e10vq
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
     
(Mark One)
 
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
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
(State or other jurisdiction of
incorporation or organization)
  95-4598246
(I.R.S. Employer
Identification No.)
 
         
Kilroy Realty, L.P.    Delaware
(State or other jurisdiction of
incorporation or organization)
  95-4612685
(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. (Check one):
 
Kilroy Realty Corporation
     Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Kilroy Realty, L.P.
     Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Kilroy Realty Corporation  Yes o     No þ
 
Kilroy Realty, L.P.  Yes o     No þ
 
As of July 25, 2011, 58,464,412 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
 


Table of Contents

 
EXPLANATORY NOTE
 
This report combines the quarterly reports on Form 10-Q for the period ended June 30, 2011 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” 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 terms “the Company,” “we,” “our,” and “us” refer to the Company or the Company and the Operating Partnership together, as the context requires.
 
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of June 30, 2011, the Company owned an approximate 97.1% common general partnership interest in the Operating Partnership. The remaining approximate 2.9% 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 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, whose only material asset is its ownership of partnership interests of 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, 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 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 at the Company and the Operating Partnership levels 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


2


Table of Contents

 
  •   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;
 
  •   Note 8, Partners’ Capital of the Operating Partnership;
 
  •   Note 14, Net (Loss) Income Available to Common Stockholders per Share of the Company;
 
  •   Note 15, Net (Loss) Income Available to Common Unitholders per Unit of the Operating Partnership;
 
  •   Note 17, Pro Forma Results of the Company; and
 
  •   Note 18, Pro Forma Results 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.


3


 

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2011
 
TABLE OF CONTENTS
 
                 
        Page
 
       
PART I—FINANCIAL INFORMATION        
             
  Item 1.         5  
             
            5  
             
            6  
             
            7  
             
            8  
             
  Item 1.         9  
             
            9  
             
            10  
             
            11  
             
            12  
             
            13  
             
  Item 2.         34  
             
  Item 3.         55  
             
  Item 4.         55  
       
PART II—OTHER INFORMATION        
             
  Item 1.         56  
             
  Item 1A         56  
             
  Item 2.         56  
             
  Item 3.         56  
             
  Item 4.         56  
             
  Item 5.         56  
             
  Item 6.         57  
       
SIGNATURES     58  
 EX-31.1
 EX-31.2
 EX-31.3
 EX-31.4
 EX-32.1
 EX-32.2
 EX-32.3
 EX-32.4
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


4


Table of Contents

PART I—FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION
 
KILROY REALTY CORPORATION
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (unaudited)        
 
ASSETS
REAL ESTATE ASSETS:
               
Land and improvements (Note 2)
  $ 528,082     $ 491,333  
Buildings and improvements (Note 2)
    2,820,766       2,435,173  
Undeveloped land and construction in progress
    303,998       290,365  
                 
Total real estate held for investment
    3,652,846       3,216,871  
Accumulated depreciation and amortization
    (720,864 )     (672,429 )
                 
Total real estate assets, net
    2,931,982       2,544,442  
CASH AND CASH EQUIVALENTS
    25,412       14,840  
RESTRICTED CASH
    1,349       1,461  
MARKETABLE SECURITIES (Note 12)
    5,654       4,902  
CURRENT RECEIVABLES, NET (Note 4)
    4,732       6,258  
DEFERRED RENT RECEIVABLES, NET (Note 4)
    97,958       89,052  
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
    153,231       131,066  
DEFERRED FINANCING COSTS, NET (Note 5)
    18,910       16,447  
PREPAID EXPENSES AND OTHER ASSETS, NET
    25,559       8,097  
                 
TOTAL ASSETS
  $ 3,264,787     $ 2,816,565  
                 
 
LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
LIABILITIES:
               
Secured debt, net (Notes 5 and 12)
  $ 475,820     $ 313,009  
Exchangeable senior notes, net (Notes 5 and 12)
    303,374       299,964  
Unsecured senior notes, net (Notes 5 and 12)
    655,929       655,803  
Unsecured line of credit (Notes 5 and 12)
    245,000       159,000  
Accounts payable, accrued expenses and other liabilities
    66,664       68,525  
Accrued distributions (Note 16)
    22,563       20,385  
Deferred revenue and acquisition-related intangible liabilities, net (Note 3)
    90,149       79,322  
Rents received in advance and tenant security deposits
    28,117       29,189  
                 
Total liabilities
    1,887,616       1,625,197  
                 
COMMITMENTS AND CONTINGENCIES (Note 11)
               
                 
NONCONTROLLING INTEREST (Note 6):
               
7.45% Series A Cumulative Redeemable Preferred units of the Operating Partnership
    73,638       73,638  
                 
EQUITY:
               
Stockholders’ Equity (Note 7):
               
Preferred stock, $.01 par value, 30,000,000 shares authorized:
               
7.45% Series A Cumulative Redeemable Preferred stock, $.01 par value,
1,500,000 shares authorized, none issued and outstanding
           
7.80% Series E Cumulative Redeemable Preferred stock, $.01 par value,
1,610,000 shares authorized, issued and outstanding ($40,250 liquidation preference)
    38,425       38,425  
7.50% Series F Cumulative Redeemable Preferred stock, $.01 par value,
3,450,000 shares authorized, issued and outstanding ($86,250 liquidation preference)
    83,157       83,157  
Common stock, $.01 par value, 150,000,000 shares authorized,
58,464,412 and 52,349,670 shares issued and outstanding, respectively
    585       523  
Additional paid-in capital
    1,433,951       1,211,498  
Distributions in excess of earnings
    (285,916 )     (247,252 )
                 
Total stockholders’ equity
    1,270,202       1,086,351  
Noncontrolling interest:
               
Common units of the Operating Partnership (Note 6)
    33,331       31,379  
                 
Total equity
    1,303,533       1,117,730  
                 
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
  $ 3,264,787     $ 2,816,565  
                 
 
See accompanying notes to consolidated financial statements.


5


Table of Contents

KILROY REALTY CORPORATION
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
 
                                 
          Six Months Ended
 
    Three Months Ended June 30,     June 30,  
    2011     2010     2011     2010  
 
REVENUES:
                               
Rental income
  $ 83,452     $ 65,038     $ 163,742     $ 125,694  
Tenant reimbursements
    7,510       6,483       13,932       12,201  
Other property income
    1,102       895       2,515       1,340  
                                 
Total revenues
    92,064       72,416       180,189       139,235  
                                 
EXPENSES:
                               
Property expenses
    17,583       14,543       35,272       26,563  
Real estate taxes
    8,413       6,482       16,582       12,518  
Provision for bad debts
    120       (12 )     146       14  
Ground leases (Note 11)
    424       370       763       312  
General and administrative expenses
    7,440       6,728       14,000       13,823  
Acquisition-related expenses
    1,194       957       1,666       1,270  
Depreciation and amortization
    32,248       23,722       61,559       44,660  
                                 
Total expenses
    67,422       52,790       129,988       99,160  
                                 
OTHER (EXPENSES) INCOME:
                               
Interest income and other net investment gains (losses) (Note 12)
    58       (18 )     242       366  
Interest expense (Note 5)
    (21,228 )     (13,088 )     (42,104 )     (25,044 )
Loss on early extinguishment of debt
          (4,564 )           (4,564 )
                                 
Total other (expenses) income
    (21,170 )     (17,670 )     (41,862 )     (29,242 )
NET INCOME
    3,472       1,956       8,339       10,833  
Net loss (income) attributable to noncontrolling common units of the Operating Partnership
    10       60       (24 )     (132 )
                                 
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
    3,482       2,016       8,315       10,701  
PREFERRED DISTRIBUTIONS AND DIVIDENDS:
                               
Distributions to noncontrolling cumulative redeemable preferred units of the Operating Partnership
    (1,397 )     (1,397 )     (2,794 )     (2,794 )
Preferred dividends
    (2,402 )     (2,402 )     (4,804 )     (4,804 )
                                 
Total preferred distributions and dividends
    (3,799 )     (3,799 )     (7,598 )     (7,598 )
                                 
NET (LOSS) INCOME AVAILABLE TO COMMON STOCKHOLDERS
  $ (317 )   $ (1,783 )   $ 717     $ 3,103  
                                 
Net (loss) income available to common stockholders per share-basic (Note 14)
  $ (0.01 )   $ (0.04 )   $ 0.00     $ 0.05  
                                 
Net (loss) income available to common stockholders per share-diluted (Note 14)
  $ (0.01 )   $ (0.04 )   $ 0.00     $ 0.05  
                                 
Weighted average common shares outstanding-basic (Note 14)
    57,685,710       50,296,643       55,008,765       46,674,494  
                                 
Weighted average common shares outstanding-diluted (Note 14)
    57,685,710       50,296,643       55,384,729       46,677,850  
                                 
Dividends declared per common share
  $ 0.35     $ 0.35     $ 0.70     $ 0.70  
                                 
 
See accompanying notes to consolidated financial statements.


6


Table of Contents

KILROY REALTY CORPORATION
 
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share data)
 
                                                                 
                                        Noncontrol-
       
                                        ling Interests
       
          Common Stock     Total
    – Common
       
                      Additional
    Distributions
    Stock-
    Units of the
       
    Preferred
    Number of
    Common
    Paid-in
    in Excess of
    holders’
    Operating
    Total
 
    Stock     Shares     Stock     Capital     Earnings     Equity     Partnership     Equity  
 
BALANCE AS OF DECEMBER 31, 2009
  $ 121,582       43,148,762     $ 431     $ 913,657     $ (180,722 )   $ 854,948     $ 28,890     $ 883,838  
Net income
                                    10,701       10,701       132       10,833  
Issuance of common stock
            9,200,000       92       299,755               299,847               299,847  
Issuance of share-based compensation awards
            3,239               1,660               1,660               1,660  
Noncash amortization of share-based compensation
                            3,361               3,361               3,361  
Exercise of stock options
            4,000               83               83               83  
Repurchase of common stock and restricted stock units
            (59,782 )             (2,121 )             (2,121 )             (2,121 )
Allocation to the equity component of cash paid upon repurchase of 3.25% Exchangeable Notes
                            (2,694 )             (2,694 )             (2,694 )
Adjustment for noncontrolling interest
                            (4,985 )             (4,985 )     4,985        
Preferred distributions and dividends
                                    (7,598 )     (7,598 )             (7,598 )
Dividends declared per common share and common unit ($0.70 per share/ unit)
                                    (33,936 )     (33,936 )     (1,207 )     (35,143 )
                                                                 
BALANCE AS OF JUNE 30, 2010
  $ 121,582       52,296,219     $ 523     $ 1,208,716     $ (211,555 )   $ 1,119,266     $ 32,800     $ 1,152,066  
                                                                 
                                        Noncontrol-
       
                                        ling Interests
       
          Common Stock     Total
    – Common
       
                      Additional
    Distributions
    Stock-
    Units of the
       
    Preferred
    Number of
    Common
    Paid-in
    in Excess of
    holders’
    Operating
    Total
 
    Stock     Shares     Stock     Capital     Earnings     Equity     Partnership     Equity  
 
BALANCE AS OF DECEMBER 31, 2010
  $ 121,582       52,349,670     $ 523     $ 1,211,498     $ (247,252 )   $ 1,086,351     $ 31,379     $ 1,117,730  
Net income
                                    8,315       8,315       24       8,339  
Issuance of common stock (Note 7)
            6,037,500       61       220,954               221,015               221,015  
Issuance of share-based compensation awards (Note 9)
            68,727       1       2,155               2,156               2,156  
Noncash amortization of share-based compensation
                            2,813               2,813               2,813  
Exercise of stock options
            15,000               395               395               395  
Repurchase of common stock and restricted stock units (Note 9)
            (11,485 )             (732 )             (732 )             (732 )
Exchange of common units of the Operating Partnership
            5,000               91               91       (91 )      
Adjustment for noncontrolling interest
                            (3,223 )             (3,223 )     3,223        
Preferred distributions and dividends
                                    (7,598 )     (7,598 )             (7,598 )
Dividends declared per common share and common unit ($0.70 per share/ unit)
                                    (39,381 )     (39,381 )     (1,204 )     (40,585 )
                                                                 
BALANCE AS OF JUNE 30, 2011
  $ 121,582       58,464,412     $ 585     $ 1,433,951     $ (285,916 )   $ 1,270,202     $ 33,331     $ 1,303,533  
                                                                 
 
See accompanying notes to consolidated financial statements.


