KRC 3/31/2013 10Q

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, 2013
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 30, 2013, 75,460,005 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, 2013 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, 2013, the Company owned an approximate 97.6% common general partnership interest in the Operating Partnership. The remaining approximate 2.4% common limited partnership interests are owned by non-affiliated investors and certain directors and executive 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, which 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 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 is required to contribute to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company's business through the Operating Partnership's operations, property dispositions, by the Operating Partnership's incurrence of indebtedness or through the issuance of partnership units.
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. This noncontrolling interest represents the Company's 1% indirect general partnership interest in Kilroy Realty Finance Partnership, L.P., 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 Company's noncontrolling interest in Kilroy Realty Finance Partnership, L.P.
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 5, Secured and Unsecured Debt of the Operating Partnership;
Note 6, Noncontrolling Interests on the Company's Consolidated Financial Statements;
Note 7, Stockholders' Equity of the Company;

i


Note 8, Partners' Capital of the Operating Partnership;
Note 12, Net (Loss) Income Available to Common Stockholders Per Share of the Company; and
Note 13, Net (Loss) Income Available to Common Unitholders Per Unit of the Operating Partnership;
"Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of the Company"; and
"Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations - 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 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, 2013
TABLE OF CONTENTS
 
 
  
 
Page
 
  
PART I-FINANCIAL INFORMATION
 
 
 
 
Item 1.
  
FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION
 
  
 
  
 
  
 
  
 
 
 
Item 1.
 
FINANCIAL STATEMENTS OF KILROY REALTY, L.P.
 
 
 
 
 
 
 
 
 
  
 
 
 
 
Item 2.
  
 
 
 
Item 3.
  
 
 
 
Item 4.
  
CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P.)
 
 
 
 
  
PART II-OTHER INFORMATION
 
 
 
 
Item 1.
  
 
 
 
Item 1A.
  
 
 
 
Item 2.
  
 
 
 
Item 3.
  
 
 
 
Item 4.
  
MINE SAFETY DISCLOSURES
 
 
 
Item 5.
  
 
 
 
Item 6.
  
 
 
 



PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

 
March 31, 2013
 
December 31, 2012
 
(unaudited)
 
 
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
637,854

 
$
612,714

Buildings and improvements (Note 2)
3,631,057

 
3,335,026

Undeveloped land and construction in progress
747,679

 
809,654

Total real estate held for investment
5,016,590

 
4,757,394

Accumulated depreciation and amortization
(790,878
)
 
(756,515
)
Total real estate assets held for investment, net ($0 and $319,770 of VIE, Note 1)
4,225,712

 
4,000,879

CASH AND CASH EQUIVALENTS
135,676

 
16,700

RESTRICTED CASH
19,465

 
247,544

MARKETABLE SECURITIES (Note 11)
8,029

 
7,435

CURRENT RECEIVABLES, NET (Note 4)
10,666

 
9,220

DEFERRED RENT RECEIVABLES, NET (Note 4)
122,142

 
115,418

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
196,525

 
189,968

DEFERRED FINANCING COSTS, NET
20,501

 
18,971

PREPAID EXPENSES AND OTHER ASSETS, NET
16,571

 
9,949

TOTAL ASSETS
$
4,755,287

 
$
4,616,084

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt (Notes 2, 5 and 11)
$
570,676

 
$
561,096

Exchangeable senior notes, net (Notes 5 and 11)
165,022

 
163,944

Unsecured debt, net (Notes 5 and 11)
1,430,880

 
1,130,895

Unsecured line of credit (Notes 5 and 11)

 
185,000

Accounts payable, accrued expenses and other liabilities
171,694

 
154,734

Accrued distributions (Note 14)
29,106

 
28,924

Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)
118,118

 
117,904

Rents received in advance and tenant security deposits
37,251

 
37,654

Total liabilities
2,522,747

 
2,380,151

COMMITMENTS AND CONTINGENCIES (Note 10)

 

EQUITY:
 
 
 
Stockholders' Equity (Note 7):
 
 
 
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, 75,349,705 and 74,926,981 shares issued and outstanding, respectively
753

 
749

Additional paid-in capital
2,149,052

 
2,126,005

Distributions in excess of earnings
(157,211
)
 
(129,535
)
Total stockholders' equity
2,185,005

 
2,189,630

Noncontrolling interest:
 
 
 
Common units of the Operating Partnership (Note 6)
47,535

 
46,303

Total equity
2,232,540

 
2,235,933

TOTAL LIABILITIES AND EQUITY
$
4,755,287

 
$
4,616,084

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,
 
2013
 
2012
REVENUES:
 
 
 
Rental income
$
107,380

 
$
84,349

Tenant reimbursements
9,887

 
7,180

Other property income
230

 
868

Total revenues
117,497

 
92,397

EXPENSES:
 
 
 
Property expenses
23,773

 
16,132

Real estate taxes
10,337

 
7,665

Provision for bad debts
95

 
2

Ground leases (Note 3)
847

 
807

General and administrative expenses
9,669

 
8,767

Acquisition-related expenses
655

 
1,528

Depreciation and amortization
50,391

 
34,652

Total expenses
95,767

 
69,553

OTHER (EXPENSES) INCOME:
 
 
 
Interest income and other net investment gains (Note 11)
392

 
484

Interest expense (Note 5)
(19,734
)
 
(21,163
)
Total other (expenses) income
(19,342
)
 
(20,679
)
INCOME FROM CONTINUING OPERATIONS
2,388

 
2,165

DISCONTINUED OPERATIONS
 
 
 
Income from discontinued operations

 
3,697

Net gain on dispositions of discontinued operations

 
72,809

Total income from discontinued operations

 
76,506

NET INCOME
2,388

 
78,671

Net loss (income) attributable to noncontrolling common units of the Operating Partnership
22

 
(1,795
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
2,410

 
76,876

PREFERRED DISTRIBUTIONS AND DIVIDENDS:
 
 
 
Distributions to noncontrolling cumulative redeemable preferred units of the Operating Partnership

 
(1,397
)
Preferred dividends
(3,313
)
 
(3,021
)
Original issuance costs of redeemed preferred stock

 
(4,918
)
Total preferred distributions and dividends
(3,313
)
 
(9,336
)
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS
$
(903
)
 
$
67,540

Loss from continuing operations available to common stockholders per common share - basic (Note 12)
$
(0.02
)
 
$
(0.12
)
Loss from continuing operations available to common stockholders per common share - diluted (Note 12)
$
(0.02
)
 
$
(0.12
)
Net (loss) income available to common stockholders per share - basic (Note 12)
$
(0.02
)
 
$
1.06

Net (loss) income available to common stockholders per share - diluted (Note 12)
$
(0.02
)
 
$
1.06

Weighted average common shares outstanding - basic (Note 12)
74,977,240

 
63,648,704

Weighted average common shares outstanding - diluted (Note 12)
74,977,240

 
63,648,704

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
 
Noncontrol-
ling Interests
- Common
Units of the
Operating
Partnership
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2011
$
121,582

 
58,819,717

 
$
588

 
$
1,448,997

 
$
(277,450
)
 
$
1,293,717

 
$
33,765

 
$
1,327,482

Net income
 
 
 
 
 
 
 
 
76,876

 
76,876

 
1,795

 
78,671

Issuance of Series G Preferred stock
96,155

 
 
 
 
 
 
 
 
 
96,155

 
 
 
96,155

Series E and Series F Preferred stock, called for redemption
(121,582
)
 
 
 
 
 
 
 
(4,918
)
 
(126,500
)
 
 
 
(126,500
)
Issuance of common stock
 
 
9,487,500

 
95

 
381,968

 
 
 
382,063

 
 
 
382,063

Issuance of share-based compensation awards
 
 
59,938

 

 
294

 
 
 
294

 
 
 
294

Noncash amortization of share-based compensation
 
 
 
 
 
 
1,469

 
 
 
1,469

 
 
 
1,469

Repurchase of common stock and restricted stock units
 
 
(22,312
)
 
 
 
(603
)
 
 
 
(603
)
 
 
 
(603
)
Exercise of stock options
 
 
5,000

 
 
 
129

 
 
 
129

 
 
 
129

Adjustment for noncontrolling interest
 
 
 
 
 
 
(4,578
)
 
 
 
(4,578
)
 
4,578

 

Preferred dividends and distributions
 
 
 
 
 
 
 
 
(4,418
)
 
(4,418
)
 
 
 
(4,418
)
Dividends declared per common share and common unit ($0.35 per share/unit)
 
 
 
 
 
 
 
 
(24,289
)
 
(24,289
)
 
(603
)
 
(24,892
)
BALANCE AS OF MARCH 31, 2012
$
96,155

 
68,349,843

 
$
683

 
$
1,827,676

 
$
(234,199
)
 
$
1,690,315

 
$
39,535

 
$
1,729,850

 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock 
 
 
Total
Stock-
holders'
Equity
 
Noncontrol-
ling Interests
- Common
Units of the
Operating
Partnership
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2012
$
192,411

 
74,926,981

 
$
749

 
$
2,126,005

 
$
(129,535
)
 
$
2,189,630

 
$
46,303

 
$
2,235,933

Net income (loss)
 
 
 
 
 
 
 
 
2,410

 
2,410

 
(22
)
 
2,388

Issuance of common stock (Note 7)
 
 
453,679

 
4

 
23,391

 
 
 
23,395

 
 
 
23,395

Issuance of share-based compensation awards (Note 9)
 
 

 
 
 
336

 
 
 
336

 
 
 
336

Noncash amortization of share-based compensation (Note 9)
 
 
 
 
 
 
2,422

 
 
 
2,422

 
 
 
2,422

Repurchase of common stock and restricted stock units (Note 9)
 
 
(33,534
)
 
 
 
(1,199
)
 
 
 
(1,199
)
 
 
 
(1,199
)
Settlement of restricted stock units for shares of common stock (Note 9)
 
 
2,579

 
 
 
(10
)
 
 
 
(10
)
 
 
 
(10
)
Adjustment for noncontrolling interest
 
 
 
 
 
 
(1,893
)
 
 
 
(1,893
)
 
1,893

 

Preferred dividends and distributions
 
 
 
 
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Dividends declared per common share and common unit ($0.35 per share/unit)
 
 
 
 
 
 
 
 
(26,773
)
 
(26,773
)
 
(639
)
 
(27,412
)
BALANCE AS OF MARCH 31, 2013
$
192,411

 
75,349,705

 
$
753

 
$
2,149,052

 
$
(157,211
)
 
$
2,185,005

 
$
47,535

 
$
2,232,540

See accompanying notes to consolidated financial statements.


3


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,388

 
$
78,671

Adjustments to reconcile net income to net cash provided by operating activities (including discontinued operations):
 
 
 
Depreciation and amortization of building and improvements and leasing costs
50,011

 
36,464

Increase in provision for bad debts
95

 
2

Depreciation of furniture, fixtures and equipment
380

 
288

Noncash amortization of share-based compensation awards
2,234

 
1,287

Noncash amortization of deferred financing costs and debt discounts and premiums
1,413

 
2,976

Noncash amortization of net below market rents (Note 3)
(2,047
)
 
(525
)
Net gain on dispositions of discontinued operations

 
(72,809
)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(2,442
)
 
(2,261
)
Straight-line rents
(6,724
)
 
(5,487
)
Net change in other operating assets
(7,390
)
 
(3,869
)
Net change in other operating liabilities
18,581

 
14,956

Insurance proceeds received for property damage

 
(951
)
Net cash provided by operating activities
56,499

 
48,742

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties (Note 2)
(85,692
)
 
(162,380
)
Expenditures for operating properties
(25,571
)
 
(17,307
)
Expenditures for development and redevelopment properties and undeveloped land
(73,369
)
 
(13,477
)
Net proceeds received from dispositions of operating properties

 
100,765

Insurance proceeds received for property damage

 
951

Increase in acquisition-related deposits

 
(5,250
)
Decrease (increase) in restricted cash (Note 1)
228,079

 
(386
)
Net cash provided by (used in) investing activities
43,447

 
(97,084
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of Series G preferred stock

 
96,757

Net proceeds from issuance of common stock (Note 7)
23,395

 
382,063

Borrowings on unsecured line of credit

 
30,000

Repayments on unsecured line of credit
(185,000
)
 
(212,000
)
Principal payments on secured debt
(84,918
)
 
(1,546
)
Proceeds from the issuance of unsecured debt (Note 5)
299,901

 
150,000

Financing costs
(2,870
)
 
(1,877
)
Repurchase of common stock and restricted stock units (Note 9)
(1,209
)
 
(603
)
Proceeds from exercise of stock options

 
129

Dividends and distributions paid to common stockholders and common unitholders
(26,956
)
 
(21,191
)
Dividends and distributions paid to preferred stockholders and preferred unitholders
(3,313
)
 
(3,799
)
Net cash provided by financing activities
19,030

 
417,933

Net increase in cash and cash equivalents
118,976

 
369,591

Cash and cash equivalents, beginning of period
16,700

 
4,777

Cash and cash equivalents, end of period
$
135,676

 
$
374,368


4


KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(unaudited, in thousands)

 
Three Months Ended March 31,
 
2013
 
2012
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of capitalized interest of $7,175 and $3,251 as of March 31, 2013 and 2012, respectively
$
11,303

 
$
4,487

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
42,140

 
$
5,421

Tenant improvements funded directly by tenants
$
1,426

 
$
95

Assumption of secured debt in connection with property acquisitions (Notes 2 and 5)
$
95,496

 
$

Assumption of other assets and liabilities in connection with operating and development property acquisitions, net (Note 2)
$
422

 
$
137

Net disposition proceeds held by a qualified intermediary in connection with Section 1031 exchange
$

 
$
42,395

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of preferred stock issuance costs
$

 
$
602

Accrual of dividends and distributions payable to common stockholders and common unitholders
$
27,011

 
$
24,524

Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders
$
1,694

 
$
2,431

Issuance of share-based compensation awards, net (Note 9)
$
8,451

 
$
29,989

Reclassification of preferred units called for redemption from equity to liabilities
$

 
$
126,500


See accompanying notes to consolidated financial statements.


5


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

KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
 
March 31, 2013
 
December 31, 2012
 
(unaudited)
 
 
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
637,854

 
$
612,714

Buildings and improvements (Note 2)
3,631,057

 
3,335,026

Undeveloped land and construction in progress
747,679

 
809,654

Total real estate held for investment
5,016,590

 
4,757,394

Accumulated depreciation and amortization
(790,878
)
 
(756,515
)
Total real estate assets held for investment, net ($0 and $319,770 of VIE, Note 1)
4,225,712

 
4,000,879

CASH AND CASH EQUIVALENTS
135,676

 
16,700

RESTRICTED CASH
19,465

 
247,544

MARKETABLE SECURITIES (Note 11)
8,029

 
7,435

CURRENT RECEIVABLES, NET (Note 4)
10,666

 
9,220

DEFERRED RENT RECEIVABLES, NET (Note 4)
122,142

 
115,418

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
196,525

 
189,968

DEFERRED FINANCING COSTS, NET
20,501

 
18,971

PREPAID EXPENSES AND OTHER ASSETS, NET
16,571

 
9,949

TOTAL ASSETS
$
4,755,287

 
$
4,616,084

LIABILITIES AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt (Notes 2, 5 and 11)
$
570,676

 
$
561,096

Exchangeable senior notes, net (Notes 5 and 11)
165,022

 
163,944

Unsecured debt, net (Notes 5 and 11)
1,430,880

 
1,130,895

Unsecured line of credit (Notes 5 and 11)

 
185,000

Accounts payable, accrued expenses and other liabilities
171,694

 
154,734

Accrued distributions (Note 14)
29,106

 
28,924

Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)
118,118

 
117,904

Rents received in advance and tenant security deposits
37,251

 
37,654

Total liabilities
2,522,747

 
2,380,151

COMMITMENTS AND CONTINGENCIES (Note 10)

 

CAPITAL:
 
 
 
Partners' Capital (Note 8):
 
 
 
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, 75,349,705 and 74,926,981 held by the general partner and 1,826,503 and 1,826,503 held by common limited partners issued and outstanding, respectively
2,036,781

 
2,040,243

Total partners' capital
2,229,192

 
2,232,654

Noncontrolling interest in consolidated subsidiaries
3,348

 
3,279

Total capital
2,232,540

 
2,235,933

TOTAL LIABILITIES AND CAPITAL
$
4,755,287

 
$
4,616,084

See accompanying notes to consolidated financial statements.

6


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit data)
 
 
Three Months Ended March 31,
 
2013
 
2012
REVENUES:
 
 
 
Rental income
$
107,380

 
84,349

Tenant reimbursements
9,887

 
7,180

Other property income
230

 
868

Total revenues
117,497

 
92,397

EXPENSES:
 
 
 
Property expenses
23,773

 
16,132

Real estate taxes
10,337

 
7,665

Provision for bad debts
95

 
2

Ground leases (Note 3)
847

 
807

General and administrative expenses
9,669

 
8,767

Acquisition-related expenses
655

 
1,528

Depreciation and amortization
50,391

 
34,652

Total expenses
95,767

 
69,553

OTHER (EXPENSES) INCOME:
 
 
 
Interest income and other net investment gains (Note 11)
392

 
484

Interest expense (Note 5)
(19,734
)
 
(21,163
)
Total other (expenses) income
(19,342
)
 
(20,679
)
INCOME FROM CONTINUING OPERATIONS
2,388

 
2,165

DISCONTINUED OPERATIONS
 
 
 
Income from discontinued operations

 
3,697

Net gain on dispositions of discontinued operations

 
72,809

Total income from discontinued operations

 
76,506

NET INCOME
2,388

 
78,671

Net income attributable to noncontrolling interests in consolidated subsidiaries
(69
)
 
(53
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
2,319

 
78,618

Preferred distributions
(3,313
)
 
(4,418
)
Original issuance costs of redeemed preferred units

 
(4,918
)
Total preferred distributions
(3,313
)
 
(9,336
)
NET (LOSS) INCOME AVAILABLE TO COMMON UNITHOLDERS
$
(994
)
 
$
69,282

Loss from continuing operations available to common unitholders per common unit - basic (Note 13)
$
(0.02
)
 
$
(0.12
)
Loss from continuing operations available to common unitholders per common unit - diluted (Note 13)
$
(0.02
)
 
$
(0.12
)
Net (loss) income available to common unitholders per unit - basic (Note 13)
$
(0.02
)
 
$
1.05

Net (loss) income available to common unitholders per unit - diluted (Note 13)
$
(0.02
)
 
$
1.05

Weighted average common units outstanding - basic (Note 13)
76,803,743

 
65,366,835

Weighted average common units outstanding - diluted (Note 13)
76,803,743

 
65,366,835

Dividends declared per common unit
$
0.35

 
$
0.35

See accompanying notes to consolidated financial statements.


7


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(unaudited, in thousands, except unit and per unit data)
 
 
Partners'
Capital
 
Total
Partners' 
Capital
 
Noncontrolling
Interests
in
Consolidated
Subsidiaries
 
 
 
Preferred
Units
  
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2011
$
121,582

  
60,537,848

 
$
1,203,259

 
$
1,324,841

 
$
2,641

 
$
1,327,482

Net income
 
  
 
 
78,618

 
78,618

 
53

 
78,671

Issuance of Series G Preferred units
96,155

 
 
 
 
 
96,155

 
 
 
96,155

Redemption of Series E and Series F Preferred units, called for redemption
(121,582
)
 
 
 
(4,918
)
 
(126,500
)
 
 
 
(126,500
)
Issuance of common units
 
 
9,487,500

 
382,063

 
382,063

 
 
 
382,063

Issuance of share-based compensation awards
 
  
59,938

 
294

 
294

 
 
 
294

Noncash amortization of share-based compensation
 
  
 
 
1,469

 
1,469

 
 
 
1,469

Repurchase of common units and restricted stock units
 
  
(22,312
)
 
(603
)
 
(603
)
 
 
 
(603
)
Exercise of stock options
 
 
5,000

 
129

 
129

 
 
 
129

Preferred distributions
 
  
 
 
(4,418
)
 
(4,418
)
 
 
 
(4,418
)
Distributions declared per common unit ($0.35 per unit)
 
  
 
 
(24,892
)
 
(24,892
)
 
 
 
(24,892
)
BALANCE AS OF MARCH 31, 2012
$
96,155

  
70,067,974

 
$
1,631,001

 
$
1,727,156

 
$
2,694

 
$
1,729,850

 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2012
$
192,411

  
76,753,484

 
$
2,040,243

 
$
2,232,654

 
$
3,279

 
$
2,235,933

Net income
 
  
 
 
2,319

 
2,319

 
69

 
2,388

Issuance of common units (Note 8)
 
 
453,679

 
23,395

 
23,395

 
 
 
23,395

Issuance of share-based compensation awards (Note 9)
 
  

 
336

 
336

 
 
 
336

Noncash amortization of share-based compensation (Note 9)
 
  
 
 
2,422

 
2,422

 
 
 
2,422

Repurchase of common units and restricted stock units (Note 9)
 
  
(33,534
)
 
(1,199
)
 
(1,199
)
 
 
 
(1,199
)
Settlement of restricted stock units (Note 9)
 
 
2,579

 
(10
)
 
(10
)
 
 
 
(10
)
Preferred distributions
 
  
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Distributions declared per common unit ($0.35 per unit)
 
  
 
 
(27,412
)
 
(27,412
)
 
 
 
(27,412
)
BALANCE AS OF MARCH 31, 2013
$
192,411

  
77,176,208

 
$
2,036,781

 
$
2,229,192

 
$
3,348

 
$
2,232,540


See accompanying notes to consolidated financial statements.


