UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                 
Commission File Number: 1-12675 (Kilroy Realty Corporation)
Commission File Number: 000-54005 (Kilroy Realty, L.P.)
KILROY REALTY CORPORATION
KILROY REALTY, L.P.
(Exact name of registrant as specified in its charter)
 
 
 
Kilroy Realty Corporation
Maryland
95-4598246
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
Kilroy Realty, L.P.
Delaware
95-4612685
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
 
12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064
(Address of principal executive offices) (Zip Code)
 
(310) 481-8400
(Registrant's telephone number, including area code)
 
 
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    
Kilroy Realty Corporation    Yes   þ     No   o
Kilroy Realty, L. P.         Yes   þ     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    
Kilroy Realty Corporation     Yes   þ     No   o
Kilroy Realty, L.P.         Yes   þ     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Kilroy Realty Corporation
 
 
 
Large accelerated filer     þ
Accelerated filer     o  
Non-accelerated filer     o
Smaller reporting company     o
(Do not check if a smaller reporting company)
 
 
 
 
Kilroy Realty, L.P.
 
 
 
Large accelerated filer     o
Accelerated filer     o  
Non-accelerated filer      þ
Smaller reporting company     o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Kilroy Realty Corporation Yes   o     No   þ
Kilroy Realty, L.P. Yes   o     No   þ
As of April 30, 2014 , 82,218,417 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.
 


EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the period ended March 31, 2014 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty, L.P., a Delaware limited partnership, and its controlled and consolidated subsidiaries.
The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of March 31, 2014 , the Company owned an approximate 97.9% common general partnership interest in the Operating Partnership. The remaining approximate 2.1% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of the Company. As the sole general partner of the Operating Partnership, the Company exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control and can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings and cause changes in its line of business, capital structure and distribution policies.
There are a few differences between the Company and the Operating Partnership that are reflected in the disclosures in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated, consolidated company. The Company is a REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company 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 units of partnership interest, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness or through the issuance of units of partnership interest.
Noncontrolling interests and stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The common limited partnership interests in the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and, to the extent not held by the Company, as noncontrolling interests in the Company’s financial statements. The Operating Partnership’s financial statements reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P., a Delaware limited partnership (the “Finance Partnership”). This noncontrolling interest represents the Company’s 1% indirect general partnership interest in the Finance Partnership, which is directly held by Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company. The differences between stockholders’ equity, partners’ capital and noncontrolling interests result from the differences in the equity issued by the Company and the Operating Partnership, and in the Operating Partnership’s noncontrolling interest in the Finance Partnership.
We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:
•
Combined reports better reflect how management and the analyst community view the business as a single operating unit;
•
Combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;
•
Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and
•
Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.
To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:
•
consolidated financial statements;
•
the following notes to the consolidated financial statements:
◦
Note 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 14, Net Income (Loss) Available to Common Stockholders Per Share of the Company; and
◦
Note 15, Net Income (Loss) Available to Common Unitholders Per Unit of the Operating Partnership;
•
“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
◦
—Liquidity and Capital Resources of the Company;” and
◦
—Liquidity and Capital Resources of the Operating Partnership.”
This report also includes separate sections under Part I, Item 4. Controls and Procedures and separate Exhibit 31 and Exhibit 32 certifications for each of the Company and the Operating Partnership to establish that the Chief Executive Officer and the Chief Financial Officer of each entity have made the requisite certifications and that the Company and Operating Partnership are compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and 18 U.S.C. §1350.


ii

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
QUARTERLY REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2014
TABLE OF CONTENTS
 
 
 
 
Page
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
 
 
 
 
  
 
  
 
  
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
  
Item 3.
 
Item 4.
 
 
 
PART II – OTHER INFORMATION
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION

KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
March 31, 2014
 
December 31, 2013
ASSETS
(unaudited)
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
679,991

 
$
657,491

Buildings and improvements (Note 2)
3,706,662

 
3,590,699

Undeveloped land and construction in progress
1,047,371

 
1,016,757

Total real estate held for investment
5,434,024

 
5,264,947

Accumulated depreciation and amortization
(854,977
)
 
(818,957
)
Total real estate assets held for investment, net ($60,575 and $234,532 of VIE, respectively, Note 1)
4,579,047

 
4,445,990

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 13)
28,272

 
213,100

CASH AND CASH EQUIVALENTS
95,534

 
35,377

RESTRICTED CASH (Notes 1 and 13)
33,717

 
49,780

MARKETABLE SECURITIES (Note 11)
11,001

 
10,008

CURRENT RECEIVABLES, NET (Note 4)
11,092

 
10,743

DEFERRED RENT RECEIVABLES, NET (Note 4)
130,750

 
127,123

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
188,466

 
186,622

DEFERRED FINANCING COSTS, NET
15,195

 
16,502

PREPAID EXPENSES AND OTHER ASSETS, NET
21,469

 
15,783

TOTAL ASSETS
$
5,114,543

 
$
5,111,028

LIABILITIES AND EQUITY
 
 
 
LIABILITIES:
 
 
 
Secured debt (Notes 5 and 11)
$
556,946

 
$
560,434

Exchangeable senior notes, net (Notes 5 and 11)
169,528

 
168,372

Unsecured debt, net (Notes 5 and 11)
1,431,217

 
1,431,132

Unsecured line of credit (Notes 5 and 11)
—

 
45,000

Accounts payable, accrued expenses and other liabilities
187,631

 
198,467

Accrued distributions (Note 16)
31,456

 
31,490

Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)
107,569

 
101,286

Rents received in advance and tenant security deposits
43,952

 
44,240

Liabilities of real estate assets held for sale (Note 13)
634

 
14,447

Total liabilities
2,528,933

 
2,594,868

COMMITMENTS AND CONTINGENCIES (Note 10)

 

EQUITY:
 
 
 
Stockholders’ Equity (Note 7):
 
 
 
Preferred stock, $.01 par value, 30,000,000 shares authorized:
 
 
 
6.875% Series G Cumulative Redeemable Preferred stock, $.01 par value, 4,600,000 shares authorized, 4,000,000 shares issued and outstanding ($100,000 liquidation preference)
96,155

 
96,155

6.375% Series H Cumulative Redeemable Preferred stock, $.01 par value, 4,000,000 shares authorized, issued and outstanding ($100,000 liquidation preference)
96,256

 
96,256

Common stock, $.01 par value, 150,000,000 shares authorized, 82,218,332 and 82,153,944 shares issued and outstanding, respectively
822

 
822

Additional paid-in capital
2,479,740

 
2,478,975

Distributions in excess of earnings
(143,636
)
 
(210,896
)
Total stockholders’ equity
2,529,337

 
2,461,312

Noncontrolling interests:
 
 
 
Common units of the Operating Partnership (Note 6)
51,388

 
49,963

Noncontrolling interest in consolidated subsidiary (Notes 1 and 6)
4,885

 
4,885

Total noncontrolling interests
56,273

 
54,848

Total equity
2,585,610

 
2,516,160

TOTAL LIABILITIES AND EQUITY
$
5,114,543

 
$
5,111,028

See accompanying notes to consolidated financial statements.

1

KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except share and per share data)
 
 
Three Months Ended March 31,
 
2014
 
2013
REVENUES:
 
 
 
Rental income
$
112,056

 
$
101,607

Tenant reimbursements
11,572

 
9,130

Other property income (Note 12)
2,157

 
227

Total revenues
125,785

 
110,964

EXPENSES:
 
 
 
Property expenses
25,094

 
22,805

Real estate taxes
11,173

 
9,664

Provision for bad debts
—

 
95

Ground leases
762

 
847

General and administrative expenses
10,811

 
9,669

Acquisition-related expenses
228

 
655

Depreciation and amortization
49,202

 
47,701

Total expenses
97,270

 
91,436

OTHER (EXPENSES) INCOME:
 
 
 
Interest income and other net investment gains (Note 11)
177

 
392

Interest expense (Note 5)
(17,252
)
 
(19,734
)
Total other (expenses) income
(17,075
)
 
(19,342
)
INCOME FROM CONTINUING OPERATIONS
11,440

 
186

DISCONTINUED OPERATIONS (Note 13)
 
 
 
Income from discontinued operations
377

 
2,202

Net gain on dispositions of discontinued operations
90,115

 
—

Total income from discontinued operations
90,492

 
2,202

NET INCOME
101,932

 
2,388

Net (income) loss attributable to noncontrolling common units of the Operating Partnership
(2,087
)
 
22

NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION
99,845

 
2,410

PREFERRED DIVIDENDS
(3,313
)
 
(3,313
)
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS
$
96,532

 
$
(903
)
Income (loss) from continuing operations available to common stockholders per common share – basic (Note 14)
$
0.09

 
$
(0.05
)
Income (loss) from continuing operations available to common stockholders per common share – diluted (Note 14)
$
0.09

 
$
(0.05
)
Net income (loss) available to common stockholders per share – basic (Note 14)
$
1.17

 
$
(0.02
)
Net income (loss) available to common stockholders per share – diluted (Note 14)
$
1.14

 
$
(0.02
)
Weighted average common shares outstanding – basic (Note 14)
82,124,538

 
74,977,240

Weighted average common shares outstanding – diluted (Note 14)
84,140,070

 
74,977,240

Dividends declared per common share
$
0.35

 
$
0.35
















See accompanying notes to consolidated financial statements.

2

KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(unaudited, in thousands, except share and per share/unit data)
 
 
 
 
Common Stock  
 
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interest
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2012
$
192,411

 
74,926,981

 
$
749

 
$
2,126,005

 
$
(129,535
)
 
$
2,189,630

 
$
46,303

 
$
2,235,933

Net income (loss)
 
 
 
 
 
 
 
 
2,410

 
2,410

 
(22
)
 
2,388

Issuance of common stock
 
 
453,679

 
4

 
23,391

 
 
 
23,395

 
 
 
23,395

Issuance of share-based compensation awards
 
 
—

 
 
 
336

 
 
 
336

 
 
 
336

Noncash amortization of share-based compensation
 
 
 
 
 
 
2,422

 
 
 
2,422

 
 
 
2,422

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

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

 
—

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

 
75,349,705

 
$
753

 
$
2,149,052

 
$
(157,211
)
 
$
2,185,005

 
$
47,535

 
$
2,232,540

 
 
 
 
 
 
 
 
 
 



 
 
Common Stock  
 
 
Total
Stock-
holders’
Equity
 
Noncontrolling Interests
 
Total
Equity
 
Preferred
Stock
 
Number of
Shares
 
Common
Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess of
Earnings
 
BALANCE AS OF DECEMBER 31, 2013
$
192,411

 
82,153,944

 
$
822

 
$
2,478,975

 
$
(210,896
)
 
$
2,461,312

 
$
54,848

 
$
2,516,160

Net income
 
 
 
 
 
 
 
 
99,845

 
99,845

 
2,087

 
101,932

Noncash amortization of share-based compensation
 
 
 
 
 
 
2,233

 
 
 
2,233

 
 
 
2,233

Repurchase of common stock, stock options and restricted stock units
 
 
(26,074
)
 
 
 
(1,517
)
 
 
 
(1,517
)
 
 
 
(1,517
)
Settlement of restricted stock units for shares of common stock
 
 
88,962

 
 
 
—

 
 
 
—

 
 
 
—

Exercise of stock options
 
 
500

 
 
 
21

 
 
 
21

 
 
 
21

Exchange of common units of the Operating Partnership
 
 
1,000

 
 
 
28

 
 
 
28

 
(28
)
 
—

Preferred dividends and distributions
 
 
 
 
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Dividends declared per common share and common unit ($0.35 per share/unit)
 
 
 
 
 
 
 
 
(29,272
)
 
(29,272
)
 
(634
)
 
(29,906
)
BALANCE AS OF MARCH 31, 2014
$
192,411

 
82,218,332

 
$
822

 
$
2,479,740

 
$
(143,636
)
 
$
2,529,337

 
$
56,273

 
$
2,585,610











See accompanying notes to consolidated financial statements.