7


Table of Contents

KILROY REALTY CORPORATION
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
                 
    Six Months Ended June 30,  
    2011     2010  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 8,339     $ 10,833  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of building and improvements and leasing costs
    61,029       44,229  
Increase in provision for bad debts
    146       14  
Depreciation of furniture, fixtures and equipment
    530       431  
Noncash amortization of share-based compensation awards
    2,239       3,519  
Noncash amortization of deferred financing costs and debt discounts and premiums
    6,884       5,750  
Noncash amortization of above/(below) market rents (Note 3)
    1,398       32  
Loss on early extinguishment of debt
          4,564  
Noncash amortization of deferred revenue related to tenant-funded tenant improvements
    (4,668 )     (4,775 )
Changes in operating assets and liabilities:
               
Marketable securities
    (752 )     (635 )
Current receivables
    1,380       483  
Deferred rent receivables
    (8,906 )     (5,421 )
Other deferred leasing costs
    398       (2,594 )
Prepaid expenses and other assets
    (3,519 )     (2,991 )
Accounts payable, accrued expenses and other liabilities
    (6,384 )     (4,177 )
Deferred revenue
    (577 )     507  
Rents received in advance and tenant security deposits
    (1,072 )     7,619  
                 
Net cash provided by operating activities
    56,465       57,388  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Expenditures for acquisition of operating properties (Note 2)
    (378,554 )     (373,574 )
Expenditures for operating properties
    (28,230 )     (33,593 )
Expenditures for development and redevelopment properties and undeveloped land
    (12,347 )     (8,113 )
Net increase in escrow deposits
    (16,500 )      
Decrease in restricted cash
    112       1,096  
Receipt of principal payments on note receivable
          76  
                 
Net cash used in investing activities
    (435,519 )     (414,108 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net proceeds from issuance of common stock (Note 7)
    221,015       299,847  
Borrowings on unsecured line of credit
    302,000       288,000  
Repayments on unsecured line of credit
    (216,000 )     (235,000 )
Principal payments on secured debt
    (3,403 )     (100,104 )
Repurchase of exchangeable senior notes
          (151,097 )
Proceeds from issuance of secured debt (Note 5)
    135,000       71,000  
Proceeds from issuance of unsecured debt
          247,870  
Financing costs
    (5,201 )     (4,643 )
Decrease in loan deposits
    2,027       1,420  
Repurchase of common stock and restricted stock units
    (732 )     (2,121 )
Proceeds from exercise of stock options
    395       83  
Dividends and distributions paid to common stockholders and common unitholders
    (37,877 )     (31,392 )
Dividends and distributions paid to preferred stockholders and preferred unitholders
    (7,598 )     (7,598 )
                 
Net cash provided by financing activities
    389,626       376,265  
                 
Net increase in cash and cash equivalents
    10,572       19,545  
Cash and cash equivalents, beginning of period
    14,840       9,883  
                 
Cash and cash equivalents, end of period
  $ 25,412     $ 29,428  
                 
SUPPLEMENTAL CASH FLOWS INFORMATION:
               
Cash paid for interest, net of capitalized interest of $3,327 and $4,055 as of June 30, 2011 and 2010, respectively
  $ 34,568     $ 18,634  
                 
NONCASH INVESTING TRANSACTIONS:
               
Accrual for expenditures for operating properties and development and redevelopment properties
  $ 9,966     $ 11,378  
                 
Tenant improvements funded directly by tenants to third parties
  $ 3,027     $ 1,946  
                 
Assumption of secured debt with property acquisition (Notes 2 and 5)
  $ 30,042     $ 51,079  
                 
Assumption of other liabilities with property acquisitions (Note 2)
  $ 4,438     $ 6,369  
                 
NONCASH FINANCING TRANSACTIONS:
               
Accrual of dividends and distributions payable to common stockholders and common unitholders
  $ 21,064     $ 18,907  
                 
Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders
  $ 1,909     $ 1,909  
                 
Issuance of share-based compensation awards (Note 9)
  $ 7,216     $ 5,418  
                 
Exchange of common units of the Operating Partnership into shares of the Company’s common stock
  $ 91     $  
                 
 
See accompanying notes to consolidated financial statements.


8


Table of Contents

ITEM 1: FINANCIAL STATEMENTS OF KILROY REALTY, L.P.
 
KILROY REALTY, L.P.
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (unaudited)        
 
ASSETS
               
REAL ESTATE ASSETS:
               
Land and improvements (Note 2)
  $ 528,082     $ 491,333  
Buildings and improvements (Note 2)
    2,820,766       2,435,173  
Undeveloped land and construction in progress
    303,998       290,365  
                 
Total real estate held for investment
    3,652,846       3,216,871  
Accumulated depreciation and amortization
    (720,864 )     (672,429 )
                 
Total real estate assets, net
    2,931,982       2,544,442  
CASH AND CASH EQUIVALENTS
    25,412       14,840  
RESTRICTED CASH
    1,349       1,461  
MARKETABLE SECURITIES (Note 12)
    5,654       4,902  
CURRENT RECEIVABLES, NET (Note 4)
    4,732       6,258  
DEFERRED RENT RECEIVABLES, NET (Note 4)
    97,958       89,052  
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
    153,231       131,066  
DEFERRED FINANCING COSTS, NET (Note 5)
    18,910       16,447  
PREPAID EXPENSES AND OTHER ASSETS, NET
    25,559       8,097  
                 
TOTAL ASSETS
  $ 3,264,787     $ 2,816,565  
                 
                 
LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL                
LIABILITIES:
               
Secured debt, net (Notes 5 and 12)
  $ 475,820     $ 313,009  
Exchangeable senior notes, net (Notes 5 and 12)
    303,374       299,964  
Unsecured senior notes, net (Notes 5 and 12)
    655,929       655,803  
Unsecured line of credit (Notes 5 and 12)
    245,000       159,000  
Accounts payable, accrued expenses and other liabilities
    66,664       68,525  
Accrued distributions (Note 16)
    22,563       20,385  
Deferred revenue and acquisition-related intangible liabilities, net (Note 3)
    90,149       79,322  
Rents received in advance and tenant security deposits
    28,117       29,189  
                 
Total liabilities
    1,887,616       1,625,197  
                 
                 
COMMITMENTS AND CONTINGENCIES (Note 11)
               
                 
7.45% SERIES A CUMULATIVE REDEEMABLE PREFERRED UNITS
    73,638       73,638  
                 
CAPITAL:
               
Partners’ Capital (Note 8):
               
7.80% Series E Cumulative Redeemable Preferred units, 1,610,000 units issued and outstanding ($40,250 liquidation preference)
    38,425       38,425  
7.50% Series F Cumulative Redeemable Preferred units, 3,450,000 units issued and outstanding ($86,250 liquidation preference)
    83,157       83,157  
Common units, 58,464,412 and 52,349,670 held by the general partner and 1,718,131 and 1,723,131 held by common limited partners issued and outstanding, respectively
    1,180,249       994,511  
                 
Total partners’ capital
    1,301,831       1,116,093  
Noncontrolling interest in consolidated subsidiaries
    1,702       1,637  
                 
Total capital
    1,303,533       1,117,730  
                 
TOTAL LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL
  $ 3,264,787     $ 2,816,565  
                 
 
See accompanying notes to consolidated financial statements.


9


Table of Contents

KILROY REALTY, L.P.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit data)
 
                                                 
    Three Months Ended June 30,     Six Months Ended June 30,              
    2011     2010     2011     2010              
 
REVENUES:
                                               
Rental income
  $ 83,452       65,038     $ 163,742     $ 125,694                  
Tenant reimbursements
    7,510       6,483       13,932       12,201                  
Other property income
    1,102       895       2,515       1,340                  
                                                 
Total revenues
    92,064       72,416       180,189       139,235                  
                                                 
EXPENSES:
                                               
Property expenses
    17,583       14,543       35,272       26,563                  
Real estate taxes
    8,413       6,482       16,582       12,518                  
Provision for bad debts
    120       (12 )     146       14                  
Ground leases (Note 11)
    424       370       763       312                  
General and administrative expenses
    7,440       6,728       14,000       13,823                  
Acquisition-related expenses
    1,194       957       1,666       1,270                  
Depreciation and amortization
    32,248       23,722       61,559       44,660                  
                                                 
Total expenses
    67,422       52,790       129,988       99,160                  
                                                 
OTHER (EXPENSES) INCOME:
                                               
Interest income and other net investment gains (losses) (Note 12)
    58       (18 )     242       366                  
Interest expense (Note 5)
    (21,228 )     (13,088 )     (42,104 )     (25,044 )                
Loss on early extinguishment of debt
          (4,564 )           (4,564 )                
                                                 
Total other (expenses) income
    (21,170 )     (17,670 )     (41,862 )     (29,242 )                
                                                 
NET INCOME
    3,472       1,956       8,339       10,833                  
Net income attributable to noncontrolling interests in consolidated subsidiaries
    (32 )     (51 )     (65 )     (96 )                
                                                 
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P. 
    3,440       1,905       8,274       10,737                  
PREFERRED DISTRIBUTIONS
    (3,799 )     (3,799 )     (7,598 )     (7,598 )                
                                                 
NET (LOSS) INCOME AVAILABLE TO COMMON UNITHOLDERS
  $ (359 )   $ (1,894 )   $ 676     $ 3,139                  
                                                 
Net (loss) income available to common unitholders per unit-basic (Note 15)
  $ (0.01 )   $ (0.04 )   $ 0.00     $ 0.05                  
                                                 
Net (loss) income available to common unitholders per unit-diluted (Note 15)
  $ (0.01 )   $ (0.04 )   $ 0.00     $ 0.05                  
                                                 
Weighted average common units outstanding-basic (Note 15)
    59,407,687       52,019,774       56,731,316       48,397,625                  
                                                 
Weighted average common units outstanding-diluted (Note 15)
    59,407,687       52,019,774       57,107,280       48,400,981                  
                                                 
Distributions declared per common unit
  $ 0.35     $ 0.35     $ 0.70     $ 0.70                  
                                                 
 
See accompanying notes to consolidated financial statements.


10


Table of Contents

KILROY REALTY, L.P.
 
CONSOLIDATED STATEMENTS OF CAPITAL
(unaudited, in thousands, except unit and per unit data)
 
                                                 
    Partners’
          Noncontrolling
       
    Capital           Interests
       
          Number of
          Total
    in
       
    Preferred
    Common
    Common
    Partners’
    Consolidated
    Total
 
    Units     Units     Units     Capital     Subsidiaries     Capital  
 
BALANCE AS OF DECEMBER 31, 2009
  $ 121,582       44,871,893     $ 760,756     $ 882,338     $ 1,500     $ 883,838  
Net income
                    10,737       10,737       96       10,833  
Issuance of common units
            9,200,000       299,847       299,847               299,847  
Issuance of share-based compensation awards
            3,239       1,660       1,660               1,660  
Noncash amortization of share-based compensation
                    3,361       3,361               3,361  
Exercise of stock options
            4,000       83       83               83  
Repurchase of common units and restricted stock units
            (59,782 )     (2,121 )     (2,121 )             (2,121 )
Allocation to the equity component of cash paid upon repurchase of 3.25% Exchangeable Notes
                    (2,694 )     (2,694 )             (2,694 )
Other
                    20       20       (20 )      
Preferred distributions
                    (7,598 )     (7,598 )             (7,598 )
Distributions declared per common unit ($0.70 per unit)
                    (35,143 )     (35,143 )             (35,143 )
                                                 
BALANCE AS OF JUNE 30, 2010
  $ 121,582       54,019,350     $ 1,028,908     $ 1,150,490     $ 1,576     $ 1,152,066  
                                                 
 
                                                 
    Partners’
          Noncontrolling
       
    Capital           Interests
       
          Number of
          Total
    in
       
    Preferred
    Common
    Common
    Partners’
    Consolidated
    Total
 
    Units     Units     Units     Capital     Subsidiaries     Capital  
 
BALANCE AS OF DECEMBER 31, 2010
  $ 121,582       54,072,801     $ 994,511     $ 1,116,093     $ 1,637     $ 1,117,730  
Net income
                    8,274       8,274       65       8,339  
Issuance of common units (Note 8)
            6,037,500       221,015       221,015               221,015  
Issuance of share-based compensation awards (Note 9)
            68,727       2,156       2,156               2,156  
Noncash amortization of share-based compensation
                    2,813       2,813               2,813  
Exercise of stock options
            15,000       395       395               395  
Repurchase of common units and restricted stock units (Note 9)
            (11,485 )     (732 )     (732 )             (732 )
Preferred distributions
                    (7,598 )     (7,598 )             (7,598 )
Distributions declared per common unit ($0.70 per unit)
                    (40,585 )     (40,585 )             (40,585 )
                                                 
BALANCE AS OF JUNE 30, 2011
  $ 121,582       60,182,543     $ 1,180,249     $ 1,301,831     $ 1,702     $ 1,303,533  
                                                 
 
See accompanying notes to consolidated financial statements.


