KRC 9/30/2011 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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
95-4598246
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
Kilroy Realty, L.P.
Delaware
95-4612685
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
 
(310) 481-8400
(Registrant's telephone number, including area code)
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Kilroy Realty Corporation    Yes  þ    No   o
Kilroy Realty, L. P.         Yes  þ    No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Kilroy Realty Corporation     Yes  þ    No   o
Kilroy Realty, L.P.         Yes  þ    No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Kilroy Realty Corporation
 
 
 
Large accelerated filer     þ
Accelerated filer     o 
Non-accelerated filer     o
Smaller reporting company     o
(Do not check if a smaller reporting company)
 
 
 
 
Kilroy Realty, L.P.
 
 
 
Large accelerated filer     o
Accelerated filer     o 
Non-accelerated filer     þ
Smaller reporting company     o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Kilroy Realty Corporation Yes  o     No   þ
Kilroy Realty, L.P. Yes  o     No   þ
As of November 1, 2011, 58,464,412 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
 


EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended September 30, 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," "we," "our," and "us" mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to "Kilroy Realty, L.P." or the "Operating Partnership" mean Kilroy Realty, L.P., a Delaware limited partnership, and its controlled and consolidated subsidiaries.
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of September 30, 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, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly obligated under any indebtedness, but guarantees some of the debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the Company's business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Company, which the Company is required to contribute to the Operating Partnership in exchange for partnership units, the Operating Partnership generates the capital required by the Company's business through the Operating Partnership's operations, 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 by the Company and the Operating Partnership, and in the Company's noncontrolling interest in Kilroy Realty Finance Partnership, L.P.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
Combined reports better reflect how management and the analyst community view the business as a single operating unit;
Combined reports enhance investors' understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
consolidated financial statements;
the following notes to the consolidated financial statements:
Note 5, Secured and Unsecured Debt of the Operating Partnership;
Note 6, Noncontrolling Interests on the Company's Consolidated Financial Statements;

i

Note 7, Stockholders' Equity of the Company;
Note 8, Partners' Capital of the Operating Partnership;
Note 15, Net Income (Loss) Available to Common Stockholders Per Share of the Company;
Note 16, Net Income (Loss) Available to Common Unitholders Per Unit of the Operating Partnership;
Note 18, Pro Forma Results of the Company;
Note 19, Pro Forma Results of the Operating Partnership;
"Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of the Company";
"Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources of the Operating Partnership".

This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and 18 U.S.C. §1350.




ii






KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011
TABLE OF CONTENTS
 
 
  
 
  
Page
 
  
PART I-FINANCIAL INFORMATION
  
 
 
 
 
 
Item 1.
  
FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
Item 1.
 
FINANCIAL STATEMENTS OF KILROY REALTY, L.P.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
Item 2.
  
 
 
 
 
 
Item 3.
  
 
 
 
 
 
Item 4.
  
CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P.)
 
 
 
 
 
 
  
PART II-OTHER INFORMATION
 
 
 
 
 
 
Item 1.
  
 
 
 
 
 
Item 1A.
  
 
 
 
 
 
Item 2.
  
 
 
 
 
 
Item 3.
  
 
 
 
 
 
Item 4.
  
 
 
 
 
 
Item 5.
  
 
 
 
 
 
Item 6.
  
 
 
 
 
 
 






PART I-FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION

KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
September 30, 2011
 
December 31, 2010
 
(unaudited)
 
 
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
537,973

 
$
491,333

Buildings and improvements (Note 2)
2,881,504

 
2,435,173

Undeveloped land and construction in progress (Note 1)
328,785

 
290,365

Total real estate held for investment
3,748,262

 
3,216,871

Accumulated depreciation and amortization
(732,162
)
 
(672,429
)
Total real estate assets, net
3,016,100

 
2,544,442

CASH AND CASH EQUIVALENTS
15,481

 
14,840

RESTRICTED CASH (Note 14)
25,436

 
1,461

MARKETABLE SECURITIES (Note 12)
5,213

 
4,902

CURRENT RECEIVABLES, NET (Note 4)
6,860

 
6,258

DEFERRED RENT RECEIVABLES, NET (Note 4)
103,668

 
89,052

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
155,757

 
131,066

DEFERRED FINANCING COSTS, NET (Note 5)
19,638

 
16,447

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 11)
19,531

 
8,097

TOTAL ASSETS
$
3,367,684

 
$
2,816,565

LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 5 and 12)
$
473,997

 
$
313,009

Exchangeable senior notes, net (Notes 5 and 12)
305,115

 
299,964

Unsecured senior notes, net (Notes 5 and 12)
980,487

 
655,803

Unsecured line of credit (Notes 5 and 12)

 
159,000

Accounts payable, accrued expenses and other liabilities
93,050

 
68,525

Accrued distributions (Note 16)
22,565

 
20,385

Deferred revenue and acquisition-related intangible liabilities, net (Note 3)
95,120

 
79,322

Rents received in advance and tenant security deposits
29,369

 
29,189

Total liabilities
1,999,703

 
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
1,435,580

 
1,211,498

Distributions in excess of earnings
(296,476
)
 
(247,252
)
Total stockholders' equity
1,261,271

 
1,086,351

Noncontrolling interest:
 
 
 
Common units of the Operating Partnership (Note 6)
33,072

 
31,379

Total equity
1,294,343

 
1,117,730

TOTAL LIABILITIES, NONCONTROLLING INTEREST AND EQUITY
$
3,367,684

 
$
2,816,565

See accompanying notes to consolidated financial statements.

1






KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2011
 
2010
 
2011
 
2010
 
REVENUES:
 
 
 
 
 
 
 
 
Rental income
$
89,306

 
$
72,135

 
$
252,102

 
$
196,883

 
Tenant reimbursements
7,683

 
6,156

 
21,469

 
18,261

 
Other property income
348

 
985

 
2,863

 
2,325

 
Total revenues
97,337

 
79,276

 
276,434

 
217,469

 
EXPENSES:
 
 
 
 
 
 
 
 
Property expenses
19,361

 
15,802

 
54,548

 
42,255

 
Real estate taxes
8,360

 
7,582

 
24,878

 
20,035

 
Provision for bad debts
(5
)
 
(857
)
 
141

 
(843
)
 
Ground leases (Note 11)
503

 
336

 
1,266

 
648

 
General and administrative expenses
6,355

 
7,273

 
20,355

 
21,096

 
Acquisition-related expenses
1,163

 
354

 
2,829

 
1,624

 
Depreciation and amortization
36,152

 
29,951

 
97,513

 
74,405

 
Total expenses
71,889

 
60,441

 
201,530

 
159,220

 
OTHER (EXPENSES) INCOME:
 
 
 
 
 
 
 
 
Interest income and other net investment gains (Note 12)
30

 
337

 
272

 
703

 
Interest expense (Note 5)
(24,051
)
 
(15,853
)
 
(66,155
)
 
(40,897
)
 
Loss on early extinguishment of debt

 

 

 
(4,564
)
 
Total other (expenses) income
(24,021
)
 
(15,516
)
 
(65,883
)
 
(44,758
)
 
INCOME FROM CONTINUING OPERATIONS
1,427

 
3,319

 
9,021

 
13,491

 
DISCONTINUED OPERATIONS (Note 14)
 
 
 
 
 
 
 
 
Net income from discontinued operations
308

 
350

 
1,053

 
1,011

 
Net gain on dispositions of discontinued operations
12,555

 

 
12,555

 

 
Total income from discontinued operations
12,863

 
350

 
13,608

 
1,011

 
NET INCOME
14,290

 
3,669

 
22,629

 
14,502

 
Net (income) loss attributable to noncontrolling common units of the Operating Partnership
(296
)
 
4

 
(320
)
 
(128
)
 
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
13,994

 
3,673

 
22,309

 
14,374

 
PREFERRED DISTRIBUTIONS AND DIVIDENDS:
 
 
 
 
 
 
 
 
Distributions to noncontrolling cumulative redeemable preferred units of the Operating Partnership
(1,397
)
 
(1,397
)
 
(4,191
)
 
(4,191
)
 
Preferred dividends
(2,402
)
 
(2,402
)
 
(7,206
)
 
(7,206
)
 
Total preferred distributions and dividends
(3,799
)
 
(3,799
)
 
(11,397
)
 
(11,397
)
 
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
$
10,195

 
$
(126
)
 
$
10,912

 
$
2,977

 
(Loss) income from continuing operations available to common stockholders per common share - basic (Note 15)
$
(0.05
)
 
$
(0.01
)
 
$
(0.06
)
 
$
0.02

 
(Loss) income from continuing operations available to common stockholders per common share - diluted (Note 15)
$
(0.05
)
 
$
(0.01
)
 
$
(0.06
)
 
$
0.02

 
Net income (loss) available to common stockholders per share - basic (Note 15)
$
0.17

 
$
(0.01
)
 
$
0.18

 
$
0.04

 
Net income (loss) available to common stockholders per share - diluted (Note 15)
$
0.17

 
$
(0.01
)
 
$
0.18

 
$
0.04

 
Weighted average common shares outstanding - basic (Note 15)
58,355,127

 
52,274,316

 
56,136,477

 
48,561,614

 
Weighted average common shares outstanding - diluted (Note 15)
58,355,127

 
52,274,316

 
56,136,477

 
48,565,028

 
Dividends declared per common share
$
0.35

 
$
0.35

 
$
1.05

 
$
1.05

 
See accompanying notes to consolidated financial statements.


2






KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share data)
 
 
 
 
Common Stock 
 
 
Total
Stock-
holders'
Equity
 
Noncontrol-
ling Interests
- Common
Units of the
Operating
Partnership
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2009
$
121,582

 
43,148,762

 
$
431

 
$
913,657

 
$
(180,722
)
 
$
854,948

 
$
28,890

 
$
883,838

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
 
 
 
 
 
14,374

 
14,374

 
128

 
14,502

Issuance of common stock
 
 
9,200,000

 
92

 
299,755

 
 
 
299,847

 
 
 
299,847

Issuance of share-based compensation awards
 
 
3,239

 
 
 
1,904

 
 
 
1,904

 
 
 
1,904

Noncash amortization of share-based compensation
 
 
 
 
 
 
5,050

 
 
 
5,050

 
 
 
5,050

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
)
Settlement of restricted stock units for shares of common stock
 
 
53,451

 
 
 
(1,296
)
 
 
 
(1,296
)
 
 
 
(1,296
)
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
 
 
 
 
 
 
(4,665
)
 
 
 
(4,665
)
 
4,665

 

Preferred distributions and dividends
 
 
 
 
 
 
 
 
(11,397
)
 
(11,397
)
 
 
 
(11,397
)
Dividends declared per common share and common unit ($1.05 per share/unit)
 
 
 
 
 
 
 
 
(52,470
)
 
(52,470
)
 
(1,810
)
 
(54,280
)
BALANCE AS OF SEPTEMBER 30, 2010
$
121,582

 
52,349,670

 
$
523

 
$
1,209,673

 
$
(230,215
)
 
$
1,101,563

 
$
31,873

 
$
1,133,436

 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock 
 
 
Total
Stock-
holders'
Equity
 
Noncontrol-
ling Interests
- Common
Units of the
Operating
Partnership
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2010
$
121,582

 
52,349,670

 
$
523

 
$
1,211,498

 
$
(247,252
)
 
$
1,086,351

 
$
31,379

 
$
1,117,730

Net income
 
 
 
 
 
 
 
 
22,309

 
22,309

 
320

 
22,629

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

 
2,446

 
 
 
2,447

 
 
 
2,447

Noncash amortization of share-based compensation
 
 
 
 
 
 
4,201

 
 
 
4,201

 
 
 
4,201

Exercise of stock options
 
 
15,000

 
 
 
395

 
 
 
395

 
 
 
395

Repurchase of common stock and restricted stock units (Note 9)
 
 
(11,485
)
 
 
 
(736
)
 
 
 
(736
)
 
 
 
(736
)
Exchange of common units of the Operating Partnership
 
 
5,000

 
 
 
91

 
 
 
91

 
(91
)
 

Adjustment for noncontrolling interest
 
 
 
 
 
 
(3,269
)
 
 
 
(3,269
)
 
3,269

 

Preferred distributions and dividends
 
 
 
 
 
 
 
 
(11,397
)
 
(11,397
)
 
 
 
(11,397
)
Dividends declared per common share and common unit ($1.05 per share/unit)
 
 
 
 
 
 
 
 
(60,136
)
 
(60,136
)
 
(1,805
)
 
(61,941
)
BALANCE AS OF SEPTEMBER 30, 2011
$
121,582

 
58,464,412

 
$
585

 
$
1,435,580

 
$
(296,476
)
 
$
1,261,271

 
$
33,072

 
$
1,294,343

See accompanying notes to consolidated financial statements.


3






KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
22,629

 
$
14,502

Adjustments to reconcile net income to net cash provided by operating activities (including discontinued operations):
 
 
 
Depreciation and amortization of building and improvements and leasing costs
96,971

 
74,049

Increase (decrease) in provision for bad debts
141

 
(843
)
Depreciation of furniture, fixtures and equipment
839

 
665

Noncash amortization of share-based compensation awards
3,365

 
5,328

Noncash amortization of deferred financing costs and debt discounts and premiums
10,164

 
9,098

Noncash amortization of net above market rents (Note 3)
1,519

 
696

Net gain on dispositions of discontinued operations (Note 14)
(12,555
)
 

Loss on early extinguishment of debt

 
4,564

Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(7,005
)
 
(7,108
)
Other
(630
)
 

Changes in operating assets and liabilities:
 
 
 
Marketable securities
(311
)
 
(1,029
)
Current receivables
(1,022
)
 
(706
)
Deferred rent receivables
(15,543
)
 
(8,441
)
Other deferred leasing costs
535

 
(2,516
)
Prepaid expenses and other assets
(3,528
)
 
(2,765
)
Accounts payable, accrued expenses and other liabilities
18,914

 
3,049

Deferred revenue
(598
)
 
5,546

Rents received in advance and tenant security deposits
180

 
839

Net cash provided by operating activities
114,065

 
94,928

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties (Note 2)
(481,756
)
 
(373,574
)
Expenditures for operating properties
(41,087
)
 
(56,393
)
Expenditures for development and redevelopment properties and undeveloped land
(18,682
)
 
(14,681
)
Net increase in escrow deposits
(11,000
)
 
(2,002
)
(Increase) decrease in restricted cash
(690
)
 
1,316

Receipt of principal payments on note receivable

 
10,679

Net cash used in investing activities
(553,215
)
 
(434,655
)
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

 
553,000

Repayments on unsecured line of credit
(461,000
)
 
(445,000
)
Principal payments on secured debt
(5,295
)
 
(101,653
)
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 (Note 5)
324,476

 
247,870

Repayments of unsecured debt

 
(61,000
)
Financing costs
(8,584
)
 
(11,200
)
Decrease in loan deposits and other
2,859

 
1,420

Repurchase of common stock and restricted stock units
(736
)
 
(3,417
)
Proceeds from exercise of stock options
395

 
83

Dividends and distributions paid to common stockholders and common unitholders
(58,942
)
 
(50,299
)
Dividends and distributions paid to preferred stockholders and preferred unitholders
(11,397
)
 
(11,397
)
Net cash provided by financing activities
439,791

 
338,157

Net increase (decrease) in cash and cash equivalents
641

 
(1,570
)
Cash and cash equivalents, beginning of period
14,840

 
9,883

Cash and cash equivalents, end of period
$
15,481

 
$
8,313


4






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

 
Nine Months Ended September 30,
 
2011
 
2010
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of capitalized interest of $5,361 and $6,140 as of September 30, 2011 and 2010, respectively
$
42,070

 
$
26,182

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
13,506

 
$
13,614

Tenant improvements funded directly by tenants to third parties
$
3,037

 
$
2,520

Assumption of secured debt with property acquisition (Notes 2 and 5)
$
30,042

 
$
51,079

Assumption of other liabilities with property acquisitions (Note 2)
$
4,515

 
$
6,369

Net proceeds from disposition held by a qualified intermediary in connection with Section 1031 exchange (Note 14)
$
23,285

 
$

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of dividends and distributions payable to common stockholders and common unitholders
$
21,064

 
$
18,925

Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders
$
1,909

 
$
1,909

Issuance of share-based compensation awards (Note 9)
$
7,505

 
$
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.


5






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

KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
 
September 30,
2011
 
December 31,
2010
 
(unaudited)
 
 
ASSETS 
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
537,973

 
$
491,333

Buildings and improvements (Note 2)
2,881,504

 
2,435,173

Undeveloped land and construction in progress (Note 1)
328,785

 
290,365

Total real estate held for investment
3,748,262

 
3,216,871

Accumulated depreciation and amortization
(732,162
)
 
(672,429
)
Total real estate assets, net
3,016,100

 
2,544,442

CASH AND CASH EQUIVALENTS
15,481

 
14,840

RESTRICTED CASH (Note 14)
25,436

 
1,461

MARKETABLE SECURITIES (Note 12)
5,213

 
4,902

CURRENT RECEIVABLES, NET (Note 4)
6,860

 
6,258

DEFERRED RENT RECEIVABLES, NET (Note 4)
103,668

 
89,052

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
155,757

 
131,066

DEFERRED FINANCING COSTS, NET (Note 5)
19,638

 
16,447

PREPAID EXPENSES AND OTHER ASSETS, NET (Note 11)
19,531

 
8,097

TOTAL ASSETS
$
3,367,684

 
$
2,816,565

LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt, net (Notes 5 and 12)
$
473,997

 
$
313,009

Exchangeable senior notes, net (Notes 5 and 12)
305,115

 
299,964

Unsecured senior notes, net (Notes 5 and 12)
980,487

 
655,803

Unsecured line of credit (Notes 5 and 12)

 
159,000

Accounts payable, accrued expenses and other liabilities
93,050

 
68,525

Accrued distributions (Note 16)
22,565

 
20,385

Deferred revenue and acquisition-related intangible liabilities, net (Note 3)
95,120

 
79,322

Rents received in advance and tenant security deposits
29,369

 
29,189

Total liabilities
1,999,703

 
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
1,171,049

 
994,511

Total partners' capital
1,292,631

 
1,116,093

Noncontrolling interest in consolidated subsidiaries
1,712

 
1,637

Total capital
1,294,343

 
1,117,730

TOTAL LIABILITIES, NONCONTROLLING INTEREST AND CAPITAL
$
3,367,684

 
$
2,816,565

See accompanying notes to consolidated financial statements.

6






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except unit and per unit data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2011
 
2010
 
2011
 
2010
 
REVENUES:
 
 
 
 
 
 
 
 
Rental income
$
89,306

 
72,135

 
$
252,102

 
$
196,883

 
Tenant reimbursements
7,683

 
6,156

 
21,469

 
18,261

 
Other property income
348

 
985

 
2,863

 
2,325

 
Total revenues
97,337

 
79,276

 
276,434

 
217,469

 
EXPENSES:
 
 
 
 
 
 
 
 
Property expenses
19,361

 
15,802

 
54,548

 
42,255

 
Real estate taxes
8,360

 
7,582

 
24,878

 
20,035

 
Provision for bad debts
(5
)
 
(857
)
 
141

 
(843
)
 
Ground leases (Note 11)
503

 
336

 
1,266

 
648

 
General and administrative expenses
6,355

 
7,273

 
20,355

 
21,096

 
Acquisition-related expenses
1,163

 
354

 
2,829

 
1,624

 
Depreciation and amortization
36,152

 
29,951

 
97,513

 
74,405

 
Total expenses
71,889

 
60,441

 
201,530

 
159,220

 
OTHER (EXPENSES) INCOME:
 
 
 
 
 
 
 
 
Interest income and other net investment gains (Note 12)
30

 
337

 
272

 
703

 
Interest expense (Note 5)
(24,051
)
 
(15,853
)
 
(66,155
)
 
(40,897
)
 
Loss on early extinguishment of debt

 

 

 
(4,564
)
 
Total other (expenses) income
(24,021
)
 
(15,516
)
 
(65,883
)
 
(44,758
)
 
INCOME FROM CONTINUING OPERATIONS
1,427

 
3,319

 
9,021

 
13,491

 
DISCONTINUED OPERATIONS (Note 14)
 
 
 
 
 
 
 
 
Net income from discontinued operations
308

 
350

 
1,053

 
1,011

 
Net gain on dispositions of discontinued operations
12,555

 

 
12,555

 

 
Total income from discontinued operations
12,863

 
350

 
13,608

 
1,011

 
NET INCOME
14,290

 
3,669

 
22,629

 
14,502

 
Net income attributable to noncontrolling interests in consolidated subsidiaries
(30
)
 
(41
)
 
(95
)
 
(138
)
 
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
14,260

 
3,628

 
22,534

 
14,364

 
PREFERRED DISTRIBUTIONS
(3,799
)
 
(3,799
)
 
(11,397
)
 
(11,397
)
 
NET INCOME (LOSS) AVAILABLE TO COMMON UNITHOLDERS
$
10,461

 
$
(171
)
 
$
11,137

 
$
2,967

 
(Loss) income from continuing operations available to common unitholders per common unit - basic (Note 16)
$
(0.05
)
 
$
(0.01
)
 
$
(0.06
)
 
$
0.02

 
(Loss) income from continuing operations available to common unitholders per common unit - diluted (Note 16)
$
(0.05
)
 
$
(0.01
)
 
$
(0.06
)
 
$
0.02

 
Net income (loss) available to common unitholders per unit - basic (Note 16)
$
0.17

 
$
(0.01
)
 
$
0.18

 
$
0.04

 
Net income (loss) available to common unitholders per unit - diluted (Note 16)
$
0.17

 
$
(0.01
)
 
$
0.18

 
$
0.04

 
Weighted average common units outstanding - basic (Note 16)
60,073,258

 
53,997,447

 
57,857,538

 
50,284,745

 
Weighted average common units outstanding - diluted (Note 16)
60,073,258

 
53,997,447

 
57,857,538

 
50,288,159

 
Distributions declared per common unit
$
0.35

 
$
0.35

 
$
1.05

 
$
1.05

 
See accompanying notes to consolidated financial statements.


7






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(unaudited, in thousands, except unit and per unit data)
 
 
Partners'
Capital
 
Total
Partners' 
Capital
 
Noncontrolling
Interests
in
Consolidated
Subsidiaries
 
 
 
Preferred
Units
  
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2009
$
121,582

  
44,871,893

 
$
760,756

 
$
882,338

 
$
1,500

 
$
883,838

Net income
 
  
 
 
14,364

 
14,364

 
138

 
14,502

Issuance of common units
 
 
9,200,000

 
299,847

 
299,847

 
 
 
299,847

Issuance of share-based compensation awards
 
  
3,239

 
1,904

 
1,904

 
 
 
1,904

Noncash amortization of share-based compensation
 
  
 
 
5,050

 
5,050

 
 
 
5,050

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
)
Settlement of restricted stock units for shares of common stock
 
 
53,451

 
(1,296
)
 
(1,296
)
 
 
 
(1,296
)
Allocation to the equity component of cash paid upon repurchase of 3.25% Exchangeable Notes
 
 
 
 
(2,694
)
 
(2,694
)
 
 
 
(2,694
)
Other
 
  
 
 
26

 
26

 
(26
)
 

Preferred distributions
 
  
 
 
(11,397
)
 
(11,397
)
 
 
 
(11,397
)
Distributions declared per common unit ($1.05 per unit)
 
  
 
 
(54,280
)
 
(54,280
)
 
 
 
(54,280
)
BALANCE AS OF SEPTEMBER 30, 2010
$
121,582

  
54,072,801

 
$
1,010,242

 
$
1,131,824

 
$
1,612

 
$
1,133,436

 
 
 
 
 
 
 
 
 
 
 
 
 
Partners'
Capital
 
Total
Partners' 
Capital
 
Noncontrolling
Interests
in
Consolidated
Subsidiaries
 
 
 
Preferred
Units
  
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2010
$
121,582

  
54,072,801

 
$
994,511

 
$
1,116,093

 
$
1,637

 
$
1,117,730

Net income
 
  
 
 
22,534

 
22,534

 
95

 
22,629

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

 
2,447

 
2,447

 
 
 
2,447

Noncash amortization of share-based compensation
 
  
 
 
4,201

 
4,201

 
 
 
4,201

Exercise of stock options
 
  
15,000

 
395

 
395

 
 
 
395

Repurchase of common units and restricted stock units (Note 9)
 
  
(11,485
)
 
(736
)
 
(736
)
 
 
 
(736
)
Other
 
 
 
 
20

 
20

 
(20
)
 

Preferred distributions
 
  
 
 
(11,397
)
 
(11,397
)
 
 
 
(11,397
)
Distributions declared per common unit ($1.05 per unit)
 
  
 
 
(61,941
)
 
(61,941
)
 
 
 
(61,941
)
BALANCE AS OF SEPTEMBER 30, 2011
$
121,582

  
60,182,543

 
$
1,171,049

 
$
1,292,631

 
$
1,712

 
$
1,294,343


See accompanying notes to consolidated financial statements.


8






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
22,629

 
$
14,502

Adjustments to reconcile net income to net cash provided by operating activities (including discontinued operations):
 
 
 
Depreciation and amortization of building and improvements and leasing costs
96,971

 
74,049

Increase (decrease) in provision for bad debts
141

 
(843
)
Depreciation of furniture, fixtures and equipment
839

 
665

Noncash amortization of share-based compensation awards
3,365

 
5,328

Noncash amortization of deferred financing costs and debt discounts and premiums
10,164

 
9,098

Noncash amortization of net above market rents (Note 3)
1,519

 
696

Net gain on dispositions of discontinued operations (Note 14)
(12,555
)
 

Loss on early extinguishment of debt

 
4,564

Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(7,005
)
 
(7,108
)
Other
(630
)
 

Changes in operating assets and liabilities:
 
 
 
Marketable securities
(311
)
 
(1,029
)
Current receivables
(1,022
)
 
(706
)
Deferred rent receivables
(15,543
)
 
(8,441
)
Other deferred leasing costs
535

 
(2,516
)
Prepaid expenses and other assets
(3,528
)
 
(2,765
)
Accounts payable, accrued expenses and other liabilities
18,914

 
3,049

Deferred revenue
(598
)
 
5,546

Rents received in advance and tenant security deposits
180

 
839

Net cash provided by operating activities
114,065

 
94,928

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties (Note 2)
(481,756
)
 
(373,574
)
Expenditures for operating properties
(41,087
)
 
(56,393
)
Expenditures for development and redevelopment properties and undeveloped land
(18,682
)
 
(14,681
)
Net increase in escrow deposits
(11,000
)
 
(2,002
)
(Increase) decrease in restricted cash
(690
)
 
1,316

Receipt of principal payments on note receivable

 
10,679

Net cash used in investing activities
(553,215
)
 
(434,655
)
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

 
553,000

Repayments on unsecured line of credit
(461,000
)
 
(445,000
)
Principal payments on secured debt
(5,295
)
 
(101,653
)
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 (Note 5)
324,476

 
247,870

Repayments of unsecured debt

 
(61,000
)
Financing costs
(8,584
)
 
(11,200
)
Decrease in loan deposits and other
2,859

 
1,420

Repurchase of common units and restricted stock units
(736
)
 
(3,417
)
Proceeds from exercise of stock options
395

 
83

Distributions paid to common unitholders
(58,942
)
 
(50,299
)
Distributions paid to preferred unitholders
(11,397
)
 
(11,397
)
Net cash provided by financing activities
439,791

 
338,157

Net increase (decrease) in cash and cash equivalents
641

 
(1,570
)
Cash and cash equivalents, beginning of period
14,840

 
9,883

Cash and cash equivalents, end of period
$
15,481

 
$
8,313

 

9






KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
(unaudited, in thousands)
 
 
 
Nine Months Ended September 30,
 
2011
  
2010
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
  
 
Cash paid for interest, net of capitalized interest of $5,361 and $6,140 as of September 30, 2011 and 2010, respectively
$
42,070

 
$
26,182

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
13,506

 
$
13,614

Tenant improvements funded directly by tenants to third parties
$
3,037

 
$
2,520

Assumption of secured debt with property acquisitions (Notes 2 and 5)
$
30,042

 
$
51,079

Assumption of other liabilities with property acquisitions (Note 2)
$
4,515

 
$
6,369

Net proceeds from disposition held by a qualified intermediary in connection with Section 1031 exchange (Note 14)
$
23,285

 
$

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of distributions payable to common unitholders
$
21,064

 
18,925

Accrual of distributions payable to preferred unitholders
$
1,909

 
$
1,909

Issuance of share-based compensation awards (Note 9)
$
7,505

 
$
5,418

See accompanying notes to consolidated financial statements.


10

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 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 terms "Kilroy Realty Corporation" or the "Company," "we," "our," and "us" refer to Kilroy Realty Corporation and its consolidated subsidiaries and the term "Operating Partnership" refers to Kilroy Realty, L.P. and its consolidated subsidiaries. The descriptions of our business, employees, and properties apply to both the Company and the Operating Partnership.
The following table of office buildings (the "Office Properties") and industrial buildings (the "Industrial Properties") summarizes our stabilized portfolio of operating properties as of September 30, 2011. As of September 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
Buildings
 
Rentable
Square Feet
 
Number of
Tenants
 
Percentage Occupied
Office Properties(1)
105

 
11,574,244

 
422

 
90.6
%
Industrial Properties
40

 
3,605,407

 
64

 
100.0
%
Total Stabilized Portfolio
145

 
15,179,651

 
486

 
92.8
%
________________________
(1) Includes nine office properties acquired during the nine months ended September 30, 2011 for a total amount of $516.3 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 we are currently in the process of repositioning for residential use. As of September 30, 2011, we had three office redevelopment properties under construction encompassing approximately 508,000 rentable square feet. We commenced redevelopment on two of the three redevelopment properties in the third quarter of 2011. 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 September 30, 2011. In addition, as of September 30, 2011 we had one industrial property that we were in the process of demolishing to prepare the land for potential sale. We successfully obtained entitlements to reposition this site for residential use in 2011. Ultimate timing of the potential sale will depend upon market conditions and other factors.
     As of September 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 September 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 rights of all the common units to quarterly distributions and payments in liquidation mirror those of the Company's common stockholders. The common limited partners have certain redemption rights as provided in the Operating Partnership's 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

11

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


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 two variable interest entities ("VIE") in which we are deemed to be the primary beneficiary. We had one bankruptcy-remote VIE, 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. In September 2011, we acquired a building which was transferred to a special purpose VIE to facilitate a potential tax-deferred property exchange pursuant to Section 1031 of the Code for federal and state income tax purposes ("Section 1031 Exchange"). The Company is obligated to complete the Section 1031 Exchange and take title to the property within 180 days of the initial acquisition date. The VIE will be terminated upon the completion of the Section 1031 Exchange. The impact of consolidating both VIEs increased the Company's total assets and liabilities by approximately $164.0 million and $63.0 million, respectively, at September 30, 2011.
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 nine months ended September 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 fell below the required 10% quantitative reporting thresholds for the Industrial Properties to be considered a reportable segment under GAAP. Therefore, for the three and nine months ended September 30, 2011, 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.

12

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


 
2.    Acquisitions
During the nine months ended September 30, 2011, we acquired the nine office properties listed below from unrelated third parties. Unless otherwise noted, we funded these acquisitions principally with the net proceeds from the public offering of common stock (see Note 7) the Company completed in April 2011, borrowings under the unsecured line of credit (see Note 5), and the net proceeds from the public offering of unsecured senior notes (see Note 5) the Operating Partnership completed in July 2011.

Property
 
Property
Type
 
Date of
Acquisition
 
Number of
Buildings
 
Rentable
Square
Feet
 
Percentage
Occupied
as of
September 30, 2011
 
Purchase
Price
(in  millions)(1)
250 Brannan Street
 
Office
 
January 28, 2011
 
 
 
 
 
 
 
 
San Francisco, CA
 
 
 
 
 
1
 
92,948

 
100.0%
 
$
33.0

10210, 10220, and 10230 NE Points Drive; 3933 Lake Washington Boulevard NE
 
Office
 
April 21, 2011
 
 
 
 
 
 
 
 
Kirkland, WA(2)
 
 
 
 
 
4
 
279,924

 
89.6%
 
100.1

10770 Wateridge Circle
 
Office
 
May 12, 2011
 
 
 
 
 
 
 
 
San Diego, CA
 
 
 
 
 
1
 
174,310

 
97.5%
 
32.7

601 108th Avenue N.E.
 
Office
 
June 3, 2011
 
 
 
 
 
 
 
 
Bellevue, WA
 
 
 
 
 
1
 
488,470

 
88.1%
 
215.0

4040 Civic Center Drive
 
Office
 
June 9, 2011
 
 
 
 
 
 
 
 
San Rafael, CA
 
 
 
 
 
1
 
126,787

 
93.1%
 
32.2

201 Third Street
 
Office
 
September 15, 2011
 
 
 
 
 
 
 
 
San Francisco, CA (3)
 
 
 
 
 
1
 
311,545

 
90.3%
 
103.3

Total
 
 
 
 
 
9
 
1,473,984

 
 
 
$
516.3

________________________
(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 recorded a premium of $1.0 million in connection with recording this debt at fair value on the acquisition date (see Note 5).
(3)
As of September 30, 2011, this property was temporarily being held in a separate VIE to facilitate a potential Section 1031 Exchange (see Note 1).

13

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 N.E., Bellevue, WA(1)
 
201 Third Street
San Francisco, CA (1)
 
All Other Acquisitions(2) 
 
Total
 
 
Assets
 
 
 
 
 
 
 
Land(3)
$

 
$
19,260

 
$
36,740

 
$
56,000

Buildings and improvements(4)
214,095

 
84,018

 
143,545

 
441,658

Undeveloped land

 

 
2,560

 
2,560

Deferred leasing costs and acquisition-related intangible assets(5)
13,790

 
8,700

 
17,500

 
39,990

Total assets acquired
227,885

 
111,978

 
200,345

 
540,208

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Deferred revenue and acquisition-related intangible liabilities(6)
12,850

 
8,700

 
1,390

 
22,940

Secured debt(7)

 

 
30,997

 
30,997

Accounts payable, accrued expenses and other liabilities
2,380

 
76

 
2,059

 
4,515

Total liabilities assumed
15,230