
)
 

Adjustment for noncontrolling interest
 
 
 
 
 
 
18,109

 
 
 
18,109

 
(18,109
)
 

Preferred dividends
 
 
 
 
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Dividends declared per common share and common unit ($0.35 per share/unit)
 
 
 
 
 
 
 
 
(32,752
)
 
(32,752
)
 
(920
)
 
(33,672
)
BALANCE AS OF MARCH 31, 2016
$
192,411

 
92,229,464

 
$
922

 
$
3,066,994

 
$
67,981

 
$
3,328,308

 
$
96,390

 
$
3,424,698








See accompanying notes to consolidated financial statements.

3


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; in thousands)
 
 
Three Months Ended March 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
178,113

 
$
44,002

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of building and improvements and leasing costs
49,664

 
50,843

Depreciation of furniture, fixtures and equipment
776

 
644

Increase in provision for bad debts

 
242

Noncash amortization of share-based compensation awards
4,703

 
3,571

Noncash amortization of deferred financing costs and debt discounts and premiums
609

 
454

Noncash amortization of net below market rents (Note 4)
(1,603
)
 
(1,928
)
Gains on sale of depreciable operating properties (Note 3)
(145,990
)
 

Gains on sale of land

 
(17,268
)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(2,888
)
 
(3,013
)
Straight-line rents
(9,451
)
 
(19,692
)
Net change in other operating assets
1,561

 
(8,421
)
Net change in other operating liabilities
2,710

 
5,545

Net cash provided by operating activities
78,204

 
54,979

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for development properties and undeveloped land
(63,702
)
 
(89,810
)
Expenditures for acquisition of undeveloped land (Note 2)
(33,513
)
 
(50,435
)
Expenditures for operating properties
(25,938
)
 
(24,345
)
Net proceeds received from dispositions (Note 3)
262,409

 
25,563

(Increase) decrease in restricted cash (Note 3)
(260,904
)
 
58,619

(Increase) decrease in acquisition-related deposits
(4,085
)
 
3,099

Increase in note receivable
(1,000
)
 

Net cash used in investing activities
(126,733
)
 
(77,309
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common stock

 
113,097

Borrowings on unsecured revolving credit facility
80,000

 
150,000

Repayments on unsecured revolving credit facility
(5,000
)
 
(160,000
)
Principal payments on secured debt (Note 6)
(2,377
)
 
(28,472
)
Financing costs
(337
)
 
(397
)
Repurchase of common stock and restricted stock units
(5,619
)
 
(1,821
)
Proceeds from exercise of stock options
256

 
10,482

Dividends and distributions paid to common stockholders and common unitholders
(32,944
)
 
(30,846
)
Dividends and distributions paid to preferred stockholders and preferred unitholders
(3,313
)
 
(3,313
)
Net cash provided by financing activities
30,666

 
48,730

Net (decrease) increase in cash and cash equivalents
(17,863
)
 
26,400

Cash and cash equivalents, beginning of period
56,508

 
23,781

Cash and cash equivalents, end of period
$
38,645

 
$
50,181












See accompanying notes to consolidated financial statements.

4





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

KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
 
March 31, 2016
 
December 31, 2015
ASSETS 
(unaudited)
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements
$
978,643

 
$
875,794

Buildings and improvements
4,501,062

 
4,091,012

Undeveloped land and construction in progress (Note 2)
1,018,738

 
1,361,340

Total real estate assets held for investment
6,498,443

 
6,328,146

Accumulated depreciation and amortization
(1,034,315
)
 
(994,241
)
Total real estate assets held for investment, net
5,464,128

 
5,333,905

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET

 
117,666

CASH AND CASH EQUIVALENTS
38,645

 
56,508

RESTRICTED CASH (Notes 1 and 3)
261,600

 
696

MARKETABLE SECURITIES (Note 12)
13,418

 
12,882

CURRENT RECEIVABLES, NET (Note 5)
9,540

 
11,153

DEFERRED RENT RECEIVABLES, NET (Note 5)
199,232

 
189,704

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 4)
186,271

 
176,683

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 1)
31,276

 
27,233

TOTAL ASSETS
$
6,204,110

 
$
5,926,430

LIABILITIES AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 1, 6 and 12)
$
378,080