11


Table of Contents

KILROY REALTY, L.P.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
                 
    Six Months Ended June 30,  
    2011     2010  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
               
Net income
  $ 8,339     $ 10,833  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization of building and improvements and leasing costs
    61,029       44,229  
Increase in provision for bad debts
    146       14  
Depreciation of furniture, fixtures and equipment
    530       431  
Noncash amortization of share-based compensation awards
    2,239       3,519  
Noncash amortization of deferred financing costs and debt discounts and premiums
    6,884       5,750  
Noncash amortization of above/(below) market rents (Note 3)
    1,398       32  
Loss on early extinguishment of debt
          4,564  
Noncash amortization of deferred revenue related to tenant-funded tenant improvements
    (4,668 )     (4,775 )
Changes in operating assets and liabilities:
               
Marketable securities
    (752 )     (635 )
Current receivables
    1,380       483  
Deferred rent receivables
    (8,906 )     (5,421 )
Other deferred leasing costs
    398       (2,594 )
Prepaid expenses and other assets
    (3,519 )     (2,991 )
Accounts payable, accrued expenses and other liabilities
    (6,384 )     (4,177 )
Deferred revenue
    (577 )     507  
Rents received in advance and tenant security deposits
    (1,072 )     7,619  
                 
Net cash provided by operating activities
    56,465       57,388  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Expenditures for acquisition of operating properties (Note 2)
    (378,554 )     (373,574 )
Expenditures for operating properties
    (28,230 )     (33,593 )
Expenditures for development and redevelopment properties and undeveloped land
    (12,347 )     (8,113 )
Net increase in escrow deposits
    (16,500 )      
Decrease in restricted cash
    112       1,096  
Receipt of principal payments on note receivable
          76  
                 
Net cash used in investing activities
    (435,519 )     (414,108 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net proceeds from issuance of common units (Note 8)
    221,015       299,847  
Borrowings on unsecured line of credit
    302,000       288,000  
Repayments on unsecured line of credit
    (216,000 )     (235,000 )
Principal payments on secured debt
    (3,403 )     (100,104 )
Repurchase of exchangeable senior notes
          (151,097 )
Proceeds from issuance of secured debt (Note 5)
    135,000       71,000  
Proceeds from issuance of unsecured debt
          247,870  
Financing costs
    (5,201 )     (4,643 )
Decrease in loan deposits
    2,027       1,420  
Repurchase of common units and restricted stock units
    (732 )     (2,121 )
Proceeds from exercise of stock options
    395       83  
Distributions paid to common unitholders
    (37,877 )     (31,392 )
Distributions paid to preferred unitholders
    (7,598 )     (7,598 )
                 
Net cash provided by financing activities
    389,626       376,265  
                 
Net increase in cash and cash equivalents
    10,572       19,545  
Cash and cash equivalents, beginning of period
    14,840       9,883  
                 
Cash and cash equivalents, end of period
  $ 25,412     $ 29,428  
                 
SUPPLEMENTAL CASH FLOWS INFORMATION:
               
Cash paid for interest, net of capitalized interest of $3,327 and $4,055 as of June 30, 2011 and 2010, respectively
  $ 34,568     $ 18,634  
                 
NONCASH INVESTING TRANSACTIONS:
               
Accrual for expenditures for operating properties and development and redevelopment properties
  $ 9,966     $ 11,378  
                 
Tenant improvements funded directly by tenants to third parties
  $ 3,027     $ 1,946  
                 
Assumption of secured debt with property acquisitions (Notes 2 and 5)
  $ 30,042     $ 51,079  
                 
Assumption of other liabilities with property acquisitions (Note 2)
  $ 4,438     $ 6,369  
                 
NONCASH FINANCING TRANSACTIONS:
               
Accrual of distributions payable to common unitholders
  $ 21,064       18,907  
                 
Accrual of distributions payable to preferred unitholders
  $ 1,909     $ 1,909  
                 
Issuance of share-based compensation awards (Note 9)
  $ 7,216     $ 5,418  
                 
 
See accompanying notes to consolidated financial statements.


12


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
Six Months Ended June 30, 2011 and 2010
(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 and industrial 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, greater Seattle and the San Francisco Bay Area, which we believe have strategic advantages and strong barriers to entry. 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 term “Kilroy Realty Corporation” or the “Company” refers to Kilroy Realty Corporation and its consolidated subsidiaries and the term “Operating Partnership” refers to Kilroy Realty, L.P. and its consolidated subsidiaries. The terms “the Company,” “we,” “our,” and “us” refer to the Company or the Company and the Operating Partnership together, as the context requires. The descriptions of our business, employees, and properties apply to both the Company and the Operating Partnership.
 
The following table of office buildings (the “Office Properties”) and industrial buildings (the “Industrial Properties”) summarizes our stabilized portfolio of operating properties as of June 30, 2011. As of June 30, 2011, all of our properties and all of our business is currently conducted in the state of California with the exception of the operation of six office properties located in the state of Washington.
 
                                 
    Number of
    Rentable
    Number of
       
    Buildings     Square Feet     Tenants     Percentage Occupied  
 
Office Properties(1)
    107       11,465,821       416       87.9 %
Industrial Properties
    40       3,605,407       62       97.6 %
                                 
Total Stabilized Portfolio
    147       15,071,228       478       90.2 %
                                 
 
 
(1) Includes eight office properties acquired during the six months ended June 30, 2011 for a total amount of $413.0 million (see Note 2 for additional information).
 
Our stabilized portfolio excludes undeveloped land, development and redevelopment properties currently under construction or committed for construction, “lease-up” properties, and one property that we are in the process of repositioning for residential use. As of June 30, 2011, we had one office redevelopment property encompassing approximately 300,000 rentable square feet under construction and we had one office redevelopment property encompassing approximately 98,000 rentable square feet which we removed from the stabilized portfolio since it was committed for redevelopment. 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. We had no “lease-up” properties as of June 30, 2011.
 
As of June 30, 2011, the Company owned a 97.1% general partnership interest in the Operating Partnership. The remaining 2.9% common limited partnership interest in the Operating Partnership as of June 30, 2011 was owned by non-affiliated investors and certain of our directors and 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 entitlements of all the common units to quarterly distributions and payments in liquidation mirror those of the the Company’s common stockholders. The common limited partners have certain redemption


13


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
rights as provided in the Operating Partnership’s Fifth Amended and Restated Agreement of Limited Partnership (as amended, the “Partnership Agreement”) (see Note 6).
 
Kilroy Realty Finance, Inc., our wholly-owned subsidiary, 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 which we conduct substantially all of our development activities. With the exception of the Operating Partnership, all of our subsidiaries, which include Kilroy Realty TRS, Inc., Kilroy Realty Management, L.P., Kilroy RB, LLC, Kilroy RB II, LLC, Kilroy Realty Northside Drive, LLC, and Kilroy Realty 303, LLC, 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 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 subsidiaries of the Operating Partnership. All intercompany balances and transactions have been eliminated in the consolidated financial statements.
 
The consolidated financial statements of the Company and the Operating Partnership also include variable interest entities (“VIE”) in which we are deemed to be the primary beneficiary. As of June 30, 2011, we had one bankruptcy-remote VIE, Kilroy Realty Northside Drive, LLC, which was formed in 2010 to hold three properties that secure the debt we assumed when we acquired the properties in 2010. The assets held by this entity are not available to satisfy the debts and other obligations of the Company or the Operating Partnership.
 
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, 2011. 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, 2010.
 
Change in Reportable Segments from Form 10-K for the year ended December 31, 2010
 
Our chief operating decision-makers internally evaluate the operating performance and financial results of our portfolio based on Net Operating Income for the following two segments of commercial real estate property: Office Properties and Industrial Properties. We define “Net Operating Income” as operating revenues (rental income, tenant reimbursements, and other property income) less operating expenses (property expenses, real estate taxes, provision for bad debts, and ground leases).
 
During the three and six months ended June 30, 2011, the amount of revenues and Net Operating Income generated by our Industrial Properties, in relation to our total consolidated operating portfolio revenues and Net Operating Income, had fallen below the required 10% quantitative reporting thresholds for the Industrial Properties to be considered a reportable segment under GAAP. Therefore, for the three and six months ended June 30, 2011,


14


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
our only reportable segment is our Office Properties segment. See Note 13 for a reconciliation of our Office Properties segment to our consolidated revenues, Net Operating Income, net income and consolidated assets.
 
2.   Acquisitions
 
During the six months ended June 30, 2011, we acquired the eight office properties listed below from unrelated third parties. Unless otherwise noted, we funded these acquisitions principally with the net proceeds from the Company’s public offering of common stock (see Note 7), and borrowings under the unsecured line of credit (see Note 5).
 
                                         
                        Percentage
       
                        Occupied
       
                  Rentable
    as of
    Purchase
 
    Property
  Date of
  Number of
    Square
    June 30,
    Price
 
Property   Type   Acquisition   Buildings     Feet     2011     (in millions)(1)  
 
250 Brannan Street San Francisco, CA
  Office   January 28, 2011     1       90,742       76.7 %   $ 33.0  
10210, 10220, and 10230 NE Points Drive; 3933 Lake Washington Boulevard NE Kirkland, WA(2)
  Office   April 21, 2011     4       279,924       87.3 %     100.1  
10770 Wateridge Circle San Diego, CA
  Office   May 12, 2011     1       174,310       97.5 %     32.7  
601 108th Avenue N.E.
Bellevue, WA
  Office   June 3, 2011     1       488,470       89.8 %     215.0  
4040 Civic Center Drive San Rafael, CA
  Office   June 9, 2011     1       126,787       93.1 %     32.2  
                                         
Total
            8       1,160,233             $ 413.0  
                                         
 
 
(1) Excludes acquisition-related costs.
 
(2) In connection with this acquisition, we assumed secured debt with an outstanding principal balance of $30.0 million and a premium of $1.0 million as a result of recording this debt at fair value on the acquisition date (see Note 5).


15


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
 
The related assets, liabilities, and results of operations of all 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 respective acquisition dates:
 
                         
    601 108th Avenue
    All Other
       
    N.E., Bellevue, WA(1)     Acquisitions(2)     Total  
    (in thousands)  
 
Assets
                       
Land(3)
  $     $ 36,740     $ 36,740  
Buildings and improvements(4)
    214,095       143,545       357,640  
Undeveloped land
          2,560       2,560  
Deferred leasing costs and acquisition-related intangible assets(5)
    13,790       17,500       31,290  
                         
Total assets acquired
    227,885       200,345       428,230  
                         
Liabilities
                       
Deferred revenue and acquisition-related intangible liabilities(6)
    12,850       1,390       14,240  
Secured debt(7)
          30,997       30,997  
Accounts payable, accrued expenses and other liabilities
    2,380       2,059       4,439  
                         
Total liabilities assumed
    15,230       34,446       49,676  
                         
Net assets and liabilities acquired(8)
  $ 212,655     $ 165,899     $ 378,554  
                         
 
 
(1) The purchase of 601 108th Avenue N.E., Bellevue, WA, represents the largest acquisition and 52.1% of the total aggregate purchase price of the properties acquired during the six months ended June 30, 2011.
 
(2) The purchase price of all other acquisitions completed during the six months ended June 30, 2011 were individually less than 5% and in aggregate less than 10% of the Company’s total assets as of December 31, 2010.
 
(3) In connection with the acquisition of 601 108th Avenue N.E., Bellevue, WA,, we assumed the lessee obligations under a noncancellable ground lease that is scheduled to expire in November 2093 (see Notes 3 and 11).
 
(4) Represents buildings, building improvements, and tenant improvements.
 
(5) Represents in-place leases (approximately $18.9 million with a weighted average amortization period of 4.1 years), above-market leases (approximately $6.6 million with a weighted average amortization period of 4.5 years), and unamortized leasing commissions (approximately $5.7 million with a weighted average amortization period of 2.8 years).
 
(6) Represents below-market leases (approximately $9.0 million with a weighted average amortization period of 4.3 years) and an above-market ground lease obligation (approximately $5.2 million with a weighted average amortization period of 82.5 years), under which we are the lessee.
 
(7) Represents the mortgage loan, which includes an unamortized premium of approximately $1.0 million, assumed in connection with the properties acquired in April 2011 (see Note 5).
 
(8) Reflects the purchase price net of assumed secured debt and other lease-related obligations.


16


Table of Contents

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 identified deferred leasing costs and acquisition-related intangible assets (acquired value of leasing costs, above-market leases, and in-place leases) and intangible liabilities (acquired value of below-market leases and above-market ground lease obligation) as of June 30, 2011 and December 31, 2010:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (in thousands)  
 
Deferred Leasing Costs and Acquisition-related Intangible Assets, net(1):
               
Deferred leasing costs
  $ 131,098     $ 128,980  
Accumulated amortization
    (43,921 )     (45,869 )
                 
Deferred leasing costs, net
    87,177       83,111  
                 
Above-market leases
    27,922       21,321  
Accumulated amortization
    (4,747 )     (2,163 )
                 
Above-market leases, net
    23,175       19,158  
                 
In-place leases
    50,915       36,964  
Accumulated amortization
    (8,036 )     (8,167 )
                 
In-place leases, net
    42,879       28,797  
                 
                 
Total deferred leasing costs and acquisition-related intangible assets, net
  $ 153,231     $ 131,066  
                 
Acquisition-related Intangible Liabilities, net(1)(2):
               
                 
Below-market leases
  $ 27,152     $ 21,938  
Accumulated amortization
    (2,462 )     (5,094 )
                 
Below-market leases, net
    24,690       16,844  
                 
Above-market ground lease obligation
    5,200        
Accumulated amortization
    (5 )      
                 
Above-market ground lease obligation, net
    5,195        
                 
                 
Total acquisition-related intangible liabilities, net
  $ 29,885     $ 16,844  
                 
 
 
(1) Balances and accumulated amortization amounts at June 30, 2011 reflect the write-off of the following fully amortized amounts at January 1, 2011: deferred leasing costs (approximately $10.4 million), in-place leases (approximately $5.0 million), and below-market leases (approximately $3.8 million). Our accounting policy is to write-off the asset and corresponding accumulated amortization for fully amortized balances on January 1st of each fiscal year.
 
(2) Included in deferred revenue and acquisition-related intangible liabilities, net in the consolidated balance sheets.


17


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
 
The following table sets forth amortization related to deferred leasing costs and acquisition-related intangibles for the three and six months ended June 30, 2011 and 2010:
 
                                 
    Three Months Ended
       
    June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
    (in thousands)  
 
Deferred leasing costs(1)
  $ 3,970     $ 2,968     $ 7,738     $ 5,673  
Net above-market leases(2)
    745       60       1,398       32  
In-place leases(1)
    2,686       267       4,859       285  
Above-market ground lease obligation(3)
    5             5        
                                 
Total
  $ 7,406     $ 3,295     $ 14,000     $ 5,990  
                                 
 
 
(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 net above-market leases is recorded as a decrease to rental income in the consolidated statements of operations for the periods presented.
 
(3) 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 June 30, 2011 for future periods:
 
                                 
                      Above-Market
 
    Deferred Leasing
    Net Above-/(Below)-
    In-Place
    Ground Lease
 
Year Ending   Costs     Market Leases(1)     Leases     Obligation  
    (in thousands)  
 
Remaining 2011
  $ 8,946     $ 706     $ 6,165     $ 32  
2012
    16,558       1,303       10,766       63  
2013
    14,751       1,062       8,682       63  
2014
    13,042       324       6,922       63  
2015
    9,859       (220 )     3,991       63  
Thereafter
    24,021       (4,690 )     6,353       4,911  
                                 
Total
  $ 87,177     $ (1,515 )   $ 42,879     $ 5,195  
                                 
 
 
(1) Represents estimated annual net amortization related to above-/(below)-market leases. Amounts shown for 2011-2014 represent net above-market leases which will be recorded as a decrease to rental income in the consolidated statement of operations, and amounts shown for the periods 2015 and thereafter represent net below-market leases which will be recorded as an increase to rental income in the consolidated statement of operations.


18


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
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 June 30, 2011 and December 31, 2010:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (in thousands)  
 
Current receivables
  $ 7,655     $ 9,077  
Allowance for uncollectible tenant receivables
    (2,923 )     (2,819 )
                 
Current receivables, net
  $ 4,732     $ 6,258  
                 
 
Deferred Rent Receivables, net
 
Deferred rent receivables, net consisted of the following as of June 30, 2011 and December 31, 2010:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (in thousands)  
 
Deferred rent receivables
  $ 101,780     $ 92,883  
Allowance for deferred rent receivables
    (3,822 )     (3,831 )
                 
Deferred rent receivables, net
  $ 97,958     $ 89,052  
                 
 
5.   Secured and Unsecured Debt of the Operating Partnership
 
Secured Debt
 
In January 2011, the Operating Partnership borrowed $135.0 million under a mortgage loan that is scheduled to mature on February 1, 2018. The mortgage loan is secured by our 303 Second Street property in San Francisco, bears interest at an annual rate of 4.27%, and requires interest-only payments for the first two years with a 30-year amortization schedule thereafter. We used a portion of the proceeds to repay borrowings under the Operating Partnership’s unsecured line of credit (the “Credit Facility”).
 
In April 2011, in connection with the acquisition of four office buildings in Kirkland, Washington, the Operating Partnership assumed a mortgage loan that is secured by the project. The assumed mortgage loan had a principal balance of $30.0 million at the acquisition date and is scheduled to mature on April 15, 2015. This mortgage loan was recorded at fair value on the date of the acquisition resulting in a premium of approximately $1.0 million. This premium will be accreted on a straight-line basis, which approximates the effective interest method, as a reduction to interest expense from the acquisition date through the maturity date of the mortgage loan. The loan bears contractual interest at an annual rate of 4.94% and requires monthly principal and interest payments based on a 30-year amortization period.
 
Although both new 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.


19


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Exchangeable Senior Notes
 
The following table summarizes the balance and significant terms of the Company’s 3.25% Exchangeable Notes due 2012 (the “3.25% Exchangeable Notes”) and 4.25% Exchangeable Notes due 2014 (the “4.25% Exchangeable Notes” and together with the 3.25% Exchangeable Notes, the “Exchangeable Notes”) outstanding as of June 30, 2011 and December 31, 2010:
 
                                 
    3.25% Exchangeable Notes     4.25% Exchangeable Notes  
    June 30,
    December 31,
    June 30,
    December 31,
 
    2011     2010     2011     2010  
    (in thousands)  
 
Principal amount
  $ 148,000     $ 148,000     $ 172,500     $ 172,500  
Unamortized discount
    (2,485 )     (4,004 )     (14,641 )     (16,532 )
                                 
Net carrying amount of liability component
  $ 145,515     $ 143,996     $ 157,859     $ 155,968  
                                 
Carrying amount of equity component
  $33,675   $19,835
Maturity date
  April 2012   November 2014
Stated coupon rate
  3.25%(1)   4.25%(2)
Effective interest rate(3)
  5.45%   7.13%
Exchange rate per $1,000 principal value of the Exchangeable Notes, as adjusted(4)
  11.3636   27.8307
Exchange price, as adjusted(4)
  $88.00   $35.93
Number of shares on which the aggregate consideration to be delivered on conversion is determined(4)
  1,681,813   4,800,796
 
 
(1) Interest on the 3.25% Exchangeable Notes is payable semi-annually in arrears on April 15th and October 15th of each year.
 
(2) Interest on the 4.25% Exchangeable Notes is payable semi-annually in arrears on May 15th and November 15th of each year.
 
(3) The rate at which we record interest expense for financial reporting purposes, which reflects the amortization of the discounts on the Exchangeable Notes. This rate represents our conventional debt borrowing rate at the date of issuance.
 
(4) 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.
 
Capped Call Transactions
 
In connection with the offerings of the Exchangeable Notes, we entered into capped call option transactions (“capped calls”) to mitigate the dilutive impact of the potential exchange of the Exchangeable Notes. The following table summarizes our capped call option positions as of both June 30, 2011 and December 31, 2010:
 
                 
    3.25% Exchangeable Notes(1)     4.25% Exchangeable Notes(2)  
 
Referenced shares of common stock
    1,121,201       4,800,796  
Exchange price including effect of capped calls
    $102.72       $42.81  
 
 
(1) The capped calls mitigate the dilutive impact to us of the potential exchange of two-thirds of the 3.25% Exchangeable Notes into shares of common stock.
 
(2) The capped calls mitigate the dilutive impact to us of the potential exchange of all of the 4.25% Exchangeable Notes into shares of common stock.
 
For the three and six months ended June 30, 2011, the per share average trading price of the Company’s common stock on the New York Stock Exchange (“NYSE”) was higher than the $35.93 exchange price for the 4.25% Exchangeable Notes, as presented below:
 
                 
    Three Months Ended
    Six Months Ended
 
    June 30, 2011     June 30, 2011  
 
Average Trading Price of the Company’s Stock
  $ 39.90     $ 38.94  
 
As a result, even though there would be no dilutive economic impact to our earnings until the Company’s share price exceeded $42.81, which is the exchange price after the impact of the capped calls, and even though the 4.25%


20


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Exchangeable Notes were not convertible as of June 30, 2011, we are required to include the dilutive impact of the 4.25% Exchangeable Notes based on the average share price in our diluted earnings per share and per unit calculations for the six months ended June 30, 2011 (see Notes 14 and 15). We are not required to include the the dilutive impact of the 4.25% Exchangeable Notes in our diluted earnings per share and per unit calculations for the three months ended June 30, 2011, since we had a net loss available to common stockholders and unitholders during this period and the effect would be anti-dilutive (see Notes 14 and 15). If the 4.25% Exchangeable Notes were able to be converted as of June 30, 2011, the approximate fair value of the shares upon conversion at that date would have been equal to approximately $191.4 million, which would exceed the $172.5 million principal amount of the 4.25% Exchangeable Notes by approximately $18.9 million.
 
Interest Expense for the Exchangeable Notes
 
The unamortized discount on 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 Exchangeable Notes based on the effective interest rates set forth above, before the effect of capitalized interest, for the three and six months ended June 30, 2011 and 2010:
 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
    (in thousands)  
 
Contractual interest payments
  $ 3,035     $ 4,241     $ 6,070     $ 8,495  
Amortization of discount
    1,722       2,372       3,410       4,679  
                                 
Interest expense attributable to the Exchangeable Notes
  $ 4,757     $ 6,613     $ 9,480     $ 13,174  
                                 
 
Unsecured Line of Credit
 
In June 2011, we amended the terms of our Credit Facility to extend the maturity date, and reduce the interest rate and facility fee. The following table summarizes the terms of our Credit Facility as of December 31, 2010 and as amended as of June 30, 2011:
 
                 
    June 30,
    December 31,
 
    2011     2010  
    (in thousands)  
 
Outstanding borrowings
  $ 245,000     $ 159,000  
Remaining borrowing capacity
    255,000       341,000  
                 
Total borrowing capacity(1)
  $ 500,000     $ 500,000  
Interest rate(2)
    2.87%       2.99%  
Facility fee-annual rate(3)
    0.350%       0.575%  
Maturity date(4)
    August 2015       August 2013  
 
 
(1) We may elect to borrow, subject to lender approval, up to an additional $200 million under an accordion feature under the terms of the Credit Facility.
 
(2) The Credit Facility interest rate included interest at an annual rate of LIBOR plus 1.750% and 2.675% as of June 30, 2011 and December 31, 2010, respectively.
 
(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, we also incurred debt origination and legal costs of approximately $5.0 million when we entered into the Credit Facility in 2010 and an additional $3.3 million when we amended the Credit Facility in 2011. The unamortized balance of these costs will be amortized as additional interest expense over the extended term of the Credit Facility.
 
(4) Under the terms of the Credit Facility, we may exercise an option to extend the maturity date by one year.
 
The Company intends to borrow amounts under the 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.


21


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
Debt Covenants and Restrictions
 
The Credit 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 June 30, 2011.
 
Debt Maturities
 
The following table summarizes the stated debt maturities and scheduled amortization payments, excluding debt discounts and premiums, as of June 30, 2011:
 
         
Year Ending   (in thousands)  
 
Remaining 2011
  $ 72,262  
2012
    305,303  
2013
    6,373  
2014
    262,443  
2015
    602,382  
Thereafter
    450,028  
         
Total
  $ 1,698,791 (1)
         
 
 
(1) Includes gross principal balance of outstanding debt before impact of all debt discounts and premiums.
 
Capitalized Interest and Loan Fees
 
The following table sets forth our gross interest expense, including debt discount/premium and loan cost amortization, net of capitalized interest, for the three and six months ended June 30, 2011 and 2010. The capitalized amounts are a cost of development and redevelopment, and increase the carrying value of undeveloped land and construction in progress.
 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
    (in thousands)  
 
Gross interest expense
  $ 23,293     $ 15,897     $ 46,148     $ 30,437  
Capitalized interest
    (2,065 )     (2,809 )     (4,044 )     (5,393 )
                                 
Interest expense
  $ 21,228     $ 13,088     $ 42,104     $ 25,044  
                                 
 
6.   Noncontrolling Interests on the Company’s Consolidated Financial Statements
 
7.45% Series A Cumulative Redeemable Preferred Units of the Operating Partnership
 
As of both June 30, 2011 and December 31, 2010, the Operating Partnership had outstanding 1,500,000 7.45% Series A Cumulative Redeemable Preferred Units representing preferred limited partnership interests in the Operating Partnership with a redemption value of $50.00 per unit. There were no changes to this noncontrolling interest during the three and six months ended June 30, 2011 and 2010.
 
Common Units of the Operating Partnership
 
The Company owned a 97.1%, 96.8% and 96.7% common general partnership interest in the Operating Partnership as of June 30, 2011, December 31, 2010, and June 30, 2010, respectively. The remaining 2.9%, 3.2%


22


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
and 3.3% common limited partnership interest as of June 30, 2011, December 31, 2010 and June 30, 2010, respectively, was owned in the form of common units by non-affiliate investors and certain of our executive officers and directors. There were 1,718,131 and 1,723,131 common units outstanding held by these investors, executive officers and directors as of June 30, 2011 and December 31, 2010, respectively.
 
The noncontrolling common units may be redeemed by unitholders for cash. We, at our option, may satisfy the cash redemption obligation with shares of the Company’s common stock on a one-for-one basis. Whether satisfied in cash or shares of the Company’s common stock, 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 $66.6 million and $61.4 million as of June 30, 2011 and December 31, 2010, respectively. This redemption value does not necessarily represent the amount that would be distributed with respect to each 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 amount payable with respect to each share of the Company’s common stock.
 
7.   Stockholders’ Equity of the Company
 
Issuance of Common Stock
 
In April 2011, the Company completed an underwritten public offering of 6,037,500 shares of its common stock. The net offering proceeds, after deducting underwriting discounts and commissions and offering expenses, were approximately $221.0 million. We have used or, intend to use a portion of the net proceeds from the offering to fund acquisitions and for general corporate purposes.
 
8.   Partners’ Capital of the Operating Partnership
 
Issuance of Common Units
 
In April 2011, the Company completed an underwritten public offering of 6,037,500 shares of its common stock as discussed in Note 7. The net offering proceeds of approximately $221.0 million were contributed by the Company to the Operating Partnership in exchange for 6,037,500 common units.
 
Common Units Outstanding
 
The Company owned 58,464,412, 52,349,670, and 52,296,219 common units representing a 97.1%, 96.8%, and 96.7% common general partnership interest in the Operating Partnership as of June 30, 2011, December 31, 2010, and June 30, 2010, respectively. The remaining 2.9%, 3.2%, and 3.3% common limited partnership interest as of June 30, 2011, December 31, 2010, and June 30, 2010, respectively, was owned by non-affiliate investors and certain of our executive officers and directors in the form of noncontrolling common units. There were 1,718,131, 1,723,131, and 1,723,131 common units outstanding held by these investors, executive officers and directors as of June 30, 2011, December 31, 2010, and June 30, 2010, respectively. For a further discussion of the noncontrolling common units as of June 30, 2011 and December 31, 2010, please refer to Note 6.
 
9.   Share-Based Compensation
 
Stockholder Approved Equity Compensation Plans
 
As of June 30, 2011, we had one share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan as amended (the “2006 Plan”). As of June 30, 2011, 3,821,041 shares were available for grant under the 2006 Plan. The number of shares that remains available for grant is calculated using the weighted share counting provisions set forth in the 2006 Plan, which are based on the type of awards that are granted. The maximum number


23


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
of shares available for grant subject to full value awards (which generally include equity awards other than options and stock appreciation rights) was 1,308,576 shares as of June 30, 2011.
 
Summary of Nonvested Shares
 
A summary of our nonvested shares activity from January 1, 2011 through June 30, 2011 is presented below:
 
                 
          Weighted-
 
          Average
 
          Grant Date
 
          Fair Value
 
Nonvested Shares   Shares     Per Share  
 
Outstanding at January 1, 2011
    50,032     $ 58.40  
Granted
    68,727       37.83  
Vested(1)
    (9,474 )     56.76  
                 
Outstanding as of June 30, 2011
    109,285     $ 45.61  
                 
 
 
(1) The total shares vested include 2,198 shares that were then tendered to satisfy minimum statutory tax withholding requirements related to the restricted shares that have vested in accordance with the terms of the 2006 Plan. We accept the return of shares at the current quoted market price of the Company’s common stock to satisfy tax obligations.
 
A summary of our nonvested and vested shares activity for the six months ended June 30, 2011 and 2010 is presented below:
 
                                 
    Shares Granted   Shares Vested
        Weighted-Average
       
        Grant Date
      Total Vest Date
    Non-Vested Shares
  Fair Value
      Fair Value(1)
Six Months Ended June 30,   Issued   Per Share   Vested Shares   (in thousands)
 
2011
    68,727     $ 37.83       (9,474 )   $ 370  
2010
    3,239       30.88       (16,358 )     474  
 
 
(1) Total fair value of shares vested was calculated based on the quoted closing share price of the Company’s common stock on the NYSE on the day of vesting.
 
Summary of Restricted Stock Units
 
A summary of our restricted stock unit (“RSU”) activity from January 1, 2011 through June 30, 2011 is presented below:
 
                                 
    Nonvested RSUs              
          Weighted-Average
             
          Grant Date
             
          Fair Value
             
    Amount     Per Share     Vested RSUs     Total RSUs  
 
Outstanding at January 1, 2011
    125,754     $ 29.88       588,068       713,822  
Granted
    107,673       37.94             107,673  
Vested
    (23,035 )     30.57       23,035        
Issuance of dividend equivalents(1)
                    13,494       13,494  
Canceled(2)
                    (8,448 )     (8,448 )
                                 
Outstanding as of June 30, 2011
    210,392     $ 33.93       616,149       826,541  
                                 
 
 
(1) RSUs issued as dividend equivalents are vested upon issuance.
 
(2) We accept the return of RSUs, at the current quoted market price of the Company’s common stock, to satisfy minimum statutory tax-withholding requirements related to either RSUs that have vested or RSU dividend equivalents in accordance with the terms of the 2006 Plan.


24


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
A summary of our RSU activity for the six months ended June 30, 2011 and 2010 is presented below:
 
                                 
    RSUs Granted   RSUs Vested
        Weighted-Average
       
        Grant Date
      Total Vest-Date
    Non-Vested RSUs
  Fair Value
      Fair Value(1)
Six Months Ended June 30,   Issued   Per Share   Vested RSUs   (in thousands)
 
2011
    107,673     $ 37.94       23,035     $ 897  
2010
    159,606       30.24       23,564       740  
 
 
(1) Total fair value of RSUs vested was calculated based on the quoted closing share price of the Company’s common stock on the NYSE on the day of vesting.
 
Compensation Cost Recorded During the Period
 
The total compensation cost for all share-based compensation programs was $1.4 million and $2.2 million for the three months ended June 30, 2011 and 2010, respectively, and $2.8 million and $4.3 million for the six months ended June 30, 2011 and 2010, respectively. Of the total share-based compensation cost, $0.3 million was capitalized as part of real estate assets for the three months ended June 30, 2011 and 2010, and $0.6 million and $0.7 million was capitalized as part of real estate assets for the six months ended June 30, 2011 and 2010, respectively. As of June 30, 2011, there was approximately $7.1 million of total unrecognized compensation cost related to nonvested incentive awards granted under share-based compensation arrangements that is expected to be recognized over a weighted-average period of 1.6 years. The remaining compensation cost related to these nonvested incentive awards had been recognized in periods prior to June 30, 2011.
 
10.   Future Minimum Rent
 
We have operating leases with tenants that expire at various dates through 2027 and are either subject to scheduled fixed increases or adjustments in rent based on the Consumer Price Index. Generally, the leases grant tenants renewal options. Leases also provide for additional rents based on certain operating expenses. Future contractual minimum rent under operating leases as of June 30, 2011 for future periods is summarized as follows:
 
         
Year Ending   (in thousands)  
 
Remaining 2011
  $ 153,705  
2012
    313,019  
2013
    293,621  
2014
    263,342  
2015
    210,150  
Thereafter
    658,754  
         
Total
  $ 1,892,591  
         
 
11.   Commitments and Contingencies
 
Ground Leases
 
We have noncancellable ground lease obligations at one building in Bellevue, Washington which expires in November 2093 and at Kilroy Airport Center Phases I, II, and III in Long Beach, California which expires in July 2084.


25


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
The minimum commitment under our ground leases as of June 30, 2011 for five years and thereafter was as follows:
 
         
Year Ending   (in thousands)  
 
Remaining 2011
  $ 1,041  
2012
    1,926  
2013
    1,926  
2014
    1,870  
2015
    1,830  
Thereafter(1)(2)
    133,212  
         
Total
  $ 141,805  
         
 
 
(1) One of our ground lease obligations is subject to a fair market value adjustment every five years; however, the lease includes ground rent subprotection and infrastructure rent credits which currently limit our annual rental obligations to $1.0 million. The contractual obligations for that ground lease included above assumes the lesser of $1.0 million or annual lease rental obligation in effect as of June 30, 2011.
 
(2) One of our ground lease obligations includes a component which is based on the percentage of gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every five years based on 50% of the average annual percentage rent for the previous five years. Currently gross income does not exceed the threshold requiring us to pay percentage rent. The contractual obligations for that ground lease included above assumes the annual lease rental obligation in effect as of June 30, 2011.
 
Non-refundable Escrow Deposits
 
As of June 30, 2011, we had $16.0 million in non-refundable escrow deposits related to potential future acquisitions. These potential future acquisitions are currently anticipated to close in 2011 and are subject to customary closing conditions.
 
12.   Fair Value Measurements and Disclosures
 
Assets and Liabilities Reported at Fair Value
 
The only assets and liabilities we record at fair value in our consolidated financial statements are the marketable securities and related deferred compensation plan liability, both of which are related to our Deferred Compensation Plan. The following table sets forth the fair value of our marketable securities and related deferred compensation plan liability as of June 30, 2011 and December 31, 2010:
 
                 
    Fair Value (Level 1)(1)
Description   June 30, 2011   December 31, 2010
    (in thousands)
 
Marketable securities(2)
  $ 5,654     $ 4,902  
Deferred compensation plan liability(3)
  $ 5,560     $ 4,809  
 
 
(1) Based on quoted prices in active markets for identical securities.
 
(2) The marketable securities are held in a limited rabbi trust.
 
(3) The deferred compensation liability is reported on our consolidated balance sheets in accounts payable, accrued expenses, and other liabilities.
 
We report the change in the fair value of the marketable securities at the end of each accounting period in interest income and other net investment gains (losses) in the consolidated statements of operations. We adjust the deferred compensation plan liability to fair value at the end of each accounting period based on the performance of the benchmark funds selected by each participant, which results in a corresponding increase or decrease to


26


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
compensation cost for the period. The following table sets forth the related amounts recorded during the three and six months ended June 30, 2011 and 2010:
 
                                 
    Three Months Ended   Six Months Ended
Description   June 30, 2011   June 30, 2010   June 30, 2011   June 30, 2010
    (in thousands)
 
Other net investments gains (losses)
  $ 26     $ (322 )   $ 213     $ (121 )
Compensation cost
    (26 )     359       (213 )     158  
 
Financial Instruments Disclosed at Fair Value
 
The following table sets forth the carrying value and the fair value of our other financial instruments as of June 30, 2011 and December 31, 2010:
 
                                 
    June 30, 2011   December 31, 2010
    Carrying
  Fair
  Carrying
  Fair
Description   Value   Value   Value   Value
    (in thousands)
 
Liabilities
                               
Secured debt
  $ 475,820     $ 493,185     $ 313,009     $ 329,456  
Exchangeable notes
    303,374       324,322       299,964       312,598  
Unsecured senior notes
    655,929       705,220       655,803       661,644  
Credit Facility
    245,000       244,757       159,000       159,659  


27


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
13.   Segment Disclosure
 
We have one reportable segment which is our Office Properties segment and we have one non-reportable segment which is our Industrial Properties segment. We also have certain corporate level activities including legal administration, accounting, finance, management information systems, and acquisitions, which are not considered separate operating segments.
 
We evaluate the performance of our segments based upon Net Operating Income. “Net Operating Income” is defined as operating revenues (rental income, tenant reimbursements, and other property income) less property and related expenses (property expenses, real estate taxes, ground leases, and provisions for bad debts) and excludes other non-property related income and expenses such as interest income and interest expense, depreciation and amortization, acquisition-related expenses and corporate general and administrative expenses. There is no intersegment activity.
 
The following tables reconcile our reportable segment activity to our consolidated net income for the three and six months ended June 30, 2011 and 2010 and the assets by segment to the to consolidated assets as of June 30, 2011 and December 31, 2010.
 
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2011     2010     2011     2010  
          (in thousands)        
 
Reportable Segment—Office Properties
                               
Operating revenues(1)
  $ 84,560     $ 64,718     $ 165,379     $ 124,321  
Property and related expenses
    24,729       19,503       47,639       35,757  
                                 
Net Operating Income
    59,831       45,215       117,740       88,564  
                                 
Non-Reportable Segment—Industrial Properties
                               
Operating revenues(1)
    7,504       7,698       14,810       14,914  
Property and related expenses
    1,811       1,880       5,124       3,650  
                                 
Net Operating Income
    5,693       5,818       9,686       11,264  
                                 
Total Segments:
                               
Operating revenues(1)
    92,064       72,416       180,189       139,235  
Property and related expenses
    26,540       21,383       52,763       39,407  
                                 
Net Operating Income
  $ 65,524     $ 51,033     $ 127,426     $ 99,828  
                                 
Reconciliation to Consolidated Net Income:
                               
Total Net Operating Income for segments
  $ 65,524     $ 51,033     $ 127,426     $ 99,828  
Unallocated (expenses) income:
                               
General and administrative expenses
    (7,440 )     (6,728 )     (14,000 )     (13,823 )
Acquisition-related expenses
    (1,194 )     (957 )     (1,666 )     (1,270 )
Depreciation and amortization
    (32,248 )     (23,722 )     (61,559 )     (44,660 )
Interest income and other net investment gains (losses)
    58       (18 )     242       366  
Interest expense
    (21,228 )     (13,088 )     (42,104 )     (25,044 )
Loss on early extinguishment of debt
          (4,564 )           (4,564 )
                                 
Net income
  $ 3,472     $ 1,956     $ 8,339     $ 10,833  
                                 
 
 
(1) All operating revenues are comprised of amounts received from third-party tenants.
 


28


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
                 
    June 30, 2011     December 31, 2010  
    (in thousands)  
 
Assets:
               
Reportable Segment — Office Properties
               
Land, buildings, and improvements, net
  $ 2,481,829     $ 2,108,019  
Undeveloped land and construction in progress
    303,998       290,365  
Total assets(1)
    3,027,731       2,611,206  
Non-Reportable Segment — Industrial Properties
               
Land, buildings, and improvements, net
    146,155       146,058  
Total assets(1)
    160,172       159,612  
Total Segments
               
Land, buildings, and improvements, net
    2,627,984       2,254,077  
Undeveloped land and construction in progress
    303,998       290,365  
Total assets(1)
    3,187,903       2,770,818  
Reconciliation to Consolidated Assets:
               
Total assets allocated to segments
  $ 3,187,903     $ 2,770,818  
Other unallocated assets:
               
Cash and cash equivalents
    25,412       14,840  
Restricted cash
    1,349       1,461  
Marketable securities
    5,654       4,902  
Deferred financing costs, net
    18,910       16,447  
Prepaid expenses and other assets, net
    25,559       8,097  
                 
Total consolidated assets
  $ 3,264,787     $ 2,816,565  
                 
 
 
(1) Includes land, buildings, and improvements, undeveloped land and construction in progress, current receivables, deferred rent receivables deferred leasing costs, and acquisition-related intangible assets, all shown on a net basis.

29


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
14.   Net (Loss) Income Available to Common Stockholders Per Share of the Company
 
The following table reconciles the numerator and denominator in computing the Company’s basic and diluted per-share computations for net (loss) income available to common stockholders for the three and six months ended June 30, 2011 and 2010:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2011     2010     2011     2010  
    (in thousands, except share and per share amounts)  
 
Numerator:
                               
Net income attributable to Kilroy Realty Corporation
  $ 3,482     $ 2,016     $ 8,315     $ 10,701  
Preferred distributions and dividends
    (3,799 )     (3,799 )     (7,598 )     (7,598 )
                                 
Net (loss) income available to common stockholders
    (317 )     (1,783 )     717       3,103  
Allocation to participating securities (nonvested shares and RSUs)
    (327 )     (305 )     (649 )     (604 )
                                 
Numerator for basic and diluted net (loss) income available to common stockholders
  $ (644 )   $ (2,088 )   $ 68     $ 2,499  
                                 
Denominator:
                               
Basic weighted average vested shares outstanding
    57,685,710       50,296,643       55,008,765       46,674,494  
Effect of dilutive securities- Exchangeable Notes and stock options
                375,964       3,356  
                                 
Diluted weighted average vested shares and common share equivalents outstanding
    57,685,710       50,296,643       55,384,729       46,677,850  
                                 
Basic earnings per share:
                               
Net (loss) income available to common stockholders per share
  $ (0.01 )   $ (0.04 )   $ 0.00     $ 0.05  
Diluted earnings per share:
                               
Net (loss) income available to common stockholders per share
  $ (0.01 )   $ (0.04 )   $ 0.00     $ 0.05  
 
The effect of the 4.25% Exchangeable Notes was not included in the Company’s diluted earnings per share calculation for the three and six months ended June 30, 2010 and the effect of the 3.25% Exchangeable Notes was not included in the Company’s diluted earnings per share calculation for the three and six months ended June 30, 2011 and 2010. The average trading price of the Company’s common stock on the NYSE was below the Exchangeable Notes exchange price for these periods; therefore, these instruments were not considered to be in the money for the purposes of our diluted earnings per share calculation for these periods (See Note 5). Additionally, the effect of the assumed exchange of the 4.25% Exchangeable Notes was not included in the Company’s diluted earnings per share calculation for the three months ended June 30, 2011 as it was anti-dilutive as a result of the net loss available to common stockholders.


30


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
15.   Net (Loss) Income Available to Common Unitholders Per Unit of the Operating Partnership
 
The following table reconciles the numerator and denominator in computing the Operating Partnership’s basic and diluted per-unit computations for net (loss) income available to common unitholders for the three and six months ended June 30, 2011 and 2010:
 
                                 
    Three Months Ended
    Six Months Ended
 
    June 30,     June 30,  
    2011     2010     2011     2010  
    (in thousands, except unit and per unit amounts)  
 
Numerator:
                               
Net income attributable to Kilroy Realty, L.P. 
  $ 3,440     $ 1,905     $ 8,274     $ 10,737  
Preferred distributions
    (3,799 )     (3,799 )     (7,598 )     (7,598 )
                                 
Net (loss) income available to common unitholders
    (359 )     (1,894 )     676       3,139  
Allocation to participating securities (nonvested units and RSUs)
    (327 )     (305 )     (649 )     (604 )
                                 
Numerator for basic and diluted net (loss) income available to common unitholders
  $ (686 )   $ (2,199 )   $ 27     $ 2,535  
                                 
Denominator:
                               
Basic weighted average vested units outstanding
    59,407,687       52,019,774       56,731,316       48,397,625  
Effect of dilutive securities-Exchangeable Notes and stock options
                375,964       3,356  
                                 
Diluted weighted average vested units and common unit equivalents outstanding
    59,407,687       52,019,774       57,107,280       48,400,981  
                                 
Basic earnings per unit:
                               
Net (loss) income available to common unitholders per unit
  $ (0.01 )   $ (0.04 )   $ 0.00     $ 0.05  
Diluted earnings per unit:
                               
Net (loss) income available to common unitholders per unit
  $ (0.01 )   $ (0.04 )   $ 0.00     $ 0.05  
 
The effect of the 4.25% Exchangeable Notes was not included in the Operating Partnership’s diluted earnings per unit calculation for the three and six months ended June 30, 2010 and the effect of the 3.25% Exchangeable Notes was not included in the Operating Partnership’s diluted earnings per unit calculation for the three and six months ended June 30, 2011 and 2010. The average trading price of the Company’s common stock on the NYSE was below the Exchangeable Notes exchange price for these periods; therefore, these instruments were not considered to be in the money for the purposes of the Operating Partnership’s diluted earnings per unit calculation for these periods (See Note 5). Additionally, the effect of the assumed exchange of the 4.25% Exchangeable Notes was not included in the Operating Partnership’s diluted earnings per unit calculation for the three months ended June 30, 2011 as it was anti-dilutive as a result of the net loss available to common unitholders.
 
16.   Subsequent Events
 
On July 15, 2011, aggregate dividends, distributions, and dividend equivalents of $21.4 million were paid to common stockholders and common unitholders of record on June 30, 2011 and RSU holders of record on July 15, 2011.
 
In July 2011, the Operating Partnership issued unsecured senior notes in a public offering with an aggregate principal balance of $325.0 million that are scheduled to mature in July 2018. The unsecured senior notes require


31


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
semi-annual interest payments each January and July based on a stated annual interest rate of 4.80%. The Company used the net proceeds from this offering for general corporate purposes, including the repayment of borrowings under the Credit Facility.
 
In July 2011, the Company commenced a “continuous equity” offering program under which it may sell up to an aggregate of $200 million of its common stock from time to time in one or more “at the market” offerings. The Company may sell common stock under this program in amounts and at times to be determined by the Company and the Company has no obligation to sell common stock under this program.
 
17.   Pro Forma Results of the Company
 
The following pro forma consolidated results of operations of the Company for the three and six months ended June 30, 2011 and 2010 assumes that the acquisition of 601 108th Avenue N.E., Bellevue, WA, was completed as of January 1, 2010. Pro forma data may not be indicative of the results that would have been reported had the acquisition actually occurred as of January 1, 2010, nor does it intend to be a projection of future results.
 
                                 
    Three Months Ended(1)
  Six Months Ended(1)
    June 30,   June 30,
    2011   2010   2011   2010
    (in thousands except per share amounts)
 
Revenues
  $ 95,050     $ 76,981     $ 187,478     $ 148,282  
Net (loss) income available to common stockholders(2)(3)
  $ (585 )   $ (1,544 )   $ (645 )   $ 3,876  
Net (loss) income available to common stockholders per share—basic(2)(3)
  $ (0.02 )   $ (0.04 )   $ (0.02 )   $ 0.07  
Net (loss) income available to common stockholders per share—diluted(2)(3)
  $ (0.02 )   $ (0.04 )   $ (0.02 )   $ 0.07  
 
 
(1) The purchase of 601 108th Avenue N.E., Bellevue, WA, represents the largest acquisition and 52.1% of the total aggregate purchase price of the properties acquired during the six months ended June 30, 2011.
 
(2) The pro forma earnings for the three and six months ended June 30, 2011 were adjusted to exclude non-recurring, acquisition-related expenses of $0.3 million incurred in 2011 for 601 108th Avenue N.E., Bellevue, WA. The pro forma data for the three and six months ended June 30, 2010 were adjusted to include these charges.
 
(3) The pro forma earnings for all periods presented includes incremental interest expense associated with the pro forma borrowings under the Credit Facility. The pro forma interest expense estimate is calculated based on the applicable interest rate. Actual funding of the acquisition may be from different sources and the pro forma borrowing and related pro forma interest expense estimate assumed herein are not indicative of actual results.
 
The following table summarizes the results of operations for the property at 601 108th Avenue N.E., Bellevue, WA, from June 3, 2011, the date of acquisition, through June 30, 2011:
 
         
    (in thousands)
 
Revenues
  $ 1,425  
Net income(1)
    7  
 
 
(1) Reflects the net operating income less depreciation for this property and amortization of acquisition-related intangibles.


32


Table of Contents

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
 
18.   Pro Forma Results of the Operating Partnership
 
The following pro forma consolidated results of operations of the Operating Partnership for the three and six months ended June 30, 2011 and 2010 assumes that the acquisition of 601 108th Avenue N.E., Bellevue, WA, was completed as of January 1, 2010. Pro forma data may not be indicative of the results that would have been reported had the acquisition actually occurred as of January 1, 2010, nor does it intend to be a projection of future results.
 
                                 
    Three Months Ended(1)
    Six Months Ended(1)
 
    June 30,     June 30,  
    2011     2010     2011     2010  
    (in thousands except per share amounts)  
 
Revenues
  $ 95,050     $ 76,981     $ 187,478     $ 148,282  
Net (loss) income available to common unitholders(2)(3)
  $ (632 )   $ (1,650 )   $ (713 )   $ 3,932  
Net (loss) income available to common unitholders per unit—basic(2)(3)
  $ (0.02 )   $ (0.04 )   $ (0.02 )   $ 0.07  
Net (loss) income available to common unitholders per unit—diluted(2)(3)
  $ (0.02 )   $ (0.04 )   $ (0.02 )   $ 0.07  
 
 
(1) The purchase of 601 108th Avenue N.E., Bellevue, WA, represents the largest acquisition and 52.1% of the total aggregate purchase price of the properties acquired during the six months ended June 30, 2011.
 
(2) The pro forma earnings for the three and six months ended June 30, 2011 were adjusted to exclude non-recurring, acquisition-related expenses of $0.3 million incurred in 2011 for 601 108th Avenue N.E., Bellevue, WA. The pro forma data for the three and six months ended June 30, 2010 were adjusted to include these charges.
 
(3) The pro forma earnings for all periods presented includes incremental interest expense associated with the pro forma borrowings under the Credit Facility. The pro forma interest expense estimate is calculated based on the applicable interest rate. Actual funding of the acquisition may be from different sources and the pro forma borrowing and related pro forma interest expense estimate assumed herein are not indicative of actual results.
 
The following table summarizes the results of operations for the property at 601 108th Avenue N.E., Bellevue, WA, from June 3, 2011, the date of acquisition, through June 30, 2011:
 
         
    (in thousands)
 
Revenues
  $ 1,425  
Net income(1)
    7  
 
 
(1) Reflects the net operating income less depreciation for this property and amortization of acquisition-related intangibles.


33


Table of Contents

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The results of operations discussion is combined for the Company and the Operating Partnership because there are no material differences in the results of operations between the two reporting entities.
 
Statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected. Some of the information presented is forward-looking in nature, including information concerning projected future occupancy rates, rental rate increases, property development and redevelopment timing and costs, and investment amounts. Numerous factors could affect our actual results, some of which are beyond our control. These include the breadth and duration of the current slowness of economic growth and its impact on our tenants, the strength of commercial and industrial real estate markets, market conditions affecting tenants, our ability to complete and successfully integrate pending and recent acquisitions, competitive market conditions, interest rate levels, volatility in the trading prices of the Company’s securities, and capital market conditions. You are cautioned not to place undue reliance on this information, which speaks only as of the date of this report. We assume no obligation to update publicly any forward-looking information, whether as a result of new information, future events, or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under federal securities laws to disclose material information. For a discussion of important risks related to our business, and related to investing in our securities, including risks that could cause actual results and events to differ materially from results and events referred to in the forward-looking information, see “Item 1A: Risk Factors” in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2010, and the discussion below under the captions “—Factors That May Influence Future Results of Operations,” “—Liquidity and Capital Resources of the Company,” and “—Liquidity and Capital Resources of the Operating Partnership”. In light of these risks, uncertainties, and assumptions, the forward-looking events discussed in this report might not occur.
 
Overview and Background
 
We are a self-administered REIT active in office and industrial submarkets along the West Coast. We own, develop, acquire and manage real estate assets, consisting primarily of Class A real estate properties in the coastal regions of Los Angeles, Orange County, San Diego, greater Seattle and the San Francisco Bay Area, which we believe have strategic advantages and strong barriers to entry. We own our interests in all of our properties through the Operating Partnership and the Finance Partnership, and conduct substantially all of our operations through the Operating Partnership. We owned a 97.1%, 96.8%, and 96.7% general partnership interest in the Operating Partnership as of June 30, 2011, December 31, 2010, and June 30, 2010, respectively. All our properties are held in fee except for the seven office buildings located at Kilroy Airport Center in Long Beach, California which are held subject to leases for the land that expire in 2084 and one office building located in Bellevue, Washington which is held subject to a lease for the land that expires in 2093.
 
Factors That May Influence Future Results of Operations
 
Acquisitions.  During the six months ended June 30, 2011, we acquired eight office buildings in five transactions for approximately $413.0 million (see Note 2 to our consolidated financial statements included in this report for more information), and during 2010 we acquired ten office buildings in eight transactions for approximately $697.8 million. We generally finance our acquisitions through debt and equity offerings and borrowings under our unsecured line of credit.
 
As a key component of our growth strategy, we continually evaluate property acquisition opportunities as they arise. As a result, at any point in time we may have one or more potential acquisitions under consideration that are in varying stages of evaluation, negotiation or due diligence review, including potential acquisitions under contract. Although, as of the date of this report we are a party to agreements to acquire properties, and in the future may enter into additional agreements to acquire properties, those agreements are and will be subject to the satisfaction of


34


Table of Contents

closing conditions. We cannot provide assurance that we will enter into any additional agreements to acquire properties or that the acquisitions contemplated by the agreements to which we were a party as of the date of this report or any additional agreements we may enter into in the future will be completed. Costs associated with acquisitions are expensed as incurred and we may be unable to complete an acquisition after making a nonrefundable deposit or incurring acquisition-related costs. In addition, acquisitions are subject to various other risks and uncertainties. During the three and six months ended June 30, 2011, we incurred approximately $1.2 million and $1.7 million, respectively, of third-party acquisition costs and we anticipate that we will incur additional third-party acquisition costs throughout 2011 as we pursue other potential acquisitions.
 
Leasing Activity and Changes in Rental Rates.  The amount of net rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space, newly developed or redeveloped properties, newly acquired properties with vacant space, and space available from unscheduled lease terminations. The amount of rental income we generate also depends on our ability to maintain or increase rental rates in our submarkets. Negative trends in one or more of these factors could adversely affect our rental income in future periods. The following tables set forth certain information regarding leases that commenced during the three and six months ended June 30, 2011.
 
Lease Commencement Information
For Leases That Commenced During the Three Months Ended June 30, 2011
 
                                                                 
                            2nd Generation(1)  
    1st & 2nd Generation(1)                       Weighted
 
    Number of
    Rentable
          Changes
          Average
 
    Leases(2)     Square Feet(2)     Changes in
    in Cash
    Retention
    Lease Term
 
    New     Renewal     New     Renewal     Rents(3)     Rents(4)     Rates(5)     (in months)  
 
Office Properties
    22       7       199,540       45,373       1.1 %     (6.6 )%     11.6 %     47  
Industrial Properties
    3       1       60,481       54,795       (23.8 )%     (31.7 )%     100.0 %     81  
                                                                 
Total portfolio
    25       8       260,021       100,168       (4.2 )%     (11.8 )%     22.4 %     64  
                                                                 
 
Lease Commencement Information
For Leases That Commenced During the Six Months Ended June 30, 2011
 
                                                                 
                            2nd Generation(1)  
    1st & 2nd Generation(1)                       Weighted
 
    Number of
    Rentable
          Changes
          Average
 
    Leases(2)     Square Feet(2)     Changes in
    in Cash
    Retention
    Lease Term
 
    New     Renewal     New     Renewal     Rents(3)     Rents(4)     Rates(5)     (in months)  
 
Office Properties
    37       17       367,449       119,329       (12.0 )%     (17.1 )%     23.6 %     55  
Industrial Properties
    5       2       145,270       91,766       (17.4 )%     (23.6 )%     93.9 %     84  
                                                                 
Total portfolio
    42       19       512,719       211,095       (12.7 )%     (17.9 )%     35.0 %     68  
                                                                 
 
 
(1) First generation leasing includes space where we have made capital expenditures that result in additional revenue generated when the space is re-leased. Second generation leasing includes space where we have made capital expenditures to maintain the current market revenue stream.
 
(2) Represents leasing activity for leases that commenced during the period, including first and second generation space, net of month-to-month leases. Excludes development and redevelopment leasing.
 
(3) Calculated as the change between GAAP rents for new/renewed leases and the expiring GAAP rents for the same space. Excludes leases for which the space was vacant longer than one year, or vacant when the property was acquired.
 
(4) Calculated as the change between stated rents for new/renewed leases and the expiring stated rents for the same space. Excludes leases for which the space was vacant longer than one year, or vacant when the property was acquired.
 
(5) Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration.
 
The changes in rents and changes in cash rents reported above exclude leases of approximately 229,900 and 376,300 rentable square feet for the three and six months ended June 30, 2011, for which the space was vacant longer than one year or we are leasing the space for the first time. We exclude space vacant for more than one year in our change in rents calculations to provide a meaningful market comparison. Retention rates for the three and six


35


Table of Contents

months ended June 30, 2011 reflects 205,000 rentable square feet that was vacated by a single tenant upon lease expiration.
 
During the second quarter of 2011, we executed 39 leases for an aggregate of approximately 359,000 rentable square feet. The weighted average change in rents as compared to the expiring rents for the same space for these new leases was a 0.3% increase in GAAP rents and a 6.8% decrease in cash rents, excluding leases for which the space was vacant longer than one year. As of June 30, 2011, we believe that the weighted average cash rental rates for our overall portfolio, including recently acquired properties, are approximately 10% above the current average market rental rates, although individual properties within any particular submarket presently may be leased either above, below, or at the current market rates within that submarket, and the average rental rates for individual submarkets may be above, below, or at the average cash rental rate of our portfolio.
 
In general, rental rates have stabilized in many of our submarkets over the last several quarters. Our rental rates and occupancy are impacted by general economic conditions, including the pace of regional economic growth and access to capital. Therefore, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates. Additionally, decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re-lease space could have further negative effects on our future financial condition, results of operations, and cash flows.
 
Scheduled Lease Expirations.  The following table sets forth certain information regarding our lease expirations for the remainder of 2011 and the next five years.
 
Lease Expirations(1)
 
                                                 
                            Percentage of
       
          Net Rentable
    Percentage of
          Annualized
    Average Annualized
 
          Area
    Leased
    Annualized Base
    Base Rental
    Base Rental
 
          Subject
    Square Feet
    Rental Revenue
    Revenue
    Revenue Per
 
    Number of
    to Expiring
    Represented by
    Under
    Represented
    Square Foot Under
 
    Expiring
    Leases
    Expiring
    Expiring Leases
    by Expiring
    Expiring Leases
 
Year of Lease Expiration   Leases     (Sq. Ft.)     Leases     (000’s)(2)     Leases(2)     (000’s)(2)  
 
Office Properties:
                                               
Remainder of 2011
    21       131,454       1.0 %   $ 3,355       1.0 %   $ 25.52  
2012
    83       847,738       6.3 %     23,085       7.0 %     27.23  
2013
    84       1,085,761       8.1 %     30,575       9.3 %     28.16  
2014
    78       1,331,446       9.9 %     35,427       10.8 %     26.61  
2015
    112       1,901,249       14.2 %     58,942       17.9 %     31.00  
2016
    48       584,546       4.4 %     14,500       4.4 %     24.81  
                                                 
Total Office
    426       5,882,194       43.9 %     165,884       50.4 %   $ 28.20  
                                                 
Industrial Properties:
                                               
Remainder of 2011
    1       78,605       0.6 %     733       0.2 %   $ 9.33  
2012
    11       452,557       3.4 %     2,647       0.8 %     5.85  
2013
    9       628,386       4.7 %     4,671       1.4 %     7.43  
2014
    17       568,386       4.2 %     4,528       1.4 %     7.97  
2015
    10       544,864       4.1 %     3,839       1.2 %     7.05  
2016
    5       317,198       2.4 %     3,695       1.1 %     11.65  
                                                 
Total Industrial
    53       2,589,996       19.4 %     20,113       6.1 %   $ 7.77  
                                                 
Total
    479       8,472,190       63.3 %   $ 185,997       56.5 %   $ 21.95  
                                                 
 
 
(1) The information presented reflects leasing activity through June 30, 2011. For leases that have been renewed early or space that has been re-leased to a new tenant, the expiration date and annualized base rent information presented takes into consideration the renewed or re-leased lease terms. Excludes space leased under month-to-month leases and vacant space as of June 30, 2011.
 
(2) Reflects annualized contractual base rent calculated on a straight-line basis in accordance with GAAP excluding the amortization of deferred revenue related to tenant-funded tenant improvements and expense reimbursement revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Amounts represent percentage of total portfolio annualized contractual base rental revenue.


36


Table of Contents

 
In addition to the 1.5 million rentable square feet, or 9.8%, of currently available space in our stabilized portfolio, leases representing approximately 1.6% and 9.7% of the occupied square footage of our stabilized portfolio are scheduled to expire during the remainder of 2011 and in 2012, respectively. The leases scheduled to expire during the remainder of 2011 and in 2012 represent approximately 1.0 million rentable square feet of office space, or 8.0% of our total annualized base rental revenue, and 0.5 million rentable square feet of industrial space, or 1.0% of our total annualized base rental revenue, respectively. We believe that the weighted average cash rental rates are approximately 10% to 15% above the current average quoted market rates for leases scheduled to expire during the remainder of 2011 and 2012, although individual properties within any particular submarket presently may be leased either above, below, or at the current quoted market rates within that submarket, and the average rental rates for individual submarkets may be above, below, or at the average cash rental rate of our overall portfolio. Our ability to re-lease available space depends upon both general market conditions and the market conditions in the specific regions in which individual properties are located.
 
Development and Redevelopment Programs.  We believe that a portion of our long-term future potential growth will continue to come from our development pipeline and redevelopment opportunities within our existing portfolio. Redevelopment opportunities are those projects in which we spend significant development and construction costs on existing buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. In recent periods we have delayed the timing and reduced the scope of our development program, which impacts the average development and redevelopment asset balances qualifying for interest and other carry cost capitalization. During the second quarter of 2011, we did not capitalize interest on seven of our eight development pipeline properties with an aggregate cost basis of approximately $157.7 million, as it was determined these projects did not qualify for interest and other carry cost capitalization under GAAP. As of June 30, 2011, our development pipeline included 117.8 gross acres of land with an aggregate cost basis of approximately $274.9 million. While in recent periods we have delayed the timing and reduced the scope of our development program activity as a result of economic conditions in our submarkets, we continue to proactively evaluate development and redevelopment opportunities throughout the West Coast.
 
In the third quarter of 2010 we commenced the redevelopment of one of our buildings in the El Segundo submarket of Los Angeles County which encompasses approximately 300,000 rentable square feet. We are currently upgrading and modernizing the building and adjacent common areas since it was previously occupied by the Boeing Company and its predecessors for more than 25 years. The redevelopment project has a total estimated investment of approximately $52.4 million and is currently expected to be completed in the third quarter of 2011.
 
At June 30, 2011, we had one office property in the Long Beach submarket of Los Angeles encompassing approximately 98,000 rentable square feet which we removed from the stabilized portfolio since it was committed for redevelopment. We are currently upgrading and modernizing the building and adjacent common areas since the property was occupied by a single tenant for approximately 20 years. The redevelopment will occur in two phases and the existing tenant will occupy approximately 50% of the property during redevelopment. The redevelopment project has a total estimated investment of approximately $19.4 million and construction is currently expected to be completed in the second quarter of 2012.
 
We also plan to continue to evaluate redevelopment opportunities for certain other of our properties, which have been occupied by long-term tenants and require significant capital expenditures to upgrade and modernize the buildings. In addition, we plan to continue to focus on enhancing the entitlements for our existing development land pipeline, and performing additional activities to prepare for the time when development will again be economically attractive.
 
Incentive Compensation.  Our Executive Compensation Committee determines compensation, including equity and cash incentive programs, for our executive officers. The programs approved by the Executive Compensation Committee have historically provided for equity and cash compensation to be earned by our executive officers based on certain performance measures, including financial, operating, and development targets. Incentive compensation for our executive officers for 2011 has been structured to allow the Executive Compensation Committee to evaluate a variety of key factors and metrics at the end of the year and make a determination of incentive compensation for executive officers based on the Company and management’s overall performance. As a result, accrued incentive compensation and compensation expense for future incentive


37


Table of Contents

compensation awards will be affected by our operating and development performance, financial results, the performance of the trading price of the Company’s common stock, and market conditions. Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation.
 
Share-Based Compensation.  As of June 30, 2011, there was $7.1 million of total unrecognized compensation cost related to outstanding nonvested shares of restricted common stock and nonvested RSUs issued under share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 1.6 years. The $7.1 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued based on the Company’s and management’s performance in 2011. Share-based compensation expense for future incentive compensation awards will be affected by our operating and development performance, financial results, the performance of the trading price of the Company’s common stock, and market conditions. Consequently, we cannot predict the amounts that will be recorded in future periods for such share-based awards. See Note 9 to our consolidated financial statements included in this report for additional information regarding our share-based incentive compensation plan.


38


Table of Contents

Stabilized Portfolio Information
 
The following table reconciles the changes in the rentable square feet in our stabilized portfolio of operating properties from June 30, 2010 to June 30, 2011:
 
                                                 
    Office Properties     Industrial Properties     Total  
    Number of
    Rentable
    Number of
    Rentable
    Number of
    Rentable
 
    Buildings     Square Feet     Buildings     Square Feet     Buildings     Square Feet  
 
Total as of June 30, 2010
    100       10,088,803       41       3,654,463       141       13,743,266  
Acquisitions
    11       1,852,726                       11       1,852,726  
Properties moved to the redevelopment portfolio
    (2 )     (384,394 )                     (2 )     (384,394 )
Dispositions
    (2 )     (106,791 )     (1 )     (51,567 )     (3 )     (158,358 )
Remeasurement
            15,477               2,511             17,988  
                                                 
Total as of June 30, 2011
    107       11,465,821       40       3,605,407       147       15,071,228  
                                                 
 
Occupancy Information
 
The following table sets forth certain information regarding our stabilized portfolio:
 
Stabilized Portfolio Occupancy
 
                                         
    Number of
    Square Feet
    Occupancy at(1)  
Region   Buildings     Total     6/30/2011     3/31/2011     12/31/2010  
 
Office Properties:
                                       
Los Angeles and Ventura Counties
    28       2,976,006       82.9 %     90.7 %     89.3 %
San Diego
    64       5,640,608       88.4       87.8       86.4  
Orange County
    5       540,656       92.5       93.9       93.1  
San Francisco Bay Area
    4       1,418,054       93.1       87.0       84.3  
Greater Seattle
    6       890,497       90.4       100.0       100.0  
                                         
      107       11,465,821       87.9       89.0       87.5  
                                         
Industrial Properties:
                                       
Los Angeles County
    1       192,053       100.0       100.0       100.0  
Orange County
    39       3,413,354       97.4       95.6       93.5  
                                         
      40       3,605,407       97.6       95.9       93.9  
                                         
Total Stabilized Portfolio
    147       15,071,228       90.2 %     90.8 %     89.1 %
                                         
 
                                 
    Average Occupancy for
    Three Months Ended
    June 30,
    Stabilized
  Core
    Portfolio(1)   Portfolio(2)
    2011   2010   2011   2010
 
Office Properties
    88.1 %     84.6 %     87.4 %     84.5 %
Industrial Properties
    97.0 %     85.0 %     97.0 %     84.7 %
Total Portfolio
    90.2 %     84.7 %     90.3 %     84.6 %
 
                                 
    Average Occupancy for
    Six Months Ended
    June 30,
    Stabilized
   
    Portfolio(1)   Core Portfolio(2)
    2011   2010   2011   2010
 
Office Properties
    88.4 %     82.8 %     88.2 %     82.9 %
Industrial Properties
    95.7 %     85.1 %     95.7 %     84.9 %
Total Portfolio
    90.2 %     83.5 %     90.5 %     83.5 %
 
 
(1) Occupancy percentages reported are based on our stabilized portfolio as of the end of the period presented.
 
(2) Occupancy percentages reported are based on Office Properties and Industrial Properties owned and stabilized as of January 1, 2010 and still owned and stabilized as of June 30, 2011.


39


Table of Contents

 
As of June 30, 2011, the Office Properties and Industrial Properties represented approximately 92.1% and 7.9%, respectively, of our total annualized base rental revenue. During the three months ended June 30, 2011, the Office and Industrial Properties represented approximately 91.3% and 8.7%, respectively, of our total Net Operating Income, as defined. During the six months ended June 30, 2011, the Office Properties and Industrial Properties represented approximately 92.4% and 7.6%, respectively, of our total Net Operating Income, as defined.
 
Current Regional Information
 
Although real estate fundamentals continue to be challenging in many of our regional submarkets, we have started to see a general increase in occupancy across our portfolio, and we have generally seen a modest decrease in vacancy rates across many of our regional submarkets as well as a stabilization in rental rates and lease concession packages.
 
Los Angeles and Ventura Counties.  Our Los Angeles and Ventura Counties stabilized office portfolio of 3.0 million rentable square feet was 82.9% occupied with approximately 508,200 available rentable square feet as of June 30, 2011 compared to 89.3% occupied with approximately 328,800 available rentable square feet as of December 31, 2010. The decrease in occupancy is primarily attributable to 205,000 of rentable square feet related to a lease with one tenant in buildings along the 101-Corridor in Ventura County. The tenant vacated the properties upon expiration of the lease.
 
As of June 30, 2011, an aggregate of approximately 114,700 and 175,100 rentable square feet are scheduled to expire in this region during the remainder of 2011 and in 2012, respectively. The aggregate rentable square feet scheduled to expire in this region during the remainder of 2011 and in 2012 represents approximately 2.2% of our occupied rentable square feet and 2.5% of our annualized base rental revenues in our total stabilized portfolio. As of June 30, 2011, we have leased approximately 87,300 rentable square feet in this region that was vacant at June 30, 2011. The new leases are scheduled to commence during the remainder of 2011.
 
San Diego County.  Our San Diego County stabilized office portfolio of 5.6 million rentable square feet was 88.4% occupied with approximately 655,300 available rentable square feet as of June 30, 2011 compared to 86.4% occupied with approximately 744,300 available rentable square feet as of December 31, 2010. As of June 30, 2011, we have leased approximately 144,800 rentable square feet in this region that was available at June 30, 2011. The new leases are scheduled to commence during the remainder of 2011.
 
As of June 30, 2011, leases representing an aggregate of approximately 9,200 and 475,700 rentable square feet are scheduled to expire during the remainder of 2011 and in 2012, respectively, in this region. The aggregate rentable square feet scheduled to expire in this region during the remainder of 2011 and in 2012 represents approximately 3.6% of our occupied rentable square feet and 3.9% of our annualized base rental revenues in our total stabilized portfolio.
 
Orange County.  As of June 30, 2011, our Orange County stabilized industrial portfolio was 97.4% occupied with approximately 88,300 available rentable square feet compared to 93.5% occupied with approximately 220,100 available rentable square feet as of December 31, 2010. The increase in occupancy is primarily attributable to two leases with a total of approximately 123,300 rentable square feet that commenced during the first half of 2011.
 
Our Orange County stabilized office portfolio of approximately 540,700 rentable square feet was 92.5% occupied with approximately 40,300 available rentable square feet as of June 30, 2011 compared to 93.1% occupied with approximately 37,300 available rentable square feet as of December 31, 2010.
 
As of June 30, 2011, leases representing an aggregate of approximately 83,100 and 513,000 rentable square feet are scheduled to expire during the remainder of 2011 and in 2012, respectively, in this region. The aggregate rentable square feet scheduled to expire during the remainder of 2011 and in 2012 represents approximately 4.4% of our occupied rentable square feet and 1.5% of our annualized base rental revenues in our total stabilized portfolio. Of the 596,100 rentable square feet scheduled to expire during the remainder of 2011 and in 2012, approximately 531,200 rentable square feet is industrial space. As of June 30, 2011, we have leased approximately 73,500 rentable square feet of the 128,600 rentable square feet that was available in this region as of June 30, 2011. The new leases are expected to commence during the remainder of 2011.


40


Table of Contents

San Francisco Bay Area.  As of June 30, 2011, our San Francisco Bay Area stabilized office portfolio was 93.1% occupied with approximately 97,500 available rentable square feet as of June 30, 2011 compared to 84.3% occupied with approximately 188,900 available rentable square feet as of December 31, 2010. The increase in occupancy is primarily attributable to one lease encompassing approximately 83,700 of rentable square feet that commenced in the second quarter of 2011.
 
No leases are scheduled to expire during the remainder of 2011 and leases representing an aggregate of approximately 83,800 rentable square feet are scheduled to expire in 2012. The aggregate rentable square feet scheduled to expire in this region during 2012 represents approximately 0.6% of our occupied rentable square feet and 0.8% of our annualized base rental revenues in our total stabilized portfolio. As of June 30, 2011, we have leased approximately 45,600 rentable square feet in this region that was available at June 30, 2011. The new leases are scheduled to commence during the third quarter of 2011.
 
Greater Seattle.  As of June 30, 2011, our Greater Seattle stabilized office portfolio was 90.4% occupied with approximately 85,500 available rentable square feet as of June 30, 2011 compared to 100.0% occupied as of December 31, 2010. The decrease in occupancy is primarily attributable to the acquisitions of five office buildings encompassing approximately 768,400 rentable square feet during the six months ended June 30, 2011. These five buildings were 88.9% occupied as of June 30, 2011.
 
As of June 30, 2011, leases representing an aggregate of approximately 3,100 and 52,600 rentable square feet are scheduled to expire during the remainder of 2011 and in 2012. The aggregate rentable square feet scheduled to expire in this region during the remainder of 2011 and in 2012 represents approximately 0.4% of our occupied rentable square feet and 0.4% of our annualized base rental revenues in our total stabilized portfolio.


41


Table of Contents

Results of Operations
 
Management internally evaluates the operating performance and financial results of our portfolio based on Net Operating Income for the consolidated portfolio. We define “Net Operating Income” as operating revenues (rental income, tenant reimbursements, and other property income) less operating expenses (property expenses, real estate taxes, provision for bad debts, and ground leases). The Net Operating Income information presented within this Management’s Discussion and Analysis of Financial Condition and Results of Operations is the same Net Operating Income information disclosed in our segment information in Note 13 to our consolidated financial statements.
 
Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010
 
The following table reconciles our Net Operating Income, as defined, to our net income for the three months ended June 30, 2011 and 2010.
 
                                 
    Three Months Ended June 30,     Dollar
    Percentage
 
    2011     2010     Change     Change  
    ($ in thousands)  
 
Net Operating Income, as defined
  $ 65,524     $ 51,033     $ 14,491       28.4 %
Unallocated (expense) income:
                               
General and administrative expenses
    (7,440 )     (6,728 )     (712 )     10.6  
Acquisition-related expenses
    (1,194 )     (957 )     (237 )     24.8  
Depreciation and amortization
    (32,248 )     (23,722 )     (8,526 )     35.9  
Interest income and other net investment gains (losses)
    58       (18 )     76       422.2  
Interest expense
    (21,228 )     (13,088 )     (8,140 )     62.2  
Loss on early extinguishment of debt
          (4,564 )     4,564       100.0  
                                 
Net income
  $ 3,472     $ 1,956     $ 1,516       77.5 %
                                 
 
Rental Operations
 
The following tables summarize the Net Operating Income, as defined, for our total portfolio for the three months ended June 30, 2011 and 2010.
 
                                                                 
    2011     2010  
    Core
    Acquisitions
          Total
    Core
    Acquisitions
          Total
 
    Portfolio(1)     Portfolio(2)     Other     Portfolio     Portfolio(1)     Portfolio(2)     Other     Portfolio  
    (in thousands)     (in thousands)  
 
Operating revenues:
                                                               
Rental income
  $ 62,182     $ 20,908     $ 362     $ 83,452     $ 59,929     $ 3,252     $ 1,857     $ 65,038  
Tenant reimbursements
    5,779       1,697       34       7,510       5,855       64       564       6,483  
Other property income
    1,082       20             1,102       694       1       200       895  
                                                                 
Total
    69,043       22,625       396       92,064       66,478       3,317       2,621       72,416  
                                                                 
Property and related expenses:
                                                               
Property expenses
    12,094       5,180       309       17,583       13,082       813       648       14,543  
Real estate taxes
    5,762       2,285       366       8,413       5,701       355       426       6,482  
Provision for bad debts
    120                   120       (12 )                 (12 )
Ground leases
    330       60       34       424       334             36       370  
                                                                 
Total
    18,306       7,525       709       26,540       19,105       1,168       1,110       21,383  
                                                                 
Net Operating Income, as defined
  $ 50,737     $ 15,100     $ (313 )   $ 65,524     $ 47,373     $ 2,149     $ 1,511     $ 51,033  
                                                                 
 
 
(1) Properties owned and stabilized as of January 1, 2010 and still owned and stabilized as of June 30, 2011.
 
(2) Includes results, from the dates of acquisition through the periods presented, for the ten office buildings we acquired during 2010 and the eight office buildings we acquired during the first half of 2011.
 


42


Table of Contents

                                                 
    Three Months Ended June 30, 2011
 
    As Compared to the Three Months Ended June 30, 2010  
    Core Portfolio     Acquisitions Portfolio     Total Portfolio  
    Dollar
    Percentage
    Dollar
    Percentage
    Dollar
    Percentage
 
    Change     Change     Change     Change     Change     Change  
    ($ in thousands)  
 
Operating revenues:
                                               
Rental income
  $ 2,253       3.8 %   $ 17,656       542.9 %   $ 18,414       28.3 %
Tenant reimbursements
    (76 )     (1.3 )     1,633       2,551.6       1,027       15.8  
Other property income
    388       55.9       19       1,900.0       207       23.1  
                                                 
Total
    2,565