8


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
2,388

 
$
78,671

Adjustments to reconcile net income to net cash provided by operating activities (including discontinued operations):
 
 
 
Depreciation and amortization of building and improvements and leasing costs
50,011

 
36,464

Increase in provision for bad debts
95

 
2

Depreciation of furniture, fixtures and equipment
380

 
288

Noncash amortization of share-based compensation awards
2,234

 
1,287

Noncash amortization of deferred financing costs and debt discounts and premiums
1,413

 
2,976

Noncash amortization of net below market rents (Note 3)
(2,047
)
 
(525
)
Net gain on dispositions of discontinued operations

 
(72,809
)
Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(2,442
)
 
(2,261
)
Straight-line rents
(6,724
)
 
(5,487
)
Net change in other operating assets
(7,390
)
 
(3,869
)
Net change in other operating liabilities
18,581

 
14,956

Insurance proceeds received for property damage

 
(951
)
Net cash provided by operating activities
56,499

 
48,742

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties (Note 2)
(85,692
)
 
(162,380
)
Expenditures for operating properties
(25,571
)
 
(17,307
)
Expenditures for development and redevelopment properties and undeveloped land
(73,369
)
 
(13,477
)
Net proceeds received from dispositions of operating properties

 
100,765

Insurance proceeds received for property damage

 
951

Increase in acquisition-related deposits

 
(5,250
)
Decrease (increase) in restricted cash (Note 1)
228,079

 
(386
)
Net cash provided by (used in) investing activities
43,447

 
(97,084
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of Series G preferred units

 
96,757

Net proceeds from issuance of common units (Note 8)
23,395

 
382,063

Borrowings on unsecured line of credit

 
30,000

Repayments on unsecured line of credit
(185,000
)
 
(212,000
)
Principal payments on secured debt
(84,918
)
 
(1,546
)
Proceeds from the issuance of unsecured debt (Note 5)
299,901

 
150,000

Financing costs
(2,870
)
 
(1,877
)
Repurchase of common units and restricted stock units (Note 9)
(1,209
)
 
(603
)
Proceeds from exercise of stock options

 
129

Distributions paid to common unitholders
(26,956
)
 
(21,191
)
Distributions paid to preferred unitholders
(3,313
)
 
(3,799
)
Net cash provided by financing activities
19,030

 
417,933

Net increase in cash and cash equivalents
118,976

 
369,591

Cash and cash equivalents, beginning of period
16,700

 
4,777

Cash and cash equivalents, end of period
$
135,676

 
$
374,368

 

9


KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(unaudited, in thousands)
 
 
 
Three Months Ended March 31,
 
2013
  
2012
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
  
 
Cash paid for interest, net of capitalized interest of $7,175 and $3,251 as of March 31, 2013 and 2012, respectively
$
11,303

 
$
4,487

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
42,140

 
$
5,421

Tenant improvements funded directly by tenants
$
1,426

 
$
95

Assumption of secured debt in connection with property acquisitions (Notes 2 and 5)
$
95,496

 
$

Assumption of other assets and liabilities in connection with operating and development property acquisitions, net (Note 2)
$
422

 
$
137

Net disposition proceeds held by a qualified intermediary in connection with Section 1031 exchange
$

 
$
42,395

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of preferred unit issuance costs
$

 
$
602

Accrual of distributions payable to common unitholders
$
27,011

 
$
24,524

Accrual of distributions payable to preferred unitholders
$
1,694

 
$
2,431

Issuance of share-based compensation awards, net (Note 9)
$
8,451

 
$
29,989

Reclassification of preferred units called for redemption from equity to liabilities
$

 
$
126,500

See accompanying notes to consolidated financial statements.


10


KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2013 and 2012
(unaudited)

1.    Organization and Basis of Presentation
Organization
Kilroy Realty Corporation (the "Company") is a self-administered real estate investment trust ("REIT") active in 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 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, 2013:

 
Number of
Buildings
 
Rentable
Square Feet
 
Number of
Tenants
 
Percentage Occupied
Office Properties
116

 
13,570,059

 
553

 
90.3
%

Our stabilized portfolio includes all of our properties with the exception of undeveloped land, development and redevelopment properties currently under construction or committed for construction, "lease-up" properties and properties held-for-sale. We define redevelopment properties as those projects for which we expect to spend significant development and construction costs on existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We 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. As of March 31, 2013, the following properties were excluded from our stabilized portfolio:
 
Number of Properties
 
Estimated Rentable Square Feet
Development properties under construction (1)
4
 
1,416,000

Lease-up properties
2
 
508,000

________________________
(1) Estimated rentable square feet upon completion.

As of March 31, 2013, all of our properties and development and redevelopment projects are owned and all of our business is
currently conducted in the state of California with the exception of eleven office properties located in the state of Washington.
As of March 31, 2013, the Company owned a 97.6% general partnership interest in the Operating Partnership. The remaining 2.4% common limited partnership interest in the Operating Partnership as of March 31, 2013 was owned by non-affiliated investors and certain of our directors and executive officers (see Note 6). Both the general and limited common partnership interests in the Operating Partnership are denominated in common units. The number of common units held by the Company is at all times 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 6).
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% general partnership interest. The Operating Partnership owns the remaining 99.0% limited partnership interest. Kilroy Services, LLC ("KSLLC"), which is a wholly-owned subsidiary of the Operating Partnership, is the entity through

11

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


which we conduct substantially all of our development activities. With the exception of the Operating Partnership, all of our subsidiaries are wholly-owned.

Basis of Presentation
The consolidated financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating Partnership, the Finance Partnership, KSLLC, 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, and all wholly-owned and controlled subsidiaries of the Operating Partnership. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
The accompanying interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America ("GAAP") and in conjunction with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012.
Consolidated Variable Interest Entities
As of December 31, 2012 the consolidated financial statements of the Company and the Operating Partnership included two variable interest entities ("VIE") in which we were deemed to be the primary beneficiary. The VIEs were established during 2012 to facilitate potential like-kind exchanges pursuant to Section 1031 of the Code to defer taxable gains on dispositions for federal and state income tax purposes. During the year ended December 31, 2012, one operating property and one development project were acquired in two separate transactions and transferred to the two special purpose VIEs to facilitate potential Section 1031 Exchanges. The impact of consolidating the VIEs increased the Company's total assets and liabilities by approximately $337.0 million and $111.1 million, respectively, at December 31, 2012. During the three months ended March 31, 2013, the Section 1031 Exchanges were completed and the VIEs were terminated. As a result, $228.1 million of restricted cash set aside to facilitate the Section 1031 Exchanges was released from escrow and the Company and the Operating Partnership did not have any VIEs at March 31, 2013.


2.    Acquisitions
Operating Properties
During the three months ended March 31, 2013, we acquired the two operating office properties listed below from an unrelated third party. The acquisition was funded with a portion of the remaining proceeds from the sale of our industrial portfolio that was included in restricted cash at December 31, 2012 and the assumption of existing mortgage debt (see Note 5).
Property
 
Date of Acquisition
 
Number of
Buildings
 
Rentable Square
Feet
 
Occupancy as of March 31, 2013
 
Purchase
Price
(in millions)(1)
320 Westlake Ave. N. and 321 Terry Ave. N. (2) (3)
 
 
 
 
 
 
 
 
 
 
Seattle, WA
 
January 16, 2013
 
2
 
320,398

 
100.0%
 
$
170.0

Total
 
 
 
2
 
320,398

 
 
 
$
170.0

________________________
(1)
Excludes acquisition-related costs and includes assumed tenant improvements.
(2)
We acquired these properties through a new special purpose entity wholly owned by the Finance Partnership.
(3)
In connection with this acquisition, we assumed secured debt with an outstanding principal balance of $83.9 million that was recorded at fair value on the acquisition date, resulting in a premium of approximately $11.6 million (see Note 5).

12

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


The related assets, liabilities, and results of operations of the acquired properties 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 at the acquisition date:
 
320 Westlake Ave. N. and 321 Terry Ave. N., Seattle, WA
 
(in thousands)
Assets
 
Land and improvements
$
25,140

Buildings and improvements(1)
142,021

Deferred leasing costs and acquisition-related intangible assets(2)
16,019

Total assets acquired
183,180

 
 
Liabilities
 
Deferred revenue and acquisition-related intangible liabilities(3)
1,570

Secured debt(4)
95,496

Accounts payable, accrued expenses and other liabilities
422

Total liabilities assumed
97,488

Net assets and liabilities acquired(5)
$
85,692

________________________
(1)
Represents buildings, building improvements and tenant improvements.
(2)
Represents in-place leases (approximately $13.0 million with a weighted average amortization period of 3.9 years), above-market leases (approximately $0.3 million with a weighted average amortization period of 4.6 years), and leasing commissions (approximately $2.7 million with a weighted average amortization period of 3.0 years).
(3)
Represents below-market leases (approximately $1.6 million with a weighted average amortization period of 9.2 years).
(4)
Represents the mortgage loan, which includes an unamortized premium of approximately $11.6 million at the date of acquisition, assumed in connection with the properties acquired in January 2013 (see Note 5).
(5)
Reflects the purchase price net of assumed secured debt and other lease-related obligations.
 
 
 
 
 
 
 
 
 



13

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


3.    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, 2013 and December 31, 2012:
 
 
March 31, 2013
 
December 31, 2012
 
(in thousands)
Deferred Leasing Costs and Acquisition-related Intangible Assets, net(1):
 
 
 
Deferred leasing costs
$
171,107

 
$
168,087

Accumulated amortization
(62,265
)
 
(61,443
)
Deferred leasing costs, net
108,842

 
106,644

Above-market operating leases
27,627

 
27,977

Accumulated amortization
(13,010
)
 
(12,180
)
Above-market operating leases, net
14,617

 
15,797

In-place leases
103,778

 
101,061

Accumulated amortization
(31,195
)
 
(34,019
)
In-place leases, net
72,583

 
67,042

Below-market ground lease obligation
690

 
690

Accumulated amortization
(207
)
 
(205
)
Below-market ground lease obligation, net
483

 
485

Total deferred leasing costs and acquisition-related intangible assets, net
$
196,525

 
$
189,968

Acquisition-related Intangible Liabilities, net(1)(2):
 
 
 
Below-market operating leases
$
67,705

 
$
70,486

Accumulated amortization
(16,690
)
 
(17,555
)
Below-market operating leases, net
51,015

 
52,931

Above-market ground lease obligation
6,320

 
6,320

Accumulated amortization
(147
)
 
(122
)
Above-market ground lease obligation, net
6,173

 
6,198

Total acquisition-related intangible liabilities, net
$
57,188

 
$
59,129

________________________
(1)
Balances and accumulated amortization amounts at March 31, 2013 reflect the write-off of the following fully amortized amounts at January 1, 2013: deferred leasing costs (approximately $7.0 million), above-market leases (approximately $0.6 million), in-place leases (approximately $10.3 million), and below-market leases (approximately $4.4 million).
(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 months ended March 31, 2013 and 2012:
 
Three Months Ended March 31,
 
2013
 
2012
 
(in thousands)
Deferred leasing costs (1)
$
7,844

 
$
4,498

Above-market operating leases (2)
1,438

 
1,371

In-place leases (1)
7,458

 
3,781

Below-market ground lease obligation (3)
2

 
50

Below-market operating leases (4)
(3,485
)
 
(1,896
)
Above-market ground lease obligation (5)
(25
)
 
(16
)
Total
$
13,232

 
$
7,788

_________________________
(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.

14

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


(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.
The following table sets forth the estimated annual amortization expense related to deferred leasing costs and acquisition−related intangibles as of March 31, 2013 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 2013
$
18,417

 
$
3,939

 
$
20,874

 
$
6

 
$
(9,847
)
 
$
(76
)
2014
21,530

 
4,389

 
18,012

 
8

 
(11,512
)
 
(101
)
2015
17,558

 
2,586

 
11,729

 
8

 
(8,998
)
 
(101
)
2016
14,877

 
1,559

 
8,613

 
8

 
(6,814
)
 
(101
)
2017
12,311

 
1,225

 
6,818

 
8

 
(5,747
)
 
(101
)
Thereafter
24,149

 
919

 
6,537

 
445

 
(8,097
)
 
(5,693
)
Total
$
108,842

 
$
14,617

 
$
72,583

 
$
483

 
$
(51,015
)
 
$
(6,173
)
_______________________
(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.

4.    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, 2013 and December 31, 2012:  
 
March 31,
2013
 
December 31,
2012
 
(in thousands)
Current receivables
$
13,192

 
$
11,801

Allowance for uncollectible tenant receivables
(2,526
)
 
(2,581
)
Current receivables, net
$
10,666

 
$
9,220

 Deferred Rent Receivables, net
Deferred rent receivables, net consisted of the following as of March 31, 2013 and December 31, 2012:
 
March 31,
2013
 
December 31,
2012
 
(in thousands)
Deferred rent receivables
$
124,269

 
$
118,025

Allowance for deferred rent receivables
(2,127
)
 
(2,607
)
Deferred rent receivables, net
$
122,142

 
$
115,418



15

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


5.    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, 2013 and December 31, 2012:
 
Annual Stated 
 
GAAP
 
 
 
 
 
 
Type of Debt
Interest Rate (1)
 
Effective Rate (1)(2)
 
Maturity Date
 
March 31, 2013 (3)
 
December 31, 2012 (3)
 
 
 
 
 
 
 
(in thousands)
Mortgage note payable
4.27%
 
4.27%
 
February 2018
 
$
134,815

 
$
135,000

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

 
97,000

Mortgage note payable (4)(5)
6.05%
 
3.50%
 
June 2019
 
94,896

 

Mortgage note payable (6)
6.37%
 
3.55%
 
April 2013
 

 
83,116

Mortgage note payable
6.51%
 
6.51%
 
February 2017
 
68,383

 
68,615

Mortgage note payable (4)
5.23%
 
3.50%
 
January 2016
 
55,863

 
56,302

Mortgage note payable (4)
5.57%
 
3.25%
 
February 2016
 
42,672

 
43,016

Mortgage note payable (4)
5.09%
 
3.50%
 
August 2015
 
35,245

 
35,379

Mortgage note payable (4)
4.94%
 
4.00%
 
April 2015
 
28,620

 
28,941

Mortgage note payable
7.15%
 
7.15%
 
May 2017
 
10,665

 
11,210

Public facility bonds (7)
Various
 
Various
 
Various
 
2,517

 
2,517

Total
 
 
 
 
 
 
$
570,676

 
$
561,096


(1)
All interest rates presented are fixed-rate interest rates.
(2)
This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of discounts/premiums, excluding debt issuance costs.
(3)
Amounts reported include the amounts of unamortized debt premiums and discounts for the periods presented.
(4)
The secured debt and the related properties that secure the debt are held in a special purpose entity and the properties are not available to satisfy the debts and other obligations of the Company or the Operating Partnership.
(5)
In January 2013, in connection with the acquisition of two office buildings in Seattle, Washington, we assumed a mortgage loan that is secured by the project. The assumed mortgage had a principal balance of $83.9 million at the acquisition date and was recorded at fair value on the date of the acquisition resulting in a premium of approximately $11.6 million. The loan requires monthly principal and interest payments based on a 6.4 year amortization period.
(6)
In January 2013, we repaid this loan prior to the stated maturity.     
(7)
The public facility bonds (the “Bonds”), the proceeds from which were used to finance infrastructure improvements on one of the Company’s undeveloped land parcels, were issued in February 2008 by the City of Carlsbad. The Bonds have annual maturities from September 1, 2013 through September 1, 2038, with interest rates ranging from 4.74% to 6.19%. Principal and interest payments for the Bonds will be charged through the assessment of special property taxes.
 
    
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.















16

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


4.25% Exchangeable Senior Notes
The table below summarizes the balance and significant terms of the Company's 4.25% Exchangeable Notes due November 2014 (the "4.25% Exchangeable Notes") outstanding as of March 31, 2013 and December 31, 2012.
 
4.25% Exchangeable Notes 
 
March 31,
2013
 
December 31,
2012
 
(in thousands)
Principal amount
$
172,500

 
$
172,500

Unamortized discount
(7,478
)
 
(8,556
)
Net carrying amount of liability component
$
165,022

 
$
163,944

Carrying amount of equity component
$19,835
Issuance date
November 2009
Maturity date
November 2014
Stated coupon rate (1)
4.25%
Effective interest rate (2)
7.13%
Exchange rate per $1,000 principal value of the 4.25% Exchangeable Notes, as adjusted (3)
27.8307
Exchange price, as adjusted (3)
$35.93
Number of shares on which the aggregate consideration to be delivered on conversion is determined (3)
4,800,796
_____________________ 
(1)
Interest on the 4.25% Exchangeable Notes is payable semi-annually in arrears on May 15th and November 15th of each year.
(2)
The rate at which we record interest expense for financial reporting purposes, which reflects the amortization of the discounts on the 4.25% Exchangeable Notes. This rate represents our conventional debt borrowing rate at the date of issuance.
(3)
The exchange rate, exchange price, and the number of shares to be delivered upon conversion are subject to adjustment under certain circumstances including increases in our common dividends.
The 4.25% Exchangeable Notes are exchangeable for shares of the Company's common stock prior to maturity only upon the occurrence of certain events. During the three months ended March 31, 2013, the closing sale price per share of the common stock of the Company was more than 130% of the exchange price per share of the Company’s common stock for at least 20 trading days in the specified period. As a result, for the three-month period ending June 30, 2013, the 4.25% Exchangeable Notes are exchangeable at the exchange rate stated above and may be exchangeable thereafter, if one or more of the events were again to occur during future measurement periods.
For the three months ended March 31, 2013 and 2012, the per share average trading price of the Company's common stock on the NYSE was higher than the $35.93 exchange price for the 4.25% Exchangeable Notes, as presented below:
 
Three Months Ended March 31,
 
2013
 
2012
Per share average trading price of the Company's common stock
$51.14
 
$42.86
Although the 4.25% Exchangeable Notes were not convertible as of March 31, 2013 and 2012, if they were convertible, the approximate fair value of the shares upon conversion at these dates, using the per share average trading price presented in the table above, would have been as follows:
 
March 31, 2013
 
March 31, 2012
 
(in thousands)
Approximate fair value of shares upon conversion
$
247,300

 
$
208,700

Principal amount of the 4.25% Exchangeable Notes
172,500

 
172,500

Approximate fair value in excess amount of principal amount
$
74,800

 
$
36,200

See Notes 12 and 13 for a discussion of the impact of the 4.25% Exchangeable Notes on our diluted earnings per share and unit calculations for the periods presented.





17

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


Interest Expense for the Exchangeable Notes
The unamortized discount on the 4.25% Exchangeable Notes and the 3.25% Exchangeable Notes due April 2012 (the "3.25% Exchangeable Notes" and together with the 4.25% Exchangeable Notes, the "Exchangeable Notes") is accreted as additional interest expense from the date of issuance through the maturity date of the applicable Exchangeable Notes. The following table summarizes the total interest expense attributable to the 4.25% Exchangeable Notes and the 3.25% Exchangeable Notes which were repaid upon maturity in April 2012, based on the respective effective interest rates, before the effect of capitalized interest, for the three months ended March 31, 2013 and 2012:
 
Three Months Ended March 31,
 
2013 (1)
 
2012
 
(in thousands)
Contractual interest payments
$
1,833

 
$
3,035

Amortization of discount
1,078

 
1,797

Interest expense attributable to the Exchangeable Notes
$
2,911

 
$
4,832

________________________
(1)
The Company repaid the 3.25% Exchangeable Notes in April 2012. Interest payments and discount amortization for the three months ended March 31, 2013 are solely attributable to the 4.25% Exchangeable Notes.
Capped Call Transactions
In connection with the offering of the 4.25% Exchangeable Notes, we entered into capped call option transactions ("capped calls") to mitigate the dilutive impact of the potential conversion of the 4.25% Exchangeable Notes. The table below summarizes our capped call option positions for the 4.25% Exchangeable Notes as of both March 31, 2013 and December 31, 2012.
 
4.25% Exchangeable Notes
Referenced shares of common stock
4,800,796

Exchange price including effect of capped calls
$
42.81

Unsecured Senior Notes
In January 2013, the Operating Partnership issued unsecured senior notes in a public offering with an aggregate principal balance of $300.0 million, which is included in unsecured debt, net on our consolidated balance sheets. The unsecured senior notes, which are scheduled to mature on January 15, 2023, require semi-annual interest payments each January and July based on a stated annual interest rate of 3.80%. The unsecured senior notes are shown net of the initial issuance discount of $0.1 million on the consolidated balance sheets. The Company used a portion of the net proceeds for general corporate purposes, including the repayment of borrowings under the Operating Partnership's revolving credit facility.
Unsecured Revolving Credit Facility
The following table summarizes the balance and terms of our revolving credit facility as of March 31, 2013 and December 31, 2012, respectively:
 
March 31,
2013
 
December 31,
2012
 
(in thousands)
Outstanding borrowings
$

 
$
185,000

Remaining borrowing capacity
500,000

 
315,000

Total borrowing capacity(1)
$
500,000

 
$
500,000

Interest rate(2) 
%
 
1.66
%
Facility fee-annual rate(3)
0.300%
Maturity date(4)
April 2017
________________________
(1)
We may elect to borrow, subject to bank approval, up to an additional $200.0 million under an accordion feature under the terms of the revolving credit facility.
(2)
The revolving credit facility interest rate was calculated based on an annual rate of LIBOR plus 1.450% as of both March 31, 2013 and December 31, 2012.
(3)
The facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, from 2010 to 2012 we incurred debt origination and legal costs totaling approximately $10.2 million that are currently being amortized through the maturity date of the revolving credit facility.
(4)
Under the terms of the revolving credit facility, we may exercise an option to extend the maturity date by one year.
The Company intends to borrow amounts under the 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.


18

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


Debt Covenants and Restrictions
The revolving credit facility, the term loan facility, 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 or partial 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, 2013.

Debt Maturities
The following table summarizes the stated debt maturities and scheduled amortization payments, excluding debt discounts and premiums, as of March 31, 2013:
Year
(in thousands)
 
Remaining 2013
7,016

 
2014
265,346

 
2015
395,104

 
2016
249,431

 
2017
71,748

 
Thereafter
1,169,741

 
Total
$
2,158,386

(1) 
________________________ 
(1)
Includes gross principal balance of outstanding debt before impact of net unamortized premiums totaling approximately $8.2 million.
Capitalized Interest and Loan Fees
The following table sets forth gross interest expense reported in continuing operations, including debt discount/premium and loan cost amortization, net of capitalized interest, for the three months ended March 31, 2013 and 2012