 
$
380,835

Unsecured debt, net (Notes 1, 6 and 12)
1,845,313

 
1,844,634

Unsecured line of credit (Notes 6 and 12)
75,000

 

Accounts payable, accrued expenses and other liabilities
265,863

 
246,323

Accrued distributions (Note 17)
35,317

 
34,992

Deferred revenue and acquisition-related intangible liabilities, net (Note 4)
131,296

 
128,156

Rents received in advance and tenant security deposits
48,543

 
49,361

Liabilities of real estate assets held for sale

 
7,543

Total liabilities
2,779,412

 
2,691,844

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, 92,229,464 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
3,221,441


3,031,609

Total partners’ capital
3,413,852

 
3,224,020

Noncontrolling interests in consolidated subsidiaries (Note 1)
10,846


10,566

Total capital
3,424,698


3,234,586

TOTAL LIABILITIES AND CAPITAL
$
6,204,110


$
5,926,430






See accompanying notes to consolidated financial statements.

5


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

 
Three Months Ended March 31,
 
2016
 
2015
REVENUES
 
 
 
Rental income
$
133,755

 
$
130,932

Tenant reimbursements
11,404

 
14,425

Other property income
287

 
725

Total revenues
145,446

 
146,082

EXPENSES
 
 
 
Property expenses
25,965

 
24,714

Real estate taxes
11,032

 
12,715

Provision for bad debts

 
242

Ground leases
829

 
776

General and administrative expenses
13,437

 
12,768

Acquisition-related expenses
62

 
128

Depreciation and amortization
50,440

 
51,487

Total expenses
101,765

 
102,830

OTHER (EXPENSES) INCOME
 
 
 
Interest income and other net investment gains (Note 12)
271

 
360

Interest expense (Note 6)
(11,829
)
 
(16,878
)
Total other (expenses) income
(11,558
)
 
(16,518
)
INCOME FROM OPERATIONS BEFORE GAINS ON SALES OF REAL ESTATE
32,123

 
26,734

Gains on sale of land

 
17,268

Gains on sale of depreciable operating properties (Note 3)
145,990

 

NET INCOME
178,113

 
44,002

Net income attributable to noncontrolling interests in consolidated subsidiaries
(280
)
 
(75
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
177,833

 
43,927

PREFERRED DISTRIBUTIONS
(3,313
)
 
(3,313
)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS
$
174,520

 
$
40,614

Net income available to common unitholders per unit – basic (Note 14)
$
1.85

 
$
0.45

Net income available to common unitholders per unit – diluted (Note 14)
$
1.84

 
$
0.45

Weighted average common units outstanding – basic (Note 14)
94,188,520

 
88,693,306

Weighted average common units outstanding – diluted (Note 14)
94,698,541

 
89,230,896

Dividends declared per common unit
$
0.35

 
$
0.35




















See accompanying notes to consolidated financial statements.

6


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(Unaudited; in thousands, except unit and per unit data)
 
 
Partners’ Capital
 
Total
Partners’ 
Capital
 
Noncontrolling Interests in Consolidated Subsidiaries
 
 
 
Preferred
Units
 
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2014
$
192,411

 
88,063,884

 
$
2,521,900

 
$
2,714,311

 
$
9,625

 
$
2,723,936

Net income
 
 
 
 
43,927

 
43,927

 
75

 
44,002

Issuance of common units
 
 
1,507,393

 
113,097

 
113,097

 
 
 
113,097

Issuance of share-based compensation awards
 
 
 
 
413

 
413

 
 
 
413

Noncash amortization of share-based compensation
 
 
 
 
4,302

 
4,302

 
 
 
4,302

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

 

 

 
 
 

Exercise of stock options
 
 
237,000

 
10,482

 
10,482

 
 
 
10,482

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

 
89,824,547

 
$
2,657,095

 
$
2,849,506

 
$
9,700

 
$
2,859,206

 
 
 
 
 
 
 
 
 
 
 
 




 
Partners’ Capital
 
Total
Partners’ 
Capital
 
Noncontrolling Interests in Consolidated Subsidiaries
 
 
 
Preferred
Units
 
Number of
Common
Units
 
Common
Units
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2015
$
192,411

 
94,023,465

 
$
3,031,609

 
$
3,224,020

 
$
10,566

 
$
3,234,586

Net income
 
 
 
 
177,833

 
177,833

 
280

 
178,113

Issuance of common units in connection with acquisition (Note 2)
 
 
867,701

 
48,033

 
48,033

 
 
 
48,033

Issuance of share-based compensation awards
 
 
 
 
404

 
404

 
 
 
404

Noncash amortization of share-based compensation
 
 
 
 
5,911

 
5,911

 
 
 
5,911

Exercise of stock options
 
 
6,000

 
256

 
256

 
 
 
256

Repurchase of common units, stock options and restricted stock units
 
 
(92,089
)
 
(5,619
)
 
(5,619
)
 
 
 
(5,619
)
Settlement of restricted stock units
 
 
55,663

 
(1
)
 
(1
)
 
 
 
(1
)
Preferred distributions
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Distributions declared per common unit ($0.35 per unit)
 
 
 
 
(33,672
)
 
(33,672
)
 
 
 
(33,672
)
BALANCE AS OF MARCH 31, 2016
$
192,411

 
94,860,740

 
$
3,221,441

 
$
3,413,852

 
$
10,846

 
$
3,424,698


















See accompanying notes to consolidated financial statements.

7


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

 
Three Months Ended March 31,
 
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
178,113

 
$
44,002

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of building and improvements and leasing costs
49,664

 
50,843

Depreciation of furniture, fixtures and equipment
776

 
644

Increase in provision for bad debts

 
242

Noncash amortization of share-based compensation awards
4,703

 
3,571

Noncash amortization of deferred financing costs and debt discounts and premiums
609

 
454

Noncash amortization of net below market rents (Note 4)
(1,603
)
 
(1,928
)
Gains on sales of depreciable operating properties (Note 3)
(145,990
)
 

Gains on sale of land

 
(17,268
)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(2,888
)
 
(3,013
)
Straight-line rents
(9,451
)
 
(19,692
)
Net change in other operating assets
1,561

 
(8,421
)
Net change in other operating liabilities
2,710

 
5,545

Net cash provided by operating activities
78,204

 
54,979

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for development properties and undeveloped land
(63,702
)
 
(89,810
)
Expenditures for acquisition of undeveloped land (Note 2)
(33,513
)
 
(50,435
)
Expenditures for operating properties
(25,938
)
 
(24,345
)
Net proceeds received from dispositions (Note 3)
262,409

 
25,563

(Increase) decrease in restricted cash (Note 3)
(260,904
)
 
58,619

(Increase) decrease in acquisition-related deposits
(4,085
)
 
3,099

Increase in note receivable
(1,000
)
 

Net cash used in investing activities
(126,733
)
 
(77,309
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common stock

 
113,097

Borrowings on unsecured revolving credit facility
80,000

 
150,000

Repayments on unsecured revolving credit facility
(5,000
)
 
(160,000
)
Principal payments on secured debt (Note 6)
(2,377
)
 
(28,472
)
Financing costs
(337
)
 
(397
)
Repurchase of common stock and restricted stock units
(5,619
)
 
(1,821
)
Proceeds from exercise of stock options
256

 
10,482

Dividends and distributions paid to common unitholders
(32,944
)
 
(30,846
)
Dividends and distributions paid to preferred unitholders
(3,313
)
 
(3,313
)
Net cash provided by financing activities
30,666

 
48,730

Net (decrease) increase in cash and cash equivalents
(17,863
)
 
26,400

Cash and cash equivalents, beginning of period
56,508

 
23,781

Cash and cash equivalents, end of period
$
38,645

 
$
50,181

 











See accompanying notes to consolidated financial statements.

8


KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 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 March 31, 2016:

 
Number of
Buildings
 
Rentable
Square Feet
 
Number of
Tenants
 
Percentage 
Occupied
Stabilized Office Properties
103

 
13,671,730

 
523

 
94.9
%

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. 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.

During the three months ended March 31, 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 portfolio as of March 31, 2016. As of March 31, 2016, the following “lease up” properties and development projects under construction were excluded from our stabilized portfolio. We did not have any redevelopment properties at March 31, 2016.

 
Number of
Properties/Projects
 
Estimated Rentable
Square Feet
Development projects in lease-up
2
 
443,000

Development projects under construction (1)

2
 
905,000

________________________
(1)
Estimated rentable square feet upon completion.

Our stabilized portfolio also excludes our near-term and future development pipeline, which as of March 31, 2016 was comprised of ten development sites, representing approximately 101 gross acres of undeveloped land.

As of March 31, 2016, 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 one future development project located in the state of Washington. As of March 31, 2016, we owned 100% of all of our properties and development projects, excluding two recently completed office properties owned by Redwood City Partners, LLC (“Redwood LLC”), a consolidated subsidiary, and one undeveloped land parcel held at a qualified intermediary for potential future transactions that are intended to qualify as

9


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


like-kind exchanges pursuant to Section 1031 of the Code (“Section 1031 Exchanges”) to defer taxable gains on dispositions for federal and state income tax purposes that been consolidated for financial reporting purposes.

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, 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.

As of March 31, 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 March 31, 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 March 31, 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 and Redwood 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, 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.

10


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


At December 31, 2015 and March 31, 2016, the consolidated financial statements of the Company and the Operating Partnership included two other VIEs in which we were deemed to be the primary beneficiary. One VIE, Redwood LLC, was established in 2013 in connection with an undeveloped land acquisition. The other VIE was established in the fourth quarter of 2015 to facilitate potential future Section 1031 Exchanges to defer taxable gains on dispositions for federal income tax purposes. At March 31, 2016, the impact of consolidating the other VIEs increased the Company’s total assets, liabilities and noncontrolling interests by approximately $208.3 million (of which $187.3 million related to real estate held for investment on our consolidated balance sheet), approximately $26.3 million and approximately $6.7 million, respectively. 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.
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 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 August 12, 2015, the FASB issued ASU No. 2015-14 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, 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.

On January 5, 2016, the FASB issued ASU No. 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. The Company does not anticipate the guidance to have a material impact on our consolidated financial statements or notes to our consolidated financial statements.
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

11


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


and interim periods within those annual periods 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.
2.    Acquisitions

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, CA from an unrelated third party. This land parcel is immediately adjacent to our Flower Mart project in the SOMA submarket of San Francisco and with the addition of this newly acquired site, our Flower Mart project is now comprised of approximately 6.9 acres. 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 9). 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 March 31, 2016, the underlying assets were included as undeveloped land and construction in progress on our consolidated balance sheets.



3.    Dispositions

Operating Property Dispositions

The following table summarizes the operating properties sold during the three months ended March 31, 2016. These properties were classified as held for sale at December 31, 2015:
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

 
 
 
 
 
 
 
 
 
 
 
________________________ 
(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.

The total gains on sale of the four properties sold during the three months ended March 31, 2016 was $146.0 million. As of March 31, 2016, approximately $258.1 million of net proceeds related to this disposition were temporarily being held at qualified intermediaries, at our direction, for the purpose of facilitating potential future Section 1031 Exchanges. The cash proceeds are included in restricted cash on our consolidated balance sheets at March 31, 2016.

Land Disposition

During the three months ended March 31, 2016, the Company sold a 7.6 acre land parcel located in Carlsbad, California for a gross sales price of $4.5 million. The land parcel was classified as held for sale at December 31, 2015.



12


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



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

The following table summarizes our deferred leasing costs and acquisition-related intangible assets (acquired value of leasing costs, above-market operating leases, in-place leases and below-market ground lease obligation) and intangible liabilities (acquired value of below-market operating leases and above-market ground lease obligation) as of March 31, 2016 and December 31, 2015:

 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Deferred Leasing Costs and Acquisition-Related Intangible Assets, net:
 
 
 
Deferred leasing costs
$
223,224

 
$
205,888

Accumulated amortization
(77,211
)
 
(72,745
)
Deferred leasing costs, net
146,013

 
133,143

Above-market operating leases
10,688

 
10,989

Accumulated amortization
(6,830
)
 
(6,739
)
Above-market operating leases, net
3,858

 
4,250

In-place leases
70,644

 
72,639

Accumulated amortization
(34,703
)
 
(33,810
)
In-place leases, net
35,941

 
38,829

Below-market ground lease obligation
490

 
490

Accumulated amortization
(31
)
 
(29
)
Below-market ground lease obligation, net
459

 
461

Total deferred leasing costs and acquisition-related intangible assets, net
$
186,271

 
$
176,683

Acquisition-Related Intangible Liabilities, net: (1)
 
 
 
Below-market operating leases
$
52,733

 
$
53,502

Accumulated amortization
(28,300
)
 
(27,074
)
Below-market operating leases, net
24,433

 
26,428

Above-market ground lease obligation
6,320

 
6,320

Accumulated amortization
(450
)
 
(424
)
Above-market ground lease obligation, net
5,870

 
5,896

Total acquisition-related intangible liabilities, net
$
30,303

 
$
32,324

________________________
(1)
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 months ended March 31, 2016 and 2015:

 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Deferred leasing costs (1)
$
6,783

 
$
6,822

Above-market operating leases (2)
392

 
911

In-place leases (1)
2,888

 
4,221

Below-market ground lease obligation (3)
2

 
2

Below-market operating leases (4)
(1,995
)
 
(2,839
)
Above-market ground lease obligation (5)
(25
)
 
(25
)
Total
$
8,045

 
$
9,092

________________________
(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.

13


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



The following table sets forth the estimated annual amortization expense related to deferred leasing costs and acquisition-related intangibles as of March 31, 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
$
20,497

 
$
1,109

 
$
7,725

 
$
6

 
$
(5,689
)
 
$
(75
)
2017
24,704

 
1,241

 
9,036

 
8

 
(6,997
)
 
(101
)
2018
21,490

 
831

 
6,296

 
8

 
(5,713
)
 
(101
)
2019
17,492

 
643

 
4,637

 
8

 
(3,574
)
 
(101
)
2020
13,515

 
16

 
2,789

 
8

 
(2,035
)
 
(101
)
Thereafter
48,315

 
18

 
5,458

 
421

 
(425
)
 
(5,391
)
Total
$
146,013

 
$
3,858

 
$
35,941

 
$
459

 
$
(24,433
)
 
$
(5,870
)
________________________
(1)
Represents estimated annual amortization related to above-market operating leases. Amounts will be recorded as a decrease to rental income in the consolidated statements of operations.
(2)
Represents estimated annual amortization related to below-market ground lease obligations. Amounts will be recorded as an increase to ground lease expense in the consolidated statements of operations.
(3)
Represents estimated annual amortization related to below-market operating leases. Amounts will be recorded as an increase to rental income in the consolidated statements of operations.
(4)
Represents estimated annual amortization related to above-market ground lease obligations. Amounts will be recorded as a decrease to ground lease expense in the consolidated statements of operations.

5.    Receivables

Current Receivables, net

Current receivables, net is primarily comprised of contractual rents and other lease-related obligations due from tenants. The balance consisted of the following as of March 31, 2016 and December 31, 2015:

 
March 31, 2016
 
December 31, 2015 (1)
 
(in thousands)
Current receivables
$
11,620

 
$
13,233

Allowance for uncollectible tenant receivables
(2,080
)
 
(2,080
)
Current receivables, net
$
9,540

 
$
11,153

________________________
(1)
Excludes current receivables, net related to real estate held for sale at December 31, 2015.

Deferred Rent Receivables, net

Deferred rent receivables, net consisted of the following as of March 31, 2016 and December 31, 2015:

 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Deferred rent receivables (1)
$
200,772

 
$
191,586

Allowance for deferred rent receivables
(1,540
)
 
(1,882
)
Deferred rent receivables, net (1)
$
199,232

 
$
189,704

________________________
(1)
Excludes deferred rent receivables, net related to real estate held for sale at December 31, 2015.




14


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


6.    Secured and Unsecured Debt of the Operating Partnership

Secured Debt

The following table sets forth the composition of our secured debt as of March 31, 2016 and December 31, 2015:

Type of Debt
Annual Stated Interest Rate (1)
 
Effective Interest Rate (1)(2)
 
Maturity Date
 
March 31, 2016
 
December 31, 2015
 
 
 
 
 
 
 
(in thousands)
Mortgage note payable (4)
4.27%
 
4.27%
 
February 2018
 
$
127,684

 
$
128,315

Mortgage note payable (4)
4.48%
 
4.48%
 
July 2027
 
95,961

 
96,354

Mortgage note payable (3) (4)
6.05%
 
3.50%
 
June 2019
 
85,037

 
85,890

Mortgage note payable
6.51%
 
6.51%
 
February 2017
 
65,281

 
65,563

Mortgage note payable
7.15%
 
7.15%
 
May 2017
 
3,314

 
3,987

Other
Various
 
Various
 
Various
 
1,809

 
1,809

Total secured debt
 
 
 
 
 
 
$
379,086

 
$
381,918

Unamortized deferred financing costs
 
 
 
 
 
 
(1,006
)
 
(1,083
)
Total secured debt, net
 
 
 
 
 
 
$
378,080

 
$
380,835

________________________
(1)
All interest rates presented are fixed-rate interest rates.
(2)
Represents the effective interest rate including the amortization of initial issuance discounts/premiums excluding the amortization of deferred financing costs.
(3)
Amounts reported include the amounts of unamortized debt premiums of $5.8 million and $6.2 million as of March 31, 2016 and December 31, 2015, respectively.
(4)
The secured debt and the related properties that secure the debt are held in a special purpose entity and the properties are not available to satisfy the debts and other obligations of the Company or the Operating Partnership.

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

Unsecured Senior Notes

The following table summarizes the balance and significant terms of the registered unsecured senior notes issued by the Operating Partnership as of March 31, 2016 and December 31, 2015:

 
 
 
 
 
 
 
 
 
Principal Amount as of

 
Issuance date
 
Maturity date
 
Stated
coupon rate
 
Effective interest rate (1)
 
March 31,
2016
 
December 31,
2015
 
 
 
 
 
 
 
 
 
(in thousands)
4.375% Unsecured Senior Notes (2)
September 2015
 
October 2025
 
4.375%
 
4.440%
 
$
400,000

 
$
400,000

Unamortized discount and deferred financing costs
 
 
 
 
 
 
 
 
(5,261
)
 
(5,400
)
Net carrying amount
 
 
 
 
 
 
 
 
$
394,739

 
$
394,600

 
 
 
 
 
 
 
 
 
 
 
 
4.250% Unsecured Senior Notes (3)
July 2014
 
August 2029
 
4.250%
 
4.350%
 
$
400,000

 
$
400,000

Unamortized discount and deferred financing costs
 
 
 
 
 
 
 
 
(7,095
)
 
(7,228
)
Net carrying amount
 
 
 
 
 
 
 
 
$
392,905

 
$
392,772

 
 
 
 
 
 
 
 
 
 
 
 
3.800% Unsecured Senior Notes (4)
January 2013
 
January 2023
 
3.800%
 
3.804%
 
$
300,000

 
$
300,000

Unamortized discount and deferred financing costs
 
 
 
 
 
 
 
 
(1,862
)
 
(1,931
)
Net carrying amount
 
 
 
 
 
 
 
 
$
298,138

 
$
298,069

 
 
 
 
 
 
 
 
 
 
 
 
4.800% Unsecured Senior Notes (4) (5)
July 2011
 
July 2018
 
4.800%
 
4.827%
 
$
325,000

 
$
325,000

Unamortized discount and deferred financing costs
 
 
 
 
 
 
 
 
(1,129
)
 
(1,251
)
Net carrying amount
 
 
 
 
 
 
 
 
$
323,871

 
$
323,749

 
 
 
 
 
 
 
 
 
 
 
 
6.625% Unsecured Senior Notes (6)
May 2010
 
June 2020
 
6.625%
 
6.743%
 
$
250,000

 
$
250,000

Unamortized discount and deferred financing costs
 
 
 
 
 
 
 
 
(2,279
)
 
(2,414
)
Net carrying amount
 
 
 
 
 
 
 
 
$
247,721

 
$
247,586

 
 
 
 
 
 
 
 
 
 
 
 
Total Unsecured Senior Notes, Net
 
 
 
 
 
 
 
 
$
1,657,374

 
$
1,656,776

 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
Represents the effective interest rate including the amortization of initial issuance discounts/premiums excluding the amortization of deferred financing costs.
(2)
Interest on these notes is payable semi-annually in arrears on April 1st and October 1st of each year.
(3)
Interest on these notes is payable semi-annually in arrears on February 15th and August 15th of each year.
(4)
Interest on these notes is payable semi-annually in arrears on January 15th and July 15th of each year.

15


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


(5)
In October 2015, certain common limited partners in the Operating Partnership that previously contributed their interests in the property at 6255 W. Sunset Blvd., Los Angeles, California to the Operating Partnership entered into an agreement with the Company.  Pursuant to this agreement, such  common limited partners will reimburse the Company for a portion of any amounts the Company may be required to pay pursuant to its guarantee of the Operating Partnership’s 4.800% Senior Notes due 2018 or that the Company may otherwise become required to pay under applicable law with respect to such notes.
(6)
Interest on these notes is payable semi-annually in arrears on June 1st and December 1st of each year.

Unsecured Term Loan Facility

The Company intends to borrow amounts under the unsecured revolving credit facility from time to time for general corporate purposes, to fund potential acquisitions, to finance development and redevelopment expenditures and to potentially repay long-term debt.

The following table summarizes the balance and terms of our unsecured term loan facility as of March 31, 2016 and December 31, 2015:

 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Outstanding borrowings (1)
$
150,000

 
$
150,000

Interest rate (2)
1.59
%
 
1.40
%
Maturity date
July 2019
________________________
(1)
As of March 31, 2016 and December 31, 2015, $0.9 million of unamortized deferred financing costs remained to be amortized through the maturity date of our unsecured term loan facility.
(2)
Our unsecured term loan facility interest rate was calculated based on an annual rate of LIBOR plus 1.150% as of March 31, 2016 and December 31, 2015.

Additionally, the Company has a $39.0 million unsecured term loan outstanding with an annual interest rate of LIBOR plus 1.150% as of March 31, 2016 and December 31, 2015, that matures in July 2019. As of March 31, 2016 and December 31, 2015, $0.2 million of unamortized deferred financing costs remained to be amortized through the maturity date of our unsecured term loan.

Unsecured Revolving Credit Facility

The following table summarizes the balance and terms of our unsecured revolving credit facility as of March 31, 2016 and December 31, 2015:
 
 
March 31, 2016
 
December 31, 2015
 
(in thousands)
Outstanding borrowings
$
75,000

 
$

Remaining borrowing capacity
525,000

 
600,000

Total borrowing capacity (1)
$
600,000

 
$
600,000

Interest rate (2)
1.49
%
 
%
Facility fee-annual rate (3)
0.200%
Maturity date
July 2019
________________________
(1)
We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $311.0 million under an accordion feature under the terms of the unsecured revolving credit facility and term loan facility.
(2)
Our unsecured revolving credit facility interest rate was calculated based on an annual rate of LIBOR plus 1.050% as of March 31, 2016 and December 31, 2015.
(3)
Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of March 31, 2016 and December 31, 2015, $4.3 million and $4.6 million, of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured revolving credit facility, which are included in prepaid expenses and other assets, net on our consolidated balance sheets.

16


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



Debt Covenants and Restrictions

The unsecured revolving credit facility, the unsecured term loan facility, the unsecured term loan, the unsecured senior notes, and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a minimum unsecured debt ratio and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and restrictions could result in the full principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our debt covenants as of March 31, 2016.

Debt Maturities

The following table summarizes the stated debt maturities and scheduled amortization payments, excluding unamortized debt discounts, premiums and deferred financing costs, as of March 31, 2016:

Year
(in thousands)
Remaining 2016
$
7,356

2017
71,734

2018
451,713

2019
340,355

2020
251,962

Thereafter
1,189,198

Total (1)
$
2,312,318

________________________ 
(1)
Includes gross principal balance of outstanding debt before the effect of the following at March 31, 2016: $12.5 million of unamortized deferred financing costs, $7.2 million of unamortized discounts for the unsecured senior notes and $5.8 million of unamortized premiums for the secured debt.

Capitalized Interest and Loan Fees

The following table sets forth gross interest expense, including debt discount/premium and deferred financing cost amortization, net of capitalized interest, for the three months ended March 31, 2016 and 2015. The interest expense capitalized was recorded as a cost of development and increased the carrying value of undeveloped land and construction in progress.

 
Three Months Ended March 31,
 
2016
 
2015
 
(in thousands)
Gross interest expense
$
26,175

 
$
27,749

Capitalized interest and deferred financing costs
(14,346
)
 
(10,871
)
Interest expense
$
11,829

 
$
16,878



7.    Noncontrolling Interests on the Company’s Consolidated Financial Statements

Common Units of the Operating Partnership

The Company owned an approximate 97.2%, 98.1% and 98.0% common general partnership interest in the Operating Partnership as of March 31, 2016, December 31, 2015 and March 31, 2015, respectively. The remaining approximate 2.8%, 1.9% and 2.0% common limited partnership interest as of March 31, 2016, December 31, 2015 and March 31, 2015, respectively, was owned by non-affiliated investors and certain of our executive officers and directors in the form of noncontrolling common units. There were 2,631,276, 1,764,775 and 1,793,170 common units outstanding held by these investors, executive officers and directors as of March 31, 2016, December 31, 2015 and March 31, 2015, respectively. The increase in the common units from December 31, 2015 to March 31, 2016 was attributable to 867,701 common units issued in connection with an acquisition (see Note 2) partially offset by a unit redemption.

The noncontrolling common units may be redeemed by unitholders for cash. Except under certain circumstances, we, at our option, may satisfy the cash redemption obligation with shares of the Company’s common stock on a one-for-one basis. If satisfied

17


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


in cash, the value for each noncontrolling common unit upon redemption is the amount equal to the average of the closing quoted price per share of the Company’s common stock, par value $.01 per share, as reported on the NYSE for the ten trading days immediately preceding the applicable redemption date. The aggregate value upon redemption of the then-outstanding noncontrolling common units was $158.8 million and $112.0 million as of March 31, 2016 and December 31, 2015, respectively. This redemption value does not necessarily represent the amount that would be distributed with respect to each noncontrolling common unit in the event of our termination or liquidation. In the event of our termination or liquidation, it is expected in most cases that each common unit would be entitled to a liquidating distribution equal to the liquidating distribution payable in respect of each share of the Company’s common stock.

8.    Stockholders’ Equity of the Company

At-The-Market Stock Offering Program

Under our current at-the-market stock offering program, which commenced in December 2014, we may offer and sell shares of our common stock having an aggregate gross sales price of up to $300.0 million from time to time in “at-the-market” offerings. No shares of common stock were sold under this program during the three months ended March 31, 2016. Since commencement of the program through March 31, 2016, we have sold 2,007,767 shares of common stock having an aggregate gross sales price of $150.1 million. As of March 31, 2016, shares of common stock having an aggregate gross sales price of up to $149.9 million remain available to be sold under this program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of the Company’s common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program.

Common Stock Repurchases

On February 23, 2016, the Company’s board of directors approved a 4,000,000 share increase to the Company’s existing share repurchase program bringing the total current repurchase authorization to 4,988,025 shares. During the three months ended March 31, 2016, the Company repurchased 52,199 shares of common stock at a weighted average price of $55.45 per common share for $2.9 million. As of March 31, 2016, 4,935,826 shares remain eligible for repurchase under the Company’s share repurchase program.


9.    Partners’ Capital of the Operating Partnership

Issuance of Common Units

In March 2016, the Operating Partnership issued 867,701 common units in connection with a development acquisition as discussed in Note 2. Each common unit was valued at $55.36, which was based on a trailing ten-day average of the closing quoted price per share of the Company’s common stock, par value $.01 per share, as reported on the NYSE, as calculated in accordance with the Partnership Agreement.

Common Units Outstanding

The following table sets forth the number of common units held by the Company and the number of common units held by non-affiliated investors and certain of our executive officers and directors in the form of noncontrolling common units as well as