3

KILROY REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Three Months Ended March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
101,932

 
$
2,388

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
48,717

 
50,011

Increase in provision for bad debts
—

 
95

Depreciation of furniture, fixtures and equipment
485

 
380

Noncash amortization of share-based compensation awards
2,502

 
2,234

Noncash amortization of deferred financing costs and debt discounts and premiums
1,256

 
1,413

Noncash amortization of net below market rents (Note 3)
(1,734
)
 
(2,047
)
Net gain on dispositions of discontinued operations (Note 13)
(90,115
)
 
—

Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(2,353
)
 
(2,442
)
Straight-line rents
(3,959
)
 
(6,724
)
Net change in other operating assets
(5,949
)
 
(7,390
)
Net change in other operating liabilities
(5,701
)
 
18,581

Net cash provided by operating activities
45,081

 
56,499

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties (Note 2)
(106,125
)
 
(85,692
)
Expenditures for operating properties
(32,016
)
 
(25,571
)
Expenditures for development and redevelopment properties and undeveloped land
(73,626
)
 
(73,369
)
Net proceeds received from dispositions of operating properties (Note 13)
309,824

 
—

(Increase) decrease in restricted cash (Notes 1 and 13)
(779
)
 
228,079

Net cash provided by investing activities
97,278

 
43,447

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common stock
—

 
23,395

Borrowings on unsecured line of credit
90,000

 
—

Repayments on unsecured line of credit
(135,000
)
 
(185,000
)
Principal payments on secured debt
(2,414
)
 
(84,918
)
Proceeds from the issuance of unsecured debt
—

 
299,901

Financing costs
(418
)
 
(2,870
)
Repurchase of common stock and restricted stock units
(1,517
)
 
(1,209
)
Proceeds from exercise of stock options
21

 
—

Dividends and distributions paid to common stockholders and common unitholders
(29,561
)
 
(26,956
)
Dividends and distributions paid to preferred stockholders and preferred unitholders
(3,313
)
 
(3,313
)
Net cash (used in) provided by financing activities
(82,202
)
 
19,030

Net increase in cash and cash equivalents
60,157

 
118,976

Cash and cash equivalents, beginning of period
35,377

 
16,700

Cash and cash equivalents, end of period
$
95,534

 
$
135,676


4

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

 
Three Months Ended March 31,
 
2014
 
2013
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of capitalized interest of $10,042 and $7,175 as of March 31, 2014 and 2013, respectively
$
14,106

 
$
11,303

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
64,709

 
$
42,140

Tenant improvements funded directly by tenants
$
4,470

 
$
1,426

Assumption of secured debt in connection with property acquisitions
$
—

 
$
95,496

Assumption of other assets and liabilities in connection with operating and development property acquisitions, net
$
—

 
$
422

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of dividends and distributions payable to common stockholders and common unitholders
$
29,906

 
$
27,011

Accrual of dividends and distributions payable to preferred stockholders and preferred unitholders
$
1,656

 
$
1,694

Grant date fair value of share-based compensation awards
$
—

 
$
8,451

Exchange of common units of the Operating Partnership into shares of the Company’s common stock
$
28

 
$
—






































See accompanying notes to consolidated financial statements.

5




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

KILROY REALTY, L.P.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
 
 
March 31, 2014
 
December 31, 2013
 
(unaudited)
 
 
ASSETS  
 
 
 
REAL ESTATE ASSETS:
 
 
 
Land and improvements (Note 2)
$
679,991

 
$
657,491

Buildings and improvements (Note 2)
3,706,662

 
3,590,699

Undeveloped land and construction in progress
1,047,371

 
1,016,757

Total real estate held for investment
5,434,024

 
5,264,947

Accumulated depreciation and amortization
(854,977
)
 
(818,957
)
Total real estate assets held for investment, net ($60,575 and $234,532 of VIE, respectively, Note 1)
4,579,047

 
4,445,990

REAL ESTATE ASSETS AND OTHER ASSETS HELD FOR SALE, NET (Note 13)
28,272

 
213,100

CASH AND CASH EQUIVALENTS
95,534

 
35,377

RESTRICTED CASH (Notes 1 and 13)
33,717

 
49,780

MARKETABLE SECURITIES (Note 11)
11,001

 
10,008

CURRENT RECEIVABLES, NET (Note 4)
11,092

 
10,743

DEFERRED RENT RECEIVABLES, NET (Note 4)
130,750

 
127,123

DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2 and 3)
188,466

 
186,622

DEFERRED FINANCING COSTS, NET
15,195

 
16,502

PREPAID EXPENSES AND OTHER ASSETS, NET
21,469

 
15,783

TOTAL ASSETS
$
5,114,543

 
$
5,111,028

LIABILITIES AND CAPITAL
 
 
 
LIABILITIES:
 
 
 
Secured debt (Notes 5 and 11)
$
556,946

 
$
560,434

Exchangeable senior notes, net (Notes 5 and 11)
169,528

 
168,372

Unsecured debt, net (Notes 5 and 11)
1,431,217

 
1,431,132

Unsecured line of credit (Notes 5 and 11)
—

 
45,000

Accounts payable, accrued expenses and other liabilities
187,631

 
198,467

Accrued distributions (Note 16)
31,456

 
31,490

Deferred revenue and acquisition-related intangible liabilities, net (Notes 2 and 3)
107,569

 
101,286

Rents received in advance and tenant security deposits
43,952

 
44,240

Liabilities of real estate assets held for sale (Note 13)
634

 
14,447

Total liabilities
2,528,933

 
2,594,868

COMMITMENTS AND CONTINGENCIES (Note 10)
 
 
 
CAPITAL:
 
 
 
Partners’ Capital (Note 8):
 
 
 
6.875% Series G Cumulative Redeemable Preferred units, 4,000,000 units issued and
outstanding ($100,000 liquidation preference)
96,155

 
96,155

6.375% Series H Cumulative Redeemable Preferred units, 4,000,000 units issued and
outstanding ($100,000 liquidation preference)
96,256

 
96,256

Common units, 82,218,332 and 82,153,944 held by the general partner and 1,804,200 and 1,805,200
held by common limited partners issued and outstanding, respectively
2,384,746


2,315,361

Total partners’ capital
2,577,157

 
2,507,772

Noncontrolling interests in consolidated subsidiaries (Notes 1 and 6)
8,453


8,388

Total capital
2,585,610


2,516,160

TOTAL LIABILITIES AND CAPITAL
$
5,114,543


$
5,111,028



See accompanying notes to consolidated financial statements.

6

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

 
Three Months Ended March 31,
 
2014
 
2013
REVENUES:
 
 
 
Rental income
$
112,056

 
101,607

Tenant reimbursements
11,572

 
9,130

Other property income (Note 12)
2,157

 
227

Total revenues
125,785

 
110,964

EXPENSES:
 
 
 
Property expenses
25,094

 
22,805

Real estate taxes
11,173

 
9,664

Provision for bad debts
—

 
95

Ground leases
762

 
847

General and administrative expenses
10,811

 
9,669

Acquisition-related expenses
228

 
655

Depreciation and amortization
49,202

 
47,701

Total expenses
97,270

 
91,436

OTHER (EXPENSES) INCOME:
 
 
 
Interest income and other net investment gains (Note 11)
177

 
392

Interest expense (Note 5)
(17,252
)
 
(19,734
)
Total other (expenses) income
(17,075
)
 
(19,342
)
INCOME FROM CONTINUING OPERATIONS
11,440

 
186

DISCONTINUED OPERATIONS (Note 13)
 
 
 
Income from discontinued operations
377

 
2,202

Net gain on dispositions of discontinued operations
90,115

 
—

Total income from discontinued operations
90,492

 
2,202

NET INCOME
101,932

 
2,388

Net income attributable to noncontrolling interests in consolidated subsidiaries
(65
)
 
(69
)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.
101,867

 
2,319

PREFERRED DISTRIBUTIONS
(3,313
)
 
(3,313
)
NET INCOME (LOSS) AVAILABLE TO COMMON UNITHOLDERS
$
98,554

 
$
(994
)
Income (loss) from continuing operations available to common unitholders per common unit - basic (Note 15)
$
0.09

 
$
(0.05
)
Income (loss) from continuing operations available to common unitholders per common unit - diluted (Note 15)
$
0.09

 
$
(0.05
)
Net income (loss) available to common unitholders per unit – basic (Note 15)
$
1.17

 
$
(0.02
)
Net income (loss) available to common unitholders per unit – diluted (Note 15)
$
1.14

 
$
(0.02
)
Weighted average common units outstanding – basic (Note 15)
83,928,993

 
76,803,743

Weighted average common units outstanding – diluted (Note 15)
85,944,525

 
76,803,743

Dividends declared per common unit
$
0.35

 
$
0.35
















See accompanying notes to consolidated financial statements.

7

KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CAPITAL
(unaudited, in thousands, except unit and per unit data)
 
 
Partners’ Capital
 
Total
Partners’  
Capital
 
Noncontrolling Interests in Consolidated Subsidiaries
 
 
 
Preferred
Units
 
Number of
Common
Units
 
Common
Units
 
 
 
Total
Capital
BALANCE AS OF DECEMBER 31, 2012
$
192,411

 
76,753,484

 
$
2,040,243

 
$
2,232,654

 
$
3,279

 
$
2,235,933

Net income
 
 
 
 
2,319

 
2,319

 
69

 
2,388

Issuance of common units
 
 
453,679

 
23,395

 
23,395

 
 
 
23,395

Issuance of share-based compensation awards
 
 
—

 
336

 
336

 
 
 
336

Noncash amortization of share-based compensation
 
 
 
 
2,422

 
2,422

 
 
 
2,422

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

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

 
77,176,208

 
$
2,036,781

 
$
2,229,192

 
$
3,348

 
$
2,232,540

 
 
 
 
 
 
 
 
 
 
 
 




 
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, 2013
$
192,411

 
83,959,144

 
$
2,315,361

 
$
2,507,772

 
$
8,388

 
$
2,516,160

Net income
 
 
 
 
101,867

 
101,867

 
65

 
101,932

Noncash amortization of share-based compensation
 
 
 
 
2,233

 
2,233

 
 
 
2,233

Repurchase of common units, stock options and restricted stock units
 
 
(26,074
)
 
(1,517
)
 
(1,517
)
 
 
 
(1,517
)
Settlement of restricted stock units
 
 
88,962

 
—

 
—

 
 
 
—

Exercise of stock options
 
 
500

 
21

 
21

 
 
 
21

Preferred distributions
 
 
 
 
(3,313
)
 
(3,313
)
 
 
 
(3,313
)
Distributions declared per common unit ($0.35 per unit)
 
 
 
 
(29,906
)
 
(29,906
)
 
 
 
(29,906
)
BALANCE AS OF MARCH 31, 2014
$
192,411

 
84,022,532

 
$
2,384,746

 
$
2,577,157

 
$
8,453

 
$
2,585,610





















See accompanying notes to consolidated financial statements.


8

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

 
Three Months Ended March 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
101,932

 
$
2,388

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
48,717

 
50,011

Increase in provision for bad debts
—

 
95

Depreciation of furniture, fixtures and equipment
485

 
380

Noncash amortization of share-based compensation awards
2,502

 
2,234

Noncash amortization of deferred financing costs and debt discounts and premiums
1,256

 
1,413

Noncash amortization of net below market rents (Note 3)
(1,734
)
 
(2,047
)
Net gain on dispositions of discontinued operations (Note 13)
(90,115
)
 
—

Noncash amortization of deferred revenue related to tenant-funded tenant improvements
(2,353
)
 
(2,442
)
Straight-line rents
(3,959
)
 
(6,724
)
Net change in other operating assets
(5,949
)
 
(7,390
)
Net change in other operating liabilities
(5,701
)
 
18,581

Net cash provided by operating activities
45,081

 
56,499

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Expenditures for acquisition of operating properties (Note 2)
(106,125
)
 
(85,692
)
Expenditures for operating properties
(32,016
)
 
(25,571
)
Expenditures for development and redevelopment properties and undeveloped land
(73,626
)
 
(73,369
)
Net proceeds received from dispositions of operating properties (Note 13)
309,824

 
—

(Increase) decrease in restricted cash (Notes 1 and 13)
(779
)
 
228,079

Net cash provided by investing activities
97,278

 
43,447

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from issuance of common units
—

 
23,395

Borrowings on unsecured line of credit
90,000

 
—

Repayments on unsecured line of credit
(135,000
)
 
(185,000
)
Principal payments on secured debt
(2,414
)
 
(84,918
)
Proceeds from the issuance of unsecured debt
—

 
299,901

Financing costs
(418
)
 
(2,870
)
Repurchase of common units and restricted stock units
(1,517
)
 
(1,209
)
Proceeds from exercise of stock options
21

 
—

Distributions paid to common unitholders
(29,561
)
 
(26,956
)
Distributions paid to preferred unitholders
(3,313
)
 
(3,313
)
Net cash (used in) provided by financing activities
(82,202
)
 
19,030

Net increase in cash and cash equivalents
60,157

 
118,976

Cash and cash equivalents, beginning of period
35,377

 
16,700

Cash and cash equivalents, end of period
$
95,534

 
$
135,676

 

9

KILROY REALTY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS–(Continued)
(unaudited, in thousands)

 
Three Months Ended March 31,
 
2014
 
2013
SUPPLEMENTAL CASH FLOWS INFORMATION:
 
 
 
Cash paid for interest, net of capitalized interest of $10,042 and $7,175 as of March 31, 2014 and 2013, respectively
$
14,106

 
$
11,303

NONCASH INVESTING TRANSACTIONS:
 
 
 
Accrual for expenditures for operating properties and development and redevelopment properties
$
64,709

 
$
42,140

Tenant improvements funded directly by tenants
$
4,470

 
$
1,426

Assumption of secured debt in connection with property acquisitions
$
—

 
$
95,496

Assumption of other assets and liabilities in connection with operating and development property acquisitions, net
$
—

 
$
422

NONCASH FINANCING TRANSACTIONS:
 
 
 
Accrual of distributions payable to common unitholders
$
29,906

 
$
27,011

Accrual of distributions payable to preferred unitholders
$
1,656

 
$
1,694

Grant date fair value of share-based compensation awards
$
—

 
$
8,451









































See accompanying notes to consolidated financial statements.

10

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended March 31, 2014 and 2013
(unaudited)

1.    Organization and Basis of Presentation

Organization

Kilroy Realty Corporation (the “Company”) is a self-administered real estate investment trust (“REIT”) active in premier office submarkets along the West Coast. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions of Los Angeles, Orange County, San Diego County, the San Francisco Bay Area and greater Seattle, which we believe have strategic advantages and strong barriers to entry. Class A real estate encompasses attractive and efficient buildings of high quality that are attractive to tenants, are well-designed and constructed with above-average material, workmanship and finishes and are well-maintained and managed. We qualify as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). The Company’s common stock is publicly traded on the New York Stock Exchange (“NYSE”) under the ticker symbol “KRC.”

We own our interests in all of our real estate assets through Kilroy Realty, L.P. (the “Operating Partnership”) and Kilroy Realty Finance Partnership, L.P. (the “Finance Partnership”). We conduct substantially all of our operations through the Operating Partnership. Unless stated otherwise or the context indicates otherwise, the terms “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” refer to Kilroy Realty Corporation and its consolidated subsidiaries and the term “Operating Partnership” refers to Kilroy Realty, L.P. and its consolidated subsidiaries. The descriptions of our business, employees, and properties apply to both the Company and the Operating Partnership.

Our stabilized portfolio of operating properties was comprised of the following office properties at March 31, 2014 :

 
Number of
Buildings
 
Rentable
Square Feet
 
Number of
Tenants
 
Percentage 
Occupied
Stabilized Office Properties
107

 
13,305,145

 
527

 
92.4
%

Our stabilized portfolio includes all of our properties with the exception of real estate assets held for sale, undeveloped land, development and redevelopment properties currently under construction or committed for construction, and “lease-up” properties. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. We define “lease-up” properties as properties we recently developed or redeveloped that have not yet reached 95%  occupancy and are within one year following cessation of major construction activities. During the first quarter of 2014, we stabilized a redevelopment property in San Francisco, California. As a result, this property is included in our stabilized portfolio as of March 31, 2014 .

As of March 31, 2014 , the following properties were excluded from our stabilized portfolio:

 
Number of Properties
 
Estimated Rentable
Square Feet
Development properties under construction (1)
6
 
2,538,000

_______________
(1)
Estimated rentable square feet upon completion.

As of March 31, 2014 , all of our properties and development and redevelopment projects and all of our business was conducted in the state of California with the exception of thirteen  office properties located in the state of Washington. All of our properties and development and redevelopment projects are 100% owned, excluding a development project owned by Redwood City Partners, LLC, a consolidated subsidiary (see Note 6) and certain properties held in connection with potential like-kind exchanges pursuant to Section 1031 of the Code (“Section 1031 Exchanges”) to defer taxable gains on dispositions for federal and state income tax purposes that have been consolidated for financial reporting purposes.


11

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


As of March 31, 2014 , the Company owned a 97.9% common general partnership interest in the Operating Partnership. The remaining 2.1% common limited partnership interest in the Operating Partnership as of March 31, 2014 was owned by non-affiliated investors and certain of our executive officers and directors (see Note 6). Both the general and limited common partnership interests in the Operating Partnership are denominated in common units. The number of common units held by the Company is at all times equivalent to the number of outstanding shares of the Company’s common stock, and the rights of all the common units to quarterly distributions and payments in liquidation mirror those of the Company’s common stockholders. The common limited partners have certain redemption rights as provided in the Operating Partnership’s Seventh Amended and Restated Agreement of Limited Partnership, as amended, the “Partnership Agreement”) (see Note 6).

Kilroy Realty Finance, Inc., which is a wholly owned subsidiary of the Company, is the sole general partner of the Finance Partnership and owns a 1.0% common general partnership interest in the Finance Partnership. The Operating Partnership owns the remaining 99.0% common limited partnership interest. Kilroy Services, LLC (“KSLLC”), which is a wholly owned subsidiary of the Operating Partnership, is the entity through which we conduct substantially all of our development activities. With the exception of the Operating Partnership and Redwood City Partners, LLC, all of our subsidiaries are wholly owned.

Basis of Presentation

The consolidated financial statements of the Company include the consolidated financial position and results of operations of the Company, the Operating Partnership, the Finance Partnership, KSLLC, Redwood City Partners, LLC and all of our wholly owned and controlled subsidiaries. The consolidated financial statements of the Operating Partnership include the consolidated financial position and results of operations of the Operating Partnership, the Finance Partnership, KSLLC, Redwood City Partners, LLC and all wholly-owned and controlled subsidiaries of the Operating Partnership. All intercompany balances and transactions have been eliminated in the consolidated financial statements.

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, 2014. 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, 2013 .

Certain amounts in the consolidated statements of operations for prior periods have been reclassified to reflect the activity of discontinued operations.

Variable Interest Entities

At March 31, 2014 , the consolidated financial statements of the Company and the Operating Partnership included one variable interest entity (“VIE”), Redwood City Partners, LLC, in which we were deemed to be the primary beneficiary. This VIE was established in the second quarter of 2013 in connection with an undeveloped land acquisition. The impact of consolidating the VIE increased the Company’s total assets, liabilities and noncontrolling interests by approximately $61.6 million (of which $60.6 million related to real estate held for investment on our consolidated balance sheet), approximately $6.8 million and approximately $4.9 million , respectively, as of March 31, 2014 . As of December 31, 2013 , the consolidated financial statements of the Company and the Operating Partnership included four VIEs, in which we were deemed to be the primary beneficiary. One of the VIEs was Redwood City Partners, LLC and the remaining three VIEs were established during the third and fourth quarter of 2013 to facilitate a potential Section 1031 Exchange. During the three months ended March 31, 2014, the Section 1031 Exchanges were successfully completed and the three VIEs were terminated. As a result, $32.2 million of our restricted cash balance at December 31, 2013 , which related to prior period disposition proceeds that were set aside to facilitate the Section 1031 Exchanges, was released from escrow. The impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests by approximately $251.8 million (of which $234.5 million related to real estate held for investment on our consolidated balance sheet), approximately $12.1 million and approximately $4.9 million , respectively, as of December 31, 2013 .

12

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


Recent Accounting Pronouncements

On April 10, 2014, the Financial Accounting Standards Board issued final guidance to change the criteria for reporting discontinued operations while enhancing disclosures in this area (Accounting Standards Update (“ASU”) No. 2014-08). Under the new guidance, only disposals representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, should be presented as discontinued operations. The guidance will be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The guidance is effective for annual financial statements with fiscal years beginning on or after December 15, 2014 with early adoption permitted for disposals or classifications as held for sale which have not been reported in financial statements previously issued or available for issuance. The Company will adopt the guidance effective January 1, 2015 and the guidance is not anticipated to have a material impact on our consolidated financial statements and notes to our consolidated financial statements.

On March 13, 2014, the Emerging Issues Task Force (the “Task Force”) reached a final consensus to amend the accounting guidance for stock compensation tied to performance targets (Issue No. 13-D). The objective of this guidance is to clarify the accounting treatment of certain types of performance conditions in stock-based compensation awards, more specifically, when performance targets can be achieved after the requisite service period. The Task Force concluded that performance criteria subsequent to a service period vesting requirement should be treated as vesting conditions, and as a result, this type of performance condition may delay expense recognition until achievement of the performance target is probable. Issue No. 13-D will be effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015, and early adoption is permitted. The adoption of this guidance is not anticipated to have a material impact on our consolidated financial statements or notes to our consolidated financial statements.

2.    Acquisitions

Operating Properties

During the three months ended March 31, 2014 , we acquired the one operating office property, listed below, from an unrelated third party. The acquisition was funded with proceeds from the 2013 and 2014 dispositions (see Note 13).

Property
 
Date of Acquisition
 
Number of
Buildings
 
Rentable Square
Feet
 
Occupancy as of March 31, 2014
 
Purchase
Price
(in millions)
401 Terry Avenue North, Seattle, WA
 
March 13, 2014
 
1
 
140,605

 
100.0%
 
$
106.1


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

 
Total 2014
Acquisitions
 
(in thousands)
Assets
 
Land and improvements
$
22,500

Buildings and improvements (1)
77,046

Deferred leasing costs and acquisition-related intangible assets (2)
11,199

Total assets acquired
110,745

Liabilities
 
Deferred revenue and acquisition-related intangible liabilities (3)
4,620

Total liabilities assumed
4,620

Net assets and liabilities acquired
$
106,125

_______________
(1)
Represents buildings, building improvements and tenant improvements.
(2)
Represents in-place leases of approximately $9.3 million (with a weighted average amortization period of seven  years) and leasing commissions of approximately $1.9 million (with a weighted average amortization period of seven  years).
(3)
Represents below-market leases of approximately $4.6 million (with a weighted average amortization period of seven  years).




13

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


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

The following table summarizes our deferred leasing costs and acquisition-related intangible assets (acquired value of leasing costs, above-market operating leases, in-place leases and below-market ground lease obligation) and intangible liabilities (acquired value of below-market operating leases and above-market ground lease obligation) as of March 31, 2014 and December 31, 2013 :

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Deferred Leasing Costs and Acquisition-Related Intangible Assets, net:
 
 
 
Deferred leasing costs
$
183,813

 
$
178,720

Accumulated amortization
(68,152
)
 
(63,246
)
Deferred leasing costs, net
115,661

 
115,474

Above-market operating leases
27,351

 
27,635

Accumulated amortization
(15,489
)
 
(14,283
)
Above-market operating leases, net
11,862

 
13,352

In-place leases
104,643

 
100,318

Accumulated amortization
(44,175
)
 
(42,999
)
In-place leases, net
60,468

 
57,319

Below-market ground lease obligation
490

 
490

Accumulated amortization
(15
)
 
(13
)
Below-market ground lease obligation, net
475

 
477

Total deferred leasing costs and acquisition-related intangible assets, net
$
188,466

 
$
186,622

Acquisition-Related Intangible Liabilities, net: (1)
 
 
 
Below-market operating leases
$
73,522

 
$
69,385

Accumulated amortization
(28,316
)
 
(25,706
)
Below-market operating leases, net
45,206

 
43,679

Above-market ground lease obligation
6,320

 
6,320

Accumulated amortization
(248
)
 
(223
)
Above-market ground lease obligation, net
6,072

 
6,097

Total acquisition-related intangible liabilities, net
$
51,278

 
$
49,776

_______________
(1)
Included in deferred revenue and acquisition-related intangible liabilities, net in the consolidated balance sheets.

The following table sets forth amortization related to deferred leasing costs and acquisition-related intangibles, including amounts attributable to discontinued operations, for the three  months ended March 31, 2014 and 2013 :

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Deferred leasing costs (1)
$
6,780

 
$
7,844

Above-market operating leases (2)
1,490

 
1,438

In-place leases (1)
6,136

 
7,458

Below-market ground lease obligation (3)
—

 
2

Below-market operating leases (4)
(3,093
)
 
(3,485
)
Above-market ground lease obligation (5)
(25
)
 
(25
)
Total
$
11,288

 
$
13,232

_______________
(1)
The amortization of deferred leasing costs related to lease incentives is recorded to rental income and other deferred leasing costs and in-place leases is recorded to depreciation and amortization expense in the consolidated statements of operations for the periods presented.
(2)
The amortization of above-market operating leases is recorded as a decrease to rental income in the consolidated statements of operations for the periods presented.
(3)
The amortization of the below-market ground lease obligation is recorded as an increase to ground lease expense in the consolidated statements of operations for the periods presented.
(4)
The amortization of below-market operating leases is recorded as an increase to rental income in the consolidated statements of operations for the periods presented.
(5)
The amortization of the above-market ground lease obligation is recorded as a decrease to ground lease expense in the consolidated statements of operations for the periods presented.


14

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


The following table sets forth the estimated annual amortization expense related to deferred leasing costs and acquisition-related intangibles as of March 31, 2014 for future periods:

Year
Deferred Leasing Costs
 
Above-Market Operating Leases (1)
 
In-Place Leases
 
Below-Market Ground Lease Obligation (2)
 
Below-Market Operating Leases (3)
 
Above-Market Ground Lease Obligation (4)
 
(in thousands)
Remaining 2014
$
20,006

 
$
3,830

 
$
15,274

 
$
6

 
$
(9,802
)
 
$
(76
)
2015
22,162

 
2,918

 
13,562

 
8

 
(9,577
)
 
(101
)
2016
19,351

 
1,891

 
10,475

 
8

 
(7,847
)
 
(101
)
2017
16,742

 
1,573

 
8,774

 
8

 
(6,780
)
 
(101
)
2018
13,416

 
973

 
5,689

 
8

 
(5,177
)
 
(101
)
Thereafter
23,984

 
677

 
6,694

 
437

 
(6,023
)
 
(5,592
)
Total
$
115,661

 
$
11,862

 
$
60,468

 
$
475

 
$
(45,206
)
 
$
(6,072
)
_______________
(1)
Represents estimated annual amortization related to above-market operating leases. Amounts will be recorded as a decrease to rental income in the consolidated statements of operations.
(2)
Represents estimated annual amortization related to below-market ground lease obligations. Amounts will be recorded as an increase to ground lease expense in the consolidated statements of operations.
(3)
Represents estimated annual amortization related to below-market operating leases. Amounts will be recorded as an increase to rental income in the consolidated statements of operations.
(4)
Represents estimated annual amortization related to above-market ground lease obligations. Amounts will be recorded as a decrease to ground lease expense in the consolidated statements of operations.

4.    Receivables

Current Receivables, net

Current receivables, net is primarily comprised of contractual rents and other lease-related obligations due from tenants. The balance consisted of the following as of March 31, 2014 and December 31, 2013 :

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Current receivables
$
13,226

 
$
12,866

Allowance for uncollectible tenant receivables
(2,134
)
 
(2,123
)
Current receivables, net
$
11,092

 
$
10,743


Deferred Rent Receivables, net

Deferred rent receivables, net consisted of the following as of March 31, 2014 and December 31, 2013 :

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Deferred rent receivables
$
132,740

 
$
129,198

Allowance for deferred rent receivables
(1,990
)
 
(2,075
)
Deferred rent receivables, net
$
130,750

 
$
127,123



15

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


5.    Secured and Unsecured Debt of the Operating Partnership

Secured Debt

The following table sets forth the composition of our secured debt as of March 31, 2014 and December 31, 2013 :

Type of Debt
Annual Stated Interest Rate (1)
 
GAAP
Effective Rate (1)(2)
 
Maturity Date
 
March 31, 2014 (3)
 
December 31, 2013 (3)
 
 
 
 
 
 
 
(in thousands)
Mortgage note payable
4.27%
 
4.27%
 
February 2018
 
$
132,539

 
$
133,117

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

 
97,000

Mortgage note payable (4)
6.05%
 
3.50%
 
June 2019
 
91,696

 
92,502

Mortgage note payable
6.51%
 
6.51%
 
February 2017
 
67,415

 
67,663

Mortgage note payable (4)
5.23%
 
3.50%
 
January 2016
 
54,120

 
54,570

Mortgage note payable (4)
5.57%
 
3.25%
 
February 2016
 
41,300

 
41,654

Mortgage note payable   (4)
5.09%
 
3.50%
 
August 2015
 
34,712

 
34,845

Mortgage note payable (4)
4.94%
 
4.00%
 
April 2015
 
27,307

 
27,641

Mortgage note payable
7.15%
 
7.15%
 
May 2017
 
8,387

 
8,972

Other
Various
 
Various
 
Various
 
2,470

 
2,470

Total
 
 
 
 
 
 
$
556,946

 
$
560,434

______________
(1)
All interest rates presented are fixed-rate interest rates.
(2)
This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of discounts/premiums, excluding debt issuance costs.
(3)
Amounts reported include the amounts of unamortized debt premiums and discounts for the periods presented.
(4)
The secured debt and the related properties that secure the debt are held in a special purpose entity and the properties are not available to satisfy the debts and other obligations of the Company or the Operating Partnership.

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

4.25% Exchangeable Senior Notes

The table below summarizes the balance and significant terms of the Company’s 4.25% Exchangeable Notes due November 2014 (the “4.25% Exchangeable Notes”) outstanding as of March 31, 2014 and December 31, 2013 .

 
4.25% Exchangeable Notes
 
March 31,
2014
 
December 31,
2013
 
(in thousands)
Principal amount
$
172,500

 
$
172,500

Unamortized discount
(2,972
)
 
(4,128
)
Net carrying amount of liability component
$
169,528

 
$
168,372

Carrying amount of equity component
$19,835
Issuance date
November 2009
Maturity date
November 2014
Stated coupon rate (1)
4.25%
Effective interest rate   (2)
7.13%
Exchange rate per $1,000 principal value of the 4.25% Exchangeable Notes, as adjusted (3)
27.8307
Exchange price, as adjusted (3)
$35.93
Number of shares on which the aggregate consideration to be delivered on conversion is determined (3)
4,800,796
_______________
(1)
Interest on the 4.25% Exchangeable Notes is payable semi-annually in arrears on May 15 th and November 15 th of each year.
(2)
The rate at which we record interest expense for financial reporting purposes, which reflects the amortization of the discounts on the 4.25% Exchangeable Notes. This rate represents our conventional debt borrowing rate at the date of issuance.
(3)
The exchange rate, exchange price and the number of shares to be delivered upon conversion are subject to adjustment under certain circumstances including increases in our common dividends.


16

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


The 4.25% Exchangeable Notes are exchangeable for shares of the Company’s common stock prior to maturity only upon the occurrence of certain events. During the three months ended March 31, 2014 , the closing sale price per share of the common stock of the Company was more than 130% of the exchange price per share of the Company’s common stock for at least 20 trading days in the specified period. As a result, for the three month period ended March 31, 2014 , the 4.25% Exchangeable Notes are exchangeable at the exchange rate stated above and may be exchangeable thereafter, if one or more of the events were again to occur during future measurement periods.

For the three months ended March 31, 2014 and 2013, the per share average trading price of the Company’s common stock on the NYSE was higher than the $35.93 exchange price for the 4.25% Exchangeable Notes, as presented below:

 
Three Months Ended March 31,
 
2014
 
2013
Per share average trading price of the Company’s common stock
$55.18
 
$51.14

The 4.25% Exchangeable Notes were exchangeable as of March 31, 2014 and March 31, 2013. If the Exchangeable Notes were exchanged, the approximate fair value of the shares upon exchange at March 31, 2014 and 2013 , using the per share average trading price presented in the table above, would have been as follows:

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Approximate fair value of shares upon exchange
$
270,602

 
$
247,300

Principal amount of the 4.25% Exchangeable Notes
172,500

 
172,500

Approximate fair value in excess amount of principal amount
$
98,102

 
$
74,800


See Notes 14 and 15 for a discussion of the impact of the 4.25% Exchangeable Notes on our diluted earnings per share and unit calculations for the periods presented.

Interest Expense for the Exchangeable Notes

The unamortized discount on the 4.25% Exchangeable Notes is accreted as additional interest expense from the date of issuance through the maturity date of the applicable Exchangeable Notes. The following table summarizes the total interest expense attributable to the 4.25% Exchangeable Notes based on the respective effective interest rates, before the effect of capitalized interest, for the three months ended March 31, 2014 and 2013 :

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Contractual interest payments  
$
1,833

 
$
1,833

Amortization of discount  
1,156

 
1,078

Interest expense attributable to the Exchangeable Notes  
$
2,989

 
$
2,911


Capped Call Transactions

In connection with the offering of the 4.25% Exchangeable Notes, we entered into capped call option transactions (“capped calls”) to mitigate the dilutive impact of the potential exchange of the 4.25% Exchangeable Notes. The table below summarizes our capped call option positions for the 4.25% Exchangeable Notes as of March 31, 2014 and December 31, 2013 .

 
4.25% Exchangeable Notes
Referenced shares of common stock
4,800,796

Exchange price including effect of capped calls
$
42.81



17

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


The capped calls are expected to terminate upon the earlier of the maturity date of the 4.25% Exchangeable Notes or upon the date upon which the 4.25% Exchangeable Notes are no longer outstanding resulting from an exchange or repurchase by us. The initial cost of capped calls were recorded as a reduction to additional paid-in capital.

Unsecured Senior Notes

The following table summarizes the balance and significant terms of the registered unsecured senior notes issued by the Operating Partnership as of March 31, 2014 and December 31, 2013 :

 
 
 
 
 
 
 
 
 
Principal Amount as of

 
Issuance date
 
Maturity date
 
Stated
coupon rate
 
Effective interest rate  (1)
 
March 31,
2014
 
December 31,
2013
 
 
 
 
 
 
 
 
 
(in thousands)
3.800% Unsecured Senior Notes (2)
January 2013
 
January 2023
 
3.800%
 
3.804%
 
$
300,000

 
$
300,000

Unamortized discount
 
 
 
 
 
 
 
 
(87
)
 
(90
)
Net carrying amount
 
 
 
 
 
 
 
 
$
299,913

 
$
299,910

 
4.800% Unsecured Senior Notes (3)
July 2011
 
July 2018
 
4.800%
 
4.827%
 
$
325,000

 
$
325,000

Unamortized discount
 
 
 
 
 
 
 
 
(320
)
 
(339
)
Net carrying amount
 
 
 
 
 
 
 
 
$
324,680

 
$
324,661

 
6.625% Unsecured Senior Notes (4)
May 2010
 
June 2020
 
6.625%
 
6.743%
 
$
250,000

 
$
250,000

Unamortized discount
 
 
 
 
 
 
 
 
(1,313
)
 
(1,367
)
Net carrying amount
 
 
 
 
 
 
 
 
$
248,687

 
$
248,633

 
5.000% Unsecured Senior Notes (5)
November 2010
 
November 2015
 
5.000%
 
5.014%
 
$
325,000

 
$
325,000

Unamortized discount
 
 
 
 
 
 
 
 
(63
)
 
(73
)
Net carrying amount
 
 
 
 
 
 
 
 
$
324,937

 
$
324,927

________________________
(1)
This represents the rate at which interest expense is recorded for financial reporting purposes, which reflects the amortization of initial issuance discounts, excluding debt issuance costs.
(2)
Interest on the 3.800% unsecured senior notes is payable semi-annually in arrears on January 15th and July 15th of each year.
(3)
Interest on the 4.800% unsecured senior notes is payable semi-annually in arrears on January 15th and July 15th of each year.
(4)
Interest on the 6.625% unsecured senior notes is payable semi-annually in arrears on June 1st and December 1st of each year.
(5)
Interest on the 5.000% unsecured senior notes is payable semi-annually in arrears on May 3rd and November 3rd of each year.

In addition to the registered unsecured senior note issuances listed above, we also had outstanding Series B unsecured senior notes with an aggregate principal balance of $83.0 million and effective interest rate of 6.45% as of March 31, 2014 and December 31, 2013 , that mature in August 2014 . The Series B notes require semi-annual interest payment each February 4th and August 4th of each year based on a fixed annual interest rate of 6.45% .

Term Loan Facility

The Company’s outstanding borrowings under the term loan facility were $150.0 million as of March 31, 2014 and December 31, 2013 . The term loan facility bears interest at an annual rate of LIBOR plus 1.750% , which can vary depending on the Operating Partnership’s credit rating, and is scheduled to mature on March 29, 2016. Under the terms of the term loan facility, we may exercise an option to extend the maturity date by one year. We may elect to borrow up to an additional $100.0 million under an accordion option, subject to bank approval and obtaining commitments for any additional borrowing capacity.


18

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


Unsecured Revolving Credit Facility

The following table summarizes the balance and terms of our revolving credit facility as of March 31, 2014 and December 31, 2013 :

 
March 31,
2014
 
December 31,
2013
 
(in thousands)
Outstanding borrowings
$
—

 
$
45,000

Remaining borrowing capacity
500,000

 
455,000

Total borrowing capacity (1)
$
500,000

 
$
500,000

Interest rate (2)
—
%
 
1.62
%
Facility fee-annual rate (3)
0.300%
Maturity date (4)
April 2017
_______________
(1)
We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $200.0 million under an accordion feature under the terms of the revolving credit facility.
(2)
The revolving credit facility interest rate was calculated based on an annual rate of LIBOR plus 1.450% as of both March 31, 2014 and December 31, 2013 .
(3)
The facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, from 2010 to 2012 we incurred debt origination and legal costs of which, as of March 31, 2014 , approximately $4.5 million remains to be amortized through the maturity date of the revolving credit facility.
(4)
Under the terms of the revolving credit facility, we may exercise an option to extend the maturity date by one year.

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

Debt Covenants and Restrictions

The revolving credit facility, the term loan facility, the unsecured senior notes, and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a minimum unsecured debt ratio and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our debt covenants as of March 31, 2014 .

Debt Maturities

The following table summarizes the stated debt maturities and scheduled amortization payments, excluding debt discounts and premiums, as of March 31, 2014 :

Year
(in thousands)
Remaining 2014
$
262,932

2015
395,104

2016
249,431

2017
71,748

2018
451,728

Thereafter
718,011

Total (1)
$
2,148,954

________________________  
(1)
Includes gross principal balance of outstanding debt before impact of net unamortized premiums totaling approximately $8.7 million .


19

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


Capitalized Interest and Loan Fees

The following table sets forth gross interest expense reported in continuing operations, including debt discount/premium and loan cost amortization, net of capitalized interest, for the three months ended March 31, 2014 and 2013 . The interest expense capitalized was recorded as a cost of development and redevelopment, and increased the carrying value of undeveloped land and construction in progress.

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Gross interest expense
$
28,034

 
$
27,466

Capitalized interest
(10,782
)
 
(7,732
)
Interest expense
$
17,252

 
$
19,734


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

Common Units of the Operating Partnership

The Company owned a 97.9% , 97.8% and 97.6% common general partnership interest in the Operating Partnership as of March 31, 2014 , December 31, 2013 and March 31, 2013 , respectively. The remaining 2.1% , 2.2% and 2.4% common limited partnership interest as of March 31, 2014 , December 31, 2013 and March 31, 2013 , respectively, was owned by non-affiliate investors and certain of our executive officers and directors in the form of noncontrolling common units. There were 1,804,200 , 1,805,200 and 1,826,503 common units outstanding held by these investors, executive officers and directors as of March 31, 2014 , December 31, 2013 and March 31, 2013 , respectively.

The noncontrolling common units may be redeemed by unitholders for cash. Except under certain circumstances, we, at our option, may satisfy the cash redemption obligation with shares of the Company’s common stock on a one-for-one basis. If satisfied in cash, the value for each noncontrolling common unit upon redemption is the amount equal to the average of the closing quoted price per share of the Company’s common stock, par value $.01 per share, as reported on the NYSE for the ten trading days immediately preceding the applicable redemption date. The aggregate value upon redemption of the then-outstanding noncontrolling common units was $105.4 million and $90.8 million as of March 31, 2014 and December 31, 2013 , respectively. This redemption value does not necessarily represent the amount that would be distributed with respect to each noncontrolling common unit in the event of our termination or liquidation. In the event of our termination or liquidation, it is expected in most cases that each common unit would be entitled to a liquidating distribution equal to the liquidating distribution payable in respect of each share of the Company’s common stock.

Noncontrolling Interest in Consolidated Variable Interest Entity

The noncontrolling interest in consolidated subsidiary represents the third party equity interest in Redwood City Partners, LLC, a consolidated VIE. This noncontrolling interest was $4.9 million at March 31, 2014 and December 31, 2013 .

7.    Stockholders’ Equity of the Company

At-The-Market Stock Offering Program

Under our at-the-market stock offering program, which commenced in July 2011, we may offer and sell shares of our common stock having an aggregate gross sales price of up to $200.0 million from time to time in “at-the-market” offerings. Since commencement of the program, we have sold 2,183,261 shares of common stock having an aggregate gross sales price of $105.3 million . As of March 31, 2014 , shares of common stock having an aggregate gross sales price of up to $94.7 million remain available to be sold under this program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of the Company’s common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program. There were no sales of our common stock under our at-the-market offering program for the three months ended March 31, 2014 .


20

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


8.    Partners’ Capital of the Operating Partnership

Common Units Outstanding

The following table sets forth the number of common units held by the Company and the number of common units held by non-affiliate investors and certain of our executive officers and directors in the form of noncontrolling common units as well as the ownership interest held on each respective date:

 
March 31, 2014
 
December 31, 2013
 
March 31, 2013
Company owned common units in the Operating Partnership
82,218,332

 
82,153,944

 
75,349,705

Company owned general partnership interest
97.9
%
 
97.8
%
 
97.6
%
Noncontrolling common units of the Operating Partnership
1,804,200

 
1,805,200

 
1,826,503

Ownership interest of noncontrolling interest
2.1
%
 
2.2
%
 
2.4
%

For a further discussion of the noncontrolling common units as of March 31, 2014 and December 31, 2013 , refer to Note 6.

9.    Share-Based Compensation

Stockholder Approved Equity Compensation Plans

As of March 31, 2014 , we maintained one share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan as amended (the “2006 Plan”). As of March 31, 2014 , no shares were available for grant under the 2006 Plan. Under applicable NYSE listing rules, we may not increase the 2006 Plan share limit without stockholder approval. At our Annual Meeting of Stockholders, on May 22, 2014, stockholders will be asked to approve an amendment and restatement of the 2006 Plan which includes an increase in the share limit to 7,120,000 shares.

2014 Share-Based Compensation Grants

On January 29, 2014, the Executive Compensation Committee of the Company’s Board of Directors granted to certain officers of the Company under the 2006 Plan 236,604 restricted stock units (“RSUs”), 119,098 RSUs that are subject to market and performance-based vesting requirements (the “2014 Performance-Based RSU Grant”) and 117,506 RSUs that are subject to time-based vesting requirements (the “2014 Time-Based RSU Grant”).

2014 Performance-Based RSU Grant

The 2014 Performance-Based RSUs are scheduled to vest at the end of a three year period based upon the achievement of pre-established levels of FFO per share (the “performance condition”) for the year ended December 31, 2014 and also based upon the average annual relative stockholder return targets (the “market condition”) for the three year period ending December 31, 2016. The 2014 Performance-Based RSUs are also subject to a three-year service vesting provision and will cliff vest at the end of the three-year period. The number of 2014 Performance-Based RSUs ultimately earned could fluctuate based upon the levels of achievement for both the FFO and relative stockholder return metrics. Compensation expense for the 2014 Performance-Based RSU Grant will be recorded on a straight-line basis over the three year period.

Each 2014 Performance-Based RSU represents the right to receive one share of our common stock in the future. However, in the event that our stockholders do not approve an increase to the share limit under our 2006 Plan, as discussed above, then the 2014 Performance-Based RSUs may be cash settled based on the fair market value of our common stock on the applicable vesting date. As a result, until a sufficient amount of shares are authorized by our stockholders for issuance under the 2006 Plan to cover the payment of these awards, we are required to re-measure the fair value of the 2014 Performance-Based RSU Grant at each reporting date and record compensation expense based on the fair value at each reporting date for the cumulative portion of the performance period that has elapsed. The total fair value of the 2014 Performance-Based RSU Grant was $7.1 million at March 31, 2014 and was calculated using a Monte Carlo simulation pricing model based on the assumptions in the table below. The determination of the fair value of the 2014 Performance-Based RSU Grant takes into consideration the likelihood of achievement of both the performance condition and the market condition discussed above. For the three months ended March 31, 2014, we recorded compensation expense based upon the $63.44 fair value at March 31, 2014 because we did not have shares authorized for issuance by our stockholders under the 2006 Plan. The following table summarizes the assumptions utilized in the Monte Carlo simulation pricing model:

21

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


 
Fair Value Assumptions as of March 31, 2014
Fair value per share at March 31, 2014
$63.44
Expected share price volatility
32.00%
Risk-free interest rate
0.79%
Remaining expected life
2.75 years

The computation of expected volatility is based on a blend of the historical volatility of our shares of common stock over approximately six years as that is expected to be most consistent with future volatility and equates to a time period twice as long as the approximate three year performance period of the RSUs and implied volatility data based on the observed pricing of six month publicly-traded options on our shares of common stock. The risk-free interest rate is based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at March 31, 2014. The expected dividend yield is estimated by examining the average of the historical dividend yield levels over the remaining 2.75 year term of the RSUs and our current annualized dividend yield as of March 31, 2014. The expected life of the RSUs is equal to the remaining 2.75 year vesting period at March 31, 2014.

2014 Time-Based RSU Grant

The 2014 Time-Based RSUs are scheduled to vest in four equal installments beginning on January 5, 2015 through January 5, 2018. Compensation expense for the 2014 Time-Based RSUs will be recognized on a straight-line basis over the four year service vesting period. Each 2014 Time-Based RSUs represents the right to receive one share of our common stock in the future. However, in the event that our stockholders do not approve an increase to the share limit under our 2006 Plan, as discussed above, then the 2014 Time-Based RSUs may be cash settled, based on the fair market value of our common stock on the applicable payment date. As a result, unless and until a sufficient amount of shares are authorized by our stockholders for issuance under the 2006 Plan to cover the payment of these awards, we are required to re-measure the fair value of the 2014 Time-Based RSUs at each reporting date and record compensation expense based on the fair value at each reporting date for the cumulative portion of the performance period that has elapsed. The total grant date fair value was $6.1 million , which was based on the $51.64 closing share price of the Company’s common stock on the NYSE on the grant date. At March 31, 2014, we recorded compensation expense based upon the $58.58 closing share price of the Company’s common stock on that date because we did not have shares authorized for issuance by our stockholders under the 2006 Plan.

Share-Based Compensation Cost Recorded During the Period

The total compensation cost for all share-based compensation programs was $2.9 million and $2.4 million for the three months ended March 31, 2014 and 2013 , respectively. Of the total share-based compensation costs, $0.4 million and $0.2 million was capitalized as part of real estate assets for the three months ended March 31, 2014 and 2013 , respectively. As of March 31, 2014 , there was approximately $36.9 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 2.6  years. $13.6 million of the total unrecognized compensation cost as of March 31, 2014 relates to the 2014 Performance-Based and Time-Based RSU grants which require fair value re-measurement at each reporting period as discussed above. The remaining compensation cost related to these nonvested incentive awards had been recognized in periods prior to March 31, 2014 .

10.    Commitments and Contingencies

General

As of March 31, 2014 , we had commitments of approximately $733.6 million , excluding our ground lease commitments, for contracts and executed leases directly related to our operating and redevelopment properties.

Environmental Matters

We follow the policy of monitoring our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material adverse effect on our financial condition, results of operations and cash flow. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.


22

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


11.    Fair Value Measurements and Disclosures

Assets and Liabilities Reported at Fair Value

The only assets we record at fair value on a recurring basis on our consolidated financial statements are the marketable securities related to our deferred compensation plan. The following table sets forth the fair value of our marketable securities as of March 31, 2014 and December 31, 2013 :

 
Fair Value (Level  1) (1)
 
March 31, 2014
 
December 31, 2013
Description
(in thousands)
Marketable securities (2)
$
11,001

 
$
10,008

_______________
(1)
Based on quoted prices in active markets for identical securities.
(2)
The marketable securities are held in a limited rabbi trust.

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 in the consolidated statements of operations. We adjust the related 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 compensation cost for the period.

The following table sets forth the net gain on marketable securities recorded during the three months ended March 31, 2014 and 2013 :

 
Three Months Ended March 31,

2014
 
2013
Description
(in thousands)
Net gain on marketable securities
$
154

 
$
356


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 March 31, 2014 and December 31, 2013 :

 
March 31, 2014
 
December 31, 2013
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
(in thousands)
Liabilities
 
 
 
 
 
 
 
Secured debt (1)
$
556,946

 
$
567,107

 
$
560,434

 
$
568,760

Exchangeable senior notes, net (1)
169,528

 
175,403

 
168,372

 
178,190

Unsecured debt, net (2)
1,431,217

 
1,506,815

 
1,431,132

 
1,523,052

Unsecured line of credit (1)
—

 
—

 
45,000

 
45,012

_______________
(1)
Fair value calculated using Level II inputs which are based on model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
(2)
Fair value calculated using Level I and Level II inputs. Level I inputs are based on quoted prices for identical instruments in active markets. The carrying value and fair value of the Level I instruments was $873.5 million and $921.2 million , respectively, as of March 31, 2014 . The carrying value and fair value of the Level I instruments as of December 31, 2013 , was $873.5 million and $929.3 million , respectively. The carrying value and fair value of the Level II instruments was $557.7 million and $585.6 million , respectively, as of March 31, 2014 . The carrying value and fair value of the Level II instruments as of December 31, 2013 , was $557.7 million and $593.7 million , respectively.

12.    Other Significant Events

In January 2014, a tenant at one of our San Diego, California operating properties exercised an early lease termination clause as permitted under the terms of their lease. As a result, the lease which encompasses approximately 79,000 rentable square feet and was scheduled to expire in February 2020, will terminate during the third quarter of 2014. The total lease termination fee of $5.7 million , of which the Company recorded $1.7 million during the three months ended March 31, 2014, will be recorded as other property income on a straight line basis through the early lease termination date. During the three months ended March 31, 2014, the Company also recognized approximately $0.4 million as a reduction to rental income due to the accelerated amortization of the deferred rent receivable and above market lease for this tenant.

23

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


13.    Dispositions and Discontinued Operations

Real Estate Assets Held for Sale

As of March 31, 2014 , the following undeveloped land parcel was classified as held for sale:

Location
 
City/Submarket
 
Property Type
10850 Via Frontera, San Diego, CA
 
I-15 Corridor/Rancho Bernardo
 
Undeveloped Land

On April 9, 2014 the Company completed the sale of the undeveloped land parcel. See Note 16 “Subsequent Events” for further details.

The major classes of assets and liabilities of the properties held for sale as of March 31, 2014 were as follows:

Real estate assets and other assets held for sale
(in thousands)
Undeveloped land and construction in progress
$
28,030

Prepaid expenses and other assets, net
242

Real estate and other assets held for sale, net
$
28,272

 
 
Liabilities of real estate assets held for sale
 
Accounts payable, accrued expenses and other liabilities
$
634

Liabilities of real estate assets held for sale
$
634


Dispositions

The following table summarizes the properties sold during the three  months ended March 31, 2014 :

Location
 
City/Submarket
 
Property Type
 
Month of Disposition
 
Number of Buildings
 
Rentable Square Feet
San Diego Properties, San Diego, CA (1)(2)
 
I-15 Corridor/Sorrento Mesa
 
Office
 
January
 
12

 
1,049,035

________________________  
(1)
The San Diego Properties included the following: 10020 Pacific Mesa Boulevard, 6055 Lusk Avenue, 5010 and 5005 Wateridge Vista Drive, 15435 and 15445 Innovation Drive, and 15051, 15073, 15231, 15253, 15333 and 15378 Avenue of Science.
(2)
These properties were held for sale as of December 31, 2013.

At March 31, 2014 and December 31, 2013 , approximately $15.3 million and $32.2 million , respectively, of net proceeds related to the buildings disposed of during the three months ended March 31, 2014 and the year ended December 31, 2013 were temporarily being held at a qualified intermediary, at our direction, for the purpose of facilitating Section 1031 Exchanges. The cash proceeds are included in restricted cash on the consolidated balance sheets at March 31, 2014 and December 31, 2013 . In February 2014, we successfully completed one of the Section 1031 Exchanges and the $32.2 million cash proceeds were released from the qualified intermediary.


24

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


For the three months ended March 31, 2014 and 2013 , discontinued operations included the income of the twelve operating office properties sold during the three months ended March 31, 2014 . For the three months ended March 31, 2013 , discontinued operations also included the income from three operating office properties that were sold during 2013. The following table summarizes the revenue and expense components that comprise income from discontinued operations for the three months ended March 31, 2014 and 2013 :

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Revenues:
 
 
 
Rental income
$
458

 
$
5,773

Tenant reimbursements
66

 
757

Other property income
9

 
3

Total revenues
533

 
6,533

Expenses:
 
 
 
Property expenses
87

 
968

Real estate taxes
69

 
673

Depreciation and amortization
—

 
2,690

Total expenses
156

 
4,331

Income from discontinued operations before net gain on dispositions of discontinued operations
377

 
2,202

Net gain on dispositions of discontinued operations
90,115

 
—

Total income from discontinued operations
$
90,492

 
$
2,202



25

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


14.    Net Income (Loss) 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 income (loss) available to common stockholders for the three months ended March 31, 2014 and 2013 :

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands, except share and
per share amounts)
Numerator:
 
 
 
Income from continuing operations
$
11,440

 
$
186

(Income) loss from continuing operations attributable to noncontrolling common units of the Operating Partnership
(172
)
 
72

Preferred dividends
(3,313
)
 
(3,313
)
Allocation to participating securities (1)
(427
)
 
(418
)
Numerator for basic and diluted income (loss) from continuing operations available to common stockholders
7,528

 
(3,473
)
Income from discontinued operations
90,492

 
2,202

Income from discontinued operations attributable to noncontrolling common units of the Operating Partnership
(1,915
)
 
(50
)
Numerator for basic and diluted net income (loss) available to common stockholders
$
96,105

 
$
(1,321
)
Denominator:
 
 
 
Basic weighted average vested shares outstanding
82,124,538

 
74,977,240

Effect of dilutive securities
2,015,532

 
—

Diluted weighted average vested shares and common share equivalents outstanding
84,140,070

 
74,977,240

Basic earnings per share:
 
 
 
Income (loss) from continuing operations available to common stockholders per share
$
0.09

 
$
(0.05
)
Income from discontinued operations per common share
1.08

 
0.03

Net income (loss) available to common stockholders per share
$
1.17

 
$
(0.02
)
Diluted earnings per share:
 
 
 
Income (loss) from continuing operations available to common stockholders per share
$
0.09

 
$
(0.05
)
Income from discontinued operations per common share
1.05

 
0.03

Net income (loss) available to common stockholders per share
$
1.14

 
$
(0.02
)
________________________ 
(1)
Participating securities include nonvested shares, certain time-based RSUs and vested market-measure RSUs.

The impact of the contingently issuable shares, which consist of the 4.25% Exchangeable Notes and 1,520,500 stock options, were considered in our diluted earnings per share calculation for the three months ended March 31, 2014 because we reported income from continuing operations attributable to common stockholders in the respective period and the effect was dilutive. The impact of the Exchangeable Notes and stock options was not considered in our diluted earnings per share calculation for the three months ended March 31, 2013 because we reported a loss from continuing operations attributable to common stockholders and the effect was anti-dilutive.

The 2014 Performance-Based RSUs and our other nonvested market measure-based RSUs are not included in dilutive securities as of March 31, 2014 because they are not considered contingently issuable shares as not all the necessary performance conditions have been met. The impact of our nonvested market measure-based RSUs were not included in dilutive securities as of March 31, 2013 because they were not considered contingently issuable shares as not all the necessary performance conditions were met.


26

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


15.    Net Income (Loss) 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 income (loss) available to common unitholders for the three months ended March 31, 2014 and 2013 :

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands, except unit and
per unit amounts)
Numerator:
 
 
 
Income from continuing operations
$
11,440

 
$
186

Income from continuing operations attributable to noncontrolling interests in consolidated subsidiaries
(65
)
 
(69
)
Preferred distributions
(3,313
)
 
(3,313
)
Allocation to participating securities (1)
(427
)
 
(418
)
Numerator for basic and diluted income (loss) from continuing operations available to common unitholders
7,635

 
(3,614
)
Income from discontinued operations
90,492

 
2,202

Numerator for basic and diluted net income (loss) available to common unitholders
$
98,127

 
$
(1,412
)
Denominator:
 
 
 
Basic weighted average vested units outstanding
83,928,993

 
76,803,743

Effect of dilutive securities
2,015,532

 
—

Diluted weighted average vested units and common unit equivalents outstanding
85,944,525

 
76,803,743

Basic earnings per unit:
 
 
 
Income (loss) from continuing operations available to common unitholders per unit
$
0.09

 
$
(0.05
)
Income from discontinued operations per common unit
1.08

 
0.03

Net income (loss) available to common unitholders per unit
$
1.17

 
$
(0.02
)
Diluted earnings per unit:
 
 
 
Income (loss) from continuing operations available to common unitholders per unit
$
0.09

 
$
(0.05
)
Income from discontinued operations per common unit
1.05

 
0.03

Net income (loss) available to common unitholders per unit
$
1.14

 
$
(0.02
)
________________________ 
(1)
Participating securities include nonvested shares, certain time-based RSUs and vested market-measure RSUs.

The impact of the contingently issuable units, which consist of the 4.25% Exchangeable Notes and 1,520,500 stock options, were considered in our diluted earnings per unit calculation for the three months ended March 31, 2014 because the Operating Partnership reported income from continuing operations attributable to common unitholders in the respective period and the effect was dilutive. The impact of the Exchangeable Notes and stock options was not considered in our diluted earnings per share calculation for the three months ended March 31, 2013 because the Operating Partnership reported a loss from continuing operations attributable to common unitholders and the effect was anti-dilutive.

The 2014 Performance-Based RSUs and our other nonvested market measure-based RSUs are not included in dilutive securities as of March 31, 2014 because they are not considered contingently issuable shares as not all the necessary performance conditions have been met. The impact of our nonvested market measure-based RSUs were not included in dilutive securities as of March 31, 2013 because they were not considered contingently issuable shares as not all the necessary performance conditions were met.

16.    Subsequent Events

On April 9, 2014, the Company sold an undeveloped land parcel located at 10850 Via Frontera in the Rancho Bernardo submarket of San Diego, California that was held for sale at March 31, 2014 for a gross sales price of $33.1 million .

On April 16, 2014, aggregate dividends, distributions and dividend equivalents of $29.8 million were paid to common stockholders and common unitholders of record on March 31, 2014 and RSU holders of record on April 16, 2014.

27

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 “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Forward-looking statements include, among other things, statements or information concerning projected future occupancy and rental rates, lease expirations, debt maturity, potential investments, strategies such as capital recycling, development and redevelopment activity, projected construction costs, dispositions, future incentive compensation, pending, potential or proposed acquisitions and other forward-looking financial data, as well as the discussion below under the captions “—Factors That May Influence Future Results of Operations,” “—Liquidity and Capital Resource of the Company,” and “—Liquidity and Capital Resources of the Operating Partnership.” Forward-looking statements can be identified by the use of words such as “believes,” “expects,” “projects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” and the negative of these words and phrases and similar expressions that do not relate to historical matters. Forward-looking statements are based on our current expectations, beliefs and assumptions, and are not guarantees of future performance. Forward-looking statements are inherently subject to uncertainties, risks, changes in circumstances, trends and factors that are difficult to predict, many of which are outside of our control. Accordingly, actual performance, results and events may vary materially from those indicated in the forward-looking statements, and you should not rely on the forward-looking statements as predictions of future performance, results or events. Numerous factors could cause actual future performance, results and events to differ materially from those indicated in forward-looking statements. For a discussion of those risk factors, see the discussion below as well as “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2013 and their respective other filings with the SEC. All forward-looking statements are based on information that was available and speak only as of the date on which they are made. We assume no obligation to update any forward-looking statement that becomes untrue because of subsequent events, new information or otherwise, except to the extent we are required to do so in connection with our ongoing requirements under Federal securities laws.

Overview and Background

We are a self-administered REIT active in premier office submarkets along the West Coast. We own, develop, acquire and manage real estate assets, consisting primarily of Class A properties in the coastal regions of Los Angeles, Orange County, San Diego, the San Francisco Bay Area and greater Seattle, 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 97.9% , 97.8% and 97.6% general partnership interest in the Operating Partnership as of March 31, 2014 , December 31, 2013 and March 31, 2013 , respectively. All our properties are held in fee except for the 11 offic e buildings that are held subject to long-term ground leases for the land.

Factors That May Influence Future Results of Operations

Acquisitions . During the three months ended March 31, 2014, we acquired one office building in greater Seattle for a total purchase price of $106.1 million . During 2013 , we acquired two office buildings in greater Seattle and two office buildings in the Del Mar submarket of San Diego County for a total purchase price of approximately $296.4 million . We generally finance our acquisitions through proceeds from the issuance of debt and equity securities, borrowings under our revolving credit facility, proceeds from our capital recycling program and the assumption of existing debt.

As a key component of our growth strategy, we continue to evaluate value-add acquisition opportunities (including undeveloped land, development and redevelopment opportunities and office properties). 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, which may include potential acquisitions under contract. We remain a disciplined buyer of office properties and undeveloped land and continue to focus on value-add opportunities in West Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, entertainment and professional services. We cannot provide assurance that we will complete additional future acquisitions. In the future, we may enter into agreements to acquire additional properties or undeveloped land, either as wholly owned properties or through joint ventures, and those agreements typically will be subject to the satisfaction of closing conditions. We cannot provide assurance that we will enter into any agreements to acquire properties or undeveloped land or that the potential acquisitions contemplated by any agreements

28

we may enter into in the future will be completed. Costs associated with acquisitions accounted for as business combinations 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  months ended March 31, 2014 , we expensed approximately $0.2 million of third-party acquisition costs, and we anticipate that we may incur additional third-party acquisition costs during the remainder of 2014. We expect that during 2014 we will continue to pursue value-add property acquisitions that either add immediate Net Operating Income to our portfolio or play a strategic role in our future growth.

Capital Recycling Program . We continuously evaluate opportunities for the potential disposition of properties and undeveloped land in our portfolio with the intent of recycling the proceeds generated from the disposition of non-strategic properties or lower return assets into capital used to fund new operating and development acquisitions, to finance development and redevelopment expenditures, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes.

In connection with our capital recycling strategy, during 2013, we completed the sale of three  office buildings to unaffiliated third parties in three separate transactions, with gross sales proceeds totaling approximately $56.9 million . During 2014 we completed the sale of twelve properties located in San Diego, California, with gross sales proceeds totaling approximately $294.7 million . Additionally, in April 2014, we completed the sale of an undeveloped land parcel located in San Diego, California, with gross sales proceeds of $33.1 million . The timing of any potential future disposition transactions will depend on market conditions and other factors, including but not limited to our capital needs and our ability to defer some or all of the taxable gains on the sales. We cannot assure that we will dispose of any additional properties or that future acquisitions and/or dispositions, if any, will qualify as Section 1031 Exchanges.

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 leasing activity for our stabilized portfolio during the three  months ended March 31, 2014 .


29

Information on Leases Commenced and Executed

For Leases Commenced
 
1st & 2nd Generation (1)
 
2nd Generation (1)
 
Number of
Leases (2)
 
Rentable
Square Feet (2)
 
TI/LC per
Sq. Ft. (3)
 
Changes in
Rents (4)(5)
 
Changes in
Cash Rents (6)
 
Retention Rates (7)
 
Weighted Average Lease Term (in months)  
 
New
 
Renewal
 
New
 
Renewal
 
Three Months Ended
March 31, 2014
18

 
19

 
111,330

 
167,025

 
$
12.53

 
6.6
%
 
3.3
%
 
44.5
%
 
34


For Leases Executed (8)  

 
1st & 2nd Generation (1)
 
2nd Generation (1)
 
Number of Leases (2)
 
Rentable Square Feet (2)
 
TI/LC per Sq. Ft. (3)
 
Changes in
Rents (4)(5)
 
Changes in
Cash Rents (6)
 
Weighted Average Lease Term
(in months)
 
New
 
Renewal
 
New
 
Renewal
 
 
 
Three Months Ended
March 31, 2014
26

 
19

 
179,193

 
167,025

 
$
23.92

 
6.6
%
 
3.0
%
 
59

_______________________
(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 or signed at properties in the stabilized portfolio during the period, including first and second generation space, net of month-to-month leases. Excludes leasing on new construction.
(3)
Amounts exclude tenant-funded tenant improvements.
(4)
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.
(5)
Excludes commenced and executed leases of approximately 61,000 and 122,000 rentable square feet, respectively, for the three  months ended March 31, 2014 , for which the space was vacant longer than one year or being leased for the first time. Space vacant for more than one year is excluded from our change in rents calculations to provide a meaningful market comparison.
(6)
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.
(7)
Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration.
(8)
For the three months ended March 31, 2014 , 20 new leases totaling 152,415 rentable square feet were signed but not commenced as of March 31, 2014 .

As of  March 31, 2014 , we believe that the weighted average cash rental rates for our stabilized portfolio, including recently acquired operating properties are approximately 5% under 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, market rental rates have continued to increase in the majority 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.


30

Scheduled Lease Expirations . The following table sets forth certain information regarding our lease expirations for our stabilized portfolio for the remainder of 2014 and the next five years.

Lease Expirations (1)  

Year of Lease Expiration
 
Number of
Expiring
Leases
 
Total Square Feet
 
% of Total Leased Sq. Ft.
 
Annualized Base Rent (2)
 
% of Total Annualized Base Rent  (2)
 
Annualized Base Rent per Sq. Ft. (2)
Remainder of 2014
 
85

 
943,282

 
7.8
%
 
$
26,713

 
6.4
%
 
$
28.32

2015
 
117

 
1,553,654

 
12.9
%
 
45,443

 
11.0
%
 
29.25

2016
 
85

 
953,350

 
7.9
%
 
25,678

 
6.2
%
 
26.93

2017
 
101

 
1,800,739

 
14.9
%
 
59,379

 
14.3
%
 
32.97

2018
 
58

 
1,583,798

 
13.1
%
 
64,291

 
15.5
%
 
40.59

2019
 
55

 
1,275,029

 
10.6
%
 
48,158

 
11.6
%
 
37.77

Total
 
501

 
8,109,852

 
67.2
%
 
$
269,662

 
65.0
%
 
$
33.25

________________________ 
(1)
The information presented for all lease expiration activity reflects leasing activity through March 31, 2014 for our stabilized portfolio. 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, intercompany leases, vacant space and lease renewal options not executed as of March 31, 2014 .
(2)
Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Percentages represent percentage of total portfolio annualized contractual base rental revenue. For additional information on tenant improvement and leasing commission costs incurred by the Company for the current reporting period, please see further discussion under the caption “Information on Leases Commenced and Executed.”

In addition to the 1.0 million  rentable square feet, or 7.6% , of currently available space in our stabilized portfolio, leases representing approximately 7.8% and 12.9% of the occupied square footage of our stabilized portfolio are scheduled to expire during 2014 and 2015 , respectively. The leases scheduled to expire during the remainder of 2014 and in 2015 represent approximately 2.5 million rentable square feet or 17.4% of our total annualized base rental revenue. We believe that the weighted average cash rental rates are approximately 5% under the current average market rental rates for leases scheduled to expire during the remainder of 2014 and in 2015 , 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.

Redevelopment Projects

We believe that a portion of our potential long-term future growth will continue to come from redevelopment opportunities both through acquired properties and within our existing portfolio. Redevelopment opportunities are those projects in which we spend significant development and construction costs on existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. During the three months ended March 31, 2014 , we stabilized the following redevelopment project:

•
360 Third Street, South of Market Area ("SOMA"), submarket of San Francisco, California on which we commenced redevelopment in the fourth quarter of 2011. This project, encompassing approximately 427,700 rentable square feet, had a total investment of approximately $187.8 million at completion. As of March 31, 2014 , the project was 96% leased and 90.1% occupied.

In-Process and Future Development Pipeline

We believe that a portion of our long-term future growth will also come from the completion of our under construction and in-process projects as well as executing on our future development pipeline, subject to market conditions. Over the past year, we increased our focus on value-add and highly accretive development opportunities and expanded our future development pipeline through targeted acquisitions of development opportunities on the West Coast.

We have a proactive planning process by which we continually evaluate the size, timing, costs and scope of our development program and, as necessary, scale activity to reflect the economic conditions and the real estate fundamentals that exist in our strategic submarkets. We expect to proceed in our development program with discipline and will be pursuing opportunities with attractive economic returns, in locations with transportation and retail amenities and in markets with strong fundamentals and visible demand. We plan to develop in phases as appropriate and we strongly favor starting projects that are pre-leased.

31

As of March 31, 2014 , our in-process development pipeline consisted of the following six projects under construction.

•
690 E. Middlefield Road, Mountain View, California, which we acquired in May 2012. The development project, which is 100% pre-leased to Synopsys, Inc., has a total estimated investment of approximately $196.0 million and is expected to encompass approximately 341,000  rentable square feet upon completion. Construction is currently in process and is expected to be completed in the first quarter of 2015.

•
350 Mission Street, SOMA, San Francisco, California, which we acquired in October 2012. The development project, which is 100% pre-leased to salesforce.com, inc., has a total estimated investment of $276.9 million and is expected to encompass approximately 450,000  rentable square feet upon completion. In the fourth quarter of 2013, we obtained full entitlements to increase this project from a 27-story building to a 30-story building. The property is expected to be LEED platinum certified, the first ground up development property in the city expected to receive this designation. Construction is currently in process and is expected to be completed in the first quarter of 2015.

•
555-599 N. Mathilda Avenue, Sunnyvale, California, which we acquired in December 2012. The project, which is comprised of one operating property and a future development site, is 100% pre-leased. We are currently developing an approximately 587,000 square foot office complex for LinkedIn, Inc., the tenant in the current existing building. The development project has a total estimated investment of approximately $314.7 million . Construction is currently in process and is expected to be completed in the third quarter of 2014.

•
Columbia Square, Hollywood, California, which we acquired in September 2012. The project is a historical media campus located in the heart of Hollywood, two blocks from the corner of Sunset Boulevard and Vine Street. During 2013, we commenced development on approximately 675,000 rentable square feet of a mixed-use project, which encompasses office, multi-family and retail components that we plan on completing in multiple phases. The project has a total estimated investment of approximately $392.2 million . Our plan is to create a mixed-use campus that preserves the historical character while establishing a new center for entertainment and media companies. Construction is currently in process and is expected to be completed in three phases between the third quarter of 2014 and the second quarter of 2016.

In December 2013, we announced that we will be collaborating with the Kor Group, a Los Angeles-based development and management firm that specializes in high-end residential and hospitality projects, on the project programming, design and branding of the residential component of Columbia Square. This portion of the project will be a mix of high-end long-term rentals and extended stay apartment homes that will cater to traveling business, entertainment and creative professionals. It will be the first luxury extended stay property to be located in the heart of Hollywood. Completion of the construction of this component is expected for the spring of 2016.

•
333 Brannan Street, SOMA, San Francisco, California, which we acquired in July 2012. In January 2014, six weeks after our ground breaking in the fourth quarter of 2013, we signed a 182,000 square foot, twelve-year lease with Dropbox for the entirety of this project. Dropbox is expected to take occupancy of the LEED platinum ground up development property at the completion of construction in the third quarter of 2015. The project has a total estimated investment of approximately $97.9 million . Construction is currently in process and is expected to be completed in the third quarter of 2015.

•
Crossing/900, Redwood City, California, which we entered into an agreement in June 2013 with a local partner. The project has a total estimated investment of approximately $183.5 million and is expected to encompass approximately 300,000  rentable square feet upon completion. Construction on the building is currently in process and is expected to be completed in the third quarter of 2015.

In the future, we may also enter into agreements to acquire other development or redevelopment opportunities, either as wholly owned properties or through joint ventures and those agreements typically will be subject to the satisfaction of closing conditions. In addition, as of March 31, 2014 , we had additional undeveloped land holdings, excluding the undeveloped land held for sale, located primarily in various submarkets in San Diego County and Los Angeles with an aggregate cost basis of approximately $334.2 million at which we believe we could currently develop approximately 2.4 million rentable square feet.

This increase in our development and redevelopment activities will continue to cause an increase in the average development asset balances qualifying for interest and other carry cost capitalization in future periods. During the three  months ended March 31, 2014 , we capitalized interest on in process development projects, redevelopment projects in lease-up, and development pipeline projects with an aggregate cost basis balance of approximately $1.0 billion at March 31, 2014 , as it was determined these projects qualified for interest and other carry cost capitalization under GAAP. For the three  months ended March 31, 2014 and

32

2013 , we capitalized $10.8 million and $7.7 million , respectively, of interest to our qualifying redevelopment and development projects. For the three  months ended March 31, 2014 and 2013 , we capitalized $2.6 million and $1.5 million , respectively, of internal costs to our qualifying redevelopment and development projects.

Incentive Compensation . Our Executive Compensation Committee determines compensation, including cash bonuses and equity incentives, for our executive officers. For 2014, the annual cash bonus program was structured to allow the Executive Compensation Committee to evaluate a variety of key quantitative and qualitative metrics at the end of the year and make a determination based on the Company’s and management’s overall performance. Our Executive Compensation Committee also grants equity incentive awards from time to time that include performance-based or market-measure based vesting requirements and/or time-based vesting requirements. As a result, accrued incentive compensation and compensation expense for future awards may be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions and other factors. Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation.

As of March 31, 2014 , there was approximately $36.9 million of total unrecognized compensation cost related to outstanding nonvested shares of restricted common stock, RSUs and stock options issued under share-based compensation arrangements. Those costs are expected to be recognized over a weighted-average period of 2.6  years. The $36.9 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued. Share-based compensation expense for potential future awards could be affected by our operating and development performance, financial results, stock price, performance against applicable performance-based vesting goals, market conditions and other factors. In addition, our Executive Compensation Committee granted restricted stock units in January 2014, and, if our stockholders do not approve an increase to the share limit under our 2006 Plan, these awards may be cash settled and will be subject to liability accounting until a sufficient amount of shares are authorized for issuance under the 2006 Plan to cover the payment of these awards. Consequently, we cannot predict the amounts that will be recorded in future periods for such awards. See Note 9 to our consolidated financial statements for additional information regarding our share-based incentive compensation plan.


Stabilized Portfolio Information

As of March 31, 2014 , our stabilized portfolio was comprised of 107  office properties encompassing an aggregate of approximately 13.3 million rentable square feet. Our stabilized portfolio includes all of our properties with the exception of undeveloped land, development and redevelopment properties currently under construction or committed for construction, “lease-up” properties and properties held-for-sale. We define lease-up properties as properties recently developed or redeveloped that have not yet reached 95%  occupancy and are within one year following cessation of major construction activities. We define redevelopment properties as those properties for which we expect to spend significant development and construction costs on the existing or acquired buildings pursuant to a formal plan, the intended result of which is a higher economic return on the property. Our stabilized portfolio also excludes our future development pipeline, which is comprised of eight  potential development sites, representing 99.9  gross acres of undeveloped land.

At March 31, 2014 , our stabilized portfolio excluded six  development properties currently under construction. There were no operating properties in “lease-up” and one undeveloped land parcel held for sale as of March 31, 2014 .

The following table reconciles the changes in the rentable square feet in our stabilized portfolio of operating properties from March 31, 2013 to March 31, 2014 :

 
Number of
Buildings
 
Rentable
Square Feet
Total as of March 31, 2013
116

 
13,570,059

Acquisitions (1)
3

 
359,545

Completed redevelopment properties placed in-service
3

 
613,519

Dispositions
(15
)
 
(1,249,341
)
Remeasurement
—

 
11,363

Total as of March 31, 2014
107

 
13,305,145

________________________
(1)
Excludes redevelopment and development property acquisitions.


33

Occupancy Information

The following table sets forth certain information regarding our stabilized portfolio:

Stabilized Portfolio Occupancy

Region
Number of
Buildings
 
Rentable Square Feet
 
Occupancy at (1)  
 
3/31/2014
 
12/31/2013
 
9/30/2013
Los Angeles and Ventura Counties
27

 
3,502,779

 
93.7
%
 
93.7
%
 
93.2
%
Orange County
3

 
437,603

 
91.1
%
 
92.8
%
 
93.3
%
San Diego
48

 
4,367,403

 
88.1
%
 
90.8
%
 
89.6
%
San Francisco Bay Area
16

 
2,809,118

 
94.1
%
 
94.8
%
 
92.7
%
Greater Seattle
13

 
2,188,242

 
96.9
%
 
96.7
%
 
95.2
%
Total Stabilized Portfolio
107

 
13,305,145

 
92.4
%
 
93.4
%
 
92.2
%

 
Average Occupancy
 
Three Months Ended March 31,
 
2014
 
2013
Stabilized Portfolio (1)
93.1
%
 
91.0
%
Same Store Portfolio (2)
92.6
%
 
92.1
%
__________________________________
(1)
Occupancy percentages reported are based on our stabilized office portfolio as of the end of the period presented.
(2)
Occupancy percentages reported are based on office properties owned and stabilized as of January 1, 2013 and still owned and stabilized as of March 31, 2014 . See discussion under “Results of Operations” for additional information.


34

Significant Tenants

The following table sets forth information about our fifteen largest tenants based upon annualized rental revenues as of March 31, 2014 .

 
Tenant Name
 
Annualized Base Rental Revenue
($ in thousands)
 
Rentable
Square Feet
 
Percentage of
Total Annualized Base Rental Revenue
 
Percentage of
Total Rentable
Square Feet
 
 
DIRECTV, LLC
 
$
23,760

 
667,852

 
5.7
%
 
5.0
%
 
 
Bridgepoint Education, Inc.
 
15,066

 
322,342

 
3.6
%
 
2.4
%
 
 
Intuit, Inc.
 
13,489

 
465,812

 
3.3
%
 
3.5
%
 
 
Delta Dental of California
 
10,413

 
218,348

 
2.5
%
 
1.6
%
 
 
AMN Healthcare, Inc.
 
8,341

 
175,672

 
2.0
%
 
1.3
%
 
 
Scan Group (1)(2)
 
6,830

 
218,742

 
1.7
%
 
1.6
%
 
 
Group Health Cooperative
 
6,372

 
183,422

 
1.5
%
 
1.4
%
 
 
Neurocrine Biosciences, Inc.
 
6,366

 
140,591

 
1.5
%
 
1.1
%
 
 
Microsoft Corporation
 
6,256

 
215,997

 
1.5
%
 
1.6
%
 
 
Fish & Richardson P.C.
 
6,071

 
139,538

 
1.5
%
 
1.0
%
 
 
Institute for Systems Biology
 
6,207

 
140,605

 
1.5
%
 
1.1
%
 
 
Splunk, Inc.
 
5,413

 
95,008

 
1.3
%
 
0.7
%
 
 
Wells Fargo (1)
 
5,280

 
127,085

 
1.3
%
 
1.0
%
 
 
Scripps Health
 
5,199

 
112,067

 
1.3
%
 
0.8
%
 
 
BP Biofuels
 
5,158

 
136,908

 
1.2
%
 
1.0
%
 
 
Total Top Fifteen Tenants
 
$
130,221

 
3,359,989

 
31.4
%
 
25.1
%
 
 
 
 
 
 
 
 
 
 
 
 
________________________
(1)
The Company has entered into leases with various affiliates of the tenant .
(2)
In December 2013, Scan Group renewed and expanded their lease at Kilroy Airport Center in Long Beach, CA. As of March 31, 2014 revenue recognition had not commenced for the expansion premises. The annualized base rental revenue and rentable square feet presented in this table include the projected annualized base rental revenue of approximately $1.5 million and rentable square feet of approximately 50,000 for the expansion premises.

Current Regional Information

We have generally seen rental rates stabilize and start to improve in many of our submarkets. We have also seen vacancy rates in many of our submarkets starting to decrease.

Los Angeles and Ventura Counties. Our Los Angeles and Ventura Counties stabilized portfolio of 3.5 million rentable square feet was 93.7% occupied with approximately 220,000 available rentable square feet as of March 31, 2014 compared to 93.7% occupied with approximately 219,000 available rentable square feet as of December 31, 2013 .

As of March 31, 2014 , leases representing an aggregate of approximately 240,000 and 309,000 rentable square feet are scheduled to expire during the remainder of 2014 and in 2015 , respectively, in this region. The aggregate rentable square feet under the leases scheduled to expire in this region during the remainder of 2014 and in 2015 represents approximately 4.6% of our occupied rentable square feet and 4.2% of our annualized base rental revenues in our total stabilized portfolio as of March 31, 2014 .

San Diego County. Our San Diego County stabilized portfolio of 4.4 million rentable square feet was 88.1% occupied with approximately 520,000 available rentable square feet as of March 31, 2014 compared to 90.8% occupied with approximately 401,000 available rentable square feet as of December 31, 2013 .

As of March 31, 2014 , leases representing an aggregate of approximately 445,000 and 455,000 rentable square feet are scheduled to expire during the remainder of 2014 and in 2015 , respectively, in this region. The aggregate rentable square feet under leases scheduled to expire during the remainder of 2014 and in 2015 represents approximately 7.4% of our occupied rentable square feet and 5.6% of our annualized base rental revenues in our total stabilized portfolio as of March 31, 2014 .


35

San Francisco Bay Area. As of March 31, 2014 , our San Francisco Bay Area stabilized portfolio of 2.8 million rentable square feet was 94.1% occupied with approximately 166,000 available rentable square feet, compared to 94.8% occupied with approximately 124,000 available rentable square feet as of December 31, 2013 .

As of March 31, 2014 , leases representing an aggregate of approximately 131,000 and 353,000 rentable square feet are scheduled to expire during the remainder of 2014 and in 2015 , respectively, in this region. The aggregate rentable square feet under leases scheduled to expire during the remainder of 2014 and in 2015 represents approximately 4.0% of our occupied rentable square feet and 4.3% of our annualized base rental revenues in our total stabilized portfolio as of March 31, 2014 .

Greater Seattle. As of March 31, 2014 , our greater Seattle stabilized portfolio of 2.2 million rentable square feet was 96.9% occupied with approximately 68,000 available rentable square feet, compared to 96.7% occupied with approximately 68,000 available rentable square feet as of December 31, 2013 . The increase in occupancy was primarily attributable to the acquisition of one office building encompassing 140,605 rentable square feet that was 100.0% occupied as of March 31, 2014 .

As of March 31, 2014 , leases representing an aggregate of approximately 115,000 and 399,000 rentable square feet are scheduled to expire during the remainder of 2014 and in 2015 , respectively, in this region. The aggregate rentable square feet under leases scheduled to expire during the remainder of 2014 and in 2015 represents approximately 4.3% of our occupied rentable square feet and 2.8% of our annualized base rental revenues in our total stabilized portfolio as of March 31, 2014 .

Results of Operations

Net Operating Income

Management internally evaluates the operating performance and financial results of our stabilized portfolio based on Net Operating Income from continuing operations. 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).

Net Operating Income from continuing operations is considered by management to be an important and appropriate supplemental performance measure to net income (loss) because we believe it helps both investors and management to understand the core operations of our properties excluding corporate and financing-related costs and noncash depreciation and amortization. Net Operating Income is an unlevered operating performance metric of our properties and allows for a useful comparison of the operating performance of individual assets or groups of assets. This measure thereby provides an operating perspective not immediately apparent from GAAP income (loss) from operations or net income (loss). In addition, Net Operating Income is considered by many in the real estate industry to be a useful starting point for determining the value of a real estate asset or group of assets. Other real estate companies may use different methodologies for calculating Net Operating Income, and accordingly, our presentation of Net Operating Income may not be comparable to other real estate companies. Because of the exclusion of the items shown in the reconciliation below, Net Operating Income should only be used as a supplemental measure of our financial performance and not as an alternative to GAAP income (loss) from operations or net income (loss).

Management further evaluates Net Operating Income by evaluating the performance from the following property groups:

•
Same Store Properties – which includes the results of all of the office properties that were owned and included in our stabilized portfolio for two comparable reporting periods, i.e., owned and included in our stabilized portfolio as of January 1,  2013 and still owned and included in the stabilized portfolio as of March 31, 2014 ;

•
Acquisition Properties – which includes the results, from the dates of acquisition through the periods presented, for the four office buildings we acquired during 2013 and the one office building we acquired during the three months ended March 31, 2014 ;

•
Stabilized Development and Redevelopment Properties – which includes the results generated by two office redevelopment buildings and one office development building that were stabilized in 2013 and one redevelopment property that was stabilized in 2014 following its one year lease-up period; and

•
Other Properties – which includes the results of properties not included in our stabilized portfolio.



36

The following table sets forth certain information regarding the property groups within our stabilized portfolio as of March 31, 2014 :

Group
 
# of Buildings
 
Rentable
Square Feet
Same Store Properties
 
98

 
11,715,581

Acquisition Properties
 
5

 
679,943

Stabilized Development and Redevelopment Properties
 
4

 
909,621

Total Stabilized Portfolio
 
107
 
13,305,145


Comparison of the Three Months Ended March 31, 2014 to the Three Months Ended March 31, 2013

The following table summarizes our Net Operating Income from continuing operations, as defined, for our total portfolio for the three months ended March 31, 2014 and 2013 .

 
Three Months Ended March 31,
 
Dollar
Change
 
Percentage
Change
 
2014
 
2013
 
 
($ in thousands)
Reconciliation to Net Income:
 
 
 
 
 
 
 
Net Operating Income, as defined
$
88,756

 
$
77,553

 
$
11,203

 
14.4
 %
Unallocated (expense) income:
 
 
 
 
 
 
 
General and administrative expenses
(10,811
)
 
(9,669
)
 
(1,142
)
 
11.8

Acquisition-related expenses
(228
)
 
(655
)
 
427

 
(65.2
)
Depreciation and amortization
(49,202
)
 
(47,701
)
 
(1,501
)
 
3.1

Interest income and other net investment gains
177

 
392

 
(215
)
 
(54.8
)
Interest expense
(17,252
)
 
(19,734
)
 
2,482

 
(12.6
)
Income from continuing operations
11,440

 
186

 
11,254

 
6,050.5

Income from discontinued operations
90,492

 
2,202

 
88,290

 
4,009.5

Net income
$
101,932

 
$
2,388

 
$
99,544

 
4,168.5
 %


37

The following tables summarize the Net Operating Income, as defined, for our total portfolio for the three months ended March 31, 2014 and 2013 .

 
Three Months Ended March 31,
 
2014
 
2013
 
Same Store
 
Acquisition Properties
 
Stabilized
Develop-ment &
Redevel-opment
 
Other
 
Total
 
Same Store
 
Acquisition Properties
 
Stabilized
Develop-ment &
Redevel-opment
 
Other
 
Total
 
(in thousands)
 
(in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
$
97,087

 
$
5,969

 
$
8,994

 
$
6

 
$
112,056

 
$
94,531

 
$
2,716

 
$
3,869

 
$
491

 
$
101,607

Tenant reimbursements
9,832

 
1,229

 
511

 
—

 
11,572

 
8,404

 
509

 
177

 
40

 
9,130

Other property income
2,145

 
—

 
12

 
—

 
2,157

 
227

 
—

 
—

 
—

 
227

Total
109,064

 
7,198

 
9,517

 
6

 
125,785

 
103,162

 
3,225

 
4,046

 
531

 
110,964

Property and related expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property expenses
22,879

 
494

 
1,597

 
124

 
25,094

 
21,270

 
401

 
772

 
362

 
22,805

Real estate taxes
9,368

 
663

 
902

 
240

 
11,173

 
8,741

 
232

 
347

 
344

 
9,664

Provision for bad debts
—

 
—

 
—

 
—

 
—

 
95

 
—

 
—

 
—

 
95

Ground leases
727

 
—

 
35

 
—

 
762

 
727

 
—

 
120

 
—

 
847

Total
32,974

 
1,157

 
2,534

 
364

 
37,029

 
30,833

 
633

 
1,239

 
706

 
33,411

Net Operating Income (Loss),
as defined
$
76,090

 
$
6,041

 
$
6,983

 
$
(358
)
 
$
88,756

 
$
72,329

 
$
2,592

 
$
2,807

 
$
(175
)
 
$
77,553


 
Three Months Ended March 31, 2014 as compared to the Three Months Ended March 31, 2013
 
Same Store
 
Acquisition Properties
 
Stabilized Development & Redevelopment
 
Other
 
Total
 
Dollar Change
 
Percent Change
 
Dollar Change
 
Percent Change
 
Dollar Change
 
Percent Change
 
Dollar Change
 
Percent Change
 
Dollar Change
 
Percent Change
 
($ in thousands)
Operating revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Rental income
$
2,556

 
2.7
 %
 
$
3,253

 
119.8
%
 
$
5,125

 
132.5
 %
 
$
(485
)
 
(98.8
)%
 
$
10,449

 
10.3
 %
Tenant reimbursements
1,428

 
17.0

 
720

 
141.5

 
334

 
188.7

 
(40
)
 
(100.0
)
 
2,442

 
26.7

Other property income
1,918

 
844.9

 
—

 
—

 
12

 
—

 
—

 
—

 
1,930

 
850.2

Total
5,902

 
5.7

 
3,973

 
123.2

 
5,471

 
135.2

 
(525
)
 
(98.9
)
 
14,821

 
13.4

Property and related expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property expenses
1,609

 
7.6

 
93

 
23.2

 
825

 
106.9
 %
 
(238
)
 
(65.7
)
 
2,289

 
10.0

Real estate taxes
627

 
7.2

 
431

 
185.8

 
555

 
159.9

 
(104
)
 
(30.2
)
 
1,509

 
15.6

Provision for bad debts
(95
)
 
(100.0
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(95
)
 
(100.0
)
Ground leases
—

 
—

 
—

 
—

 
(85
)
 
(70.8
)
 
—

 
—

 
(85
)
 
(10.0
)
Total
2,141

 
6.9

 
524

 
82.8

 
1,295

 
104.5

 
(342
)
 
(48.4
)
 
3,618

 
10.8

Net Operating Income,
as defined
$
3,761

 
5.2
 %
 
$
3,449

 
133.1
%
 
$
4,176

 
148.8
 %
 
$
(183
)
 
104.6
 %
 
$
11,203

 
14.4
 %

Net Operating Income increased $11.2 million , or 14.4% , for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily resulting from:

•
An increase of $3.4 million attributable to the Acquisition Properties;

•
An increase of $3.8 million attributable to the Same Store Properties primarily resulting from:

•
An increase in rental income of $2.6 million primarily due to increased occupancy, new leases at higher rates and increased parking income at a number of properties;

•
An increase in tenant reimbursements of $1.4 million primarily due to higher reimbursable property expenses and real estate taxes;

38


•
An increase in other property income of $1.9 million primarily due to lease termination revenue;

•
A partially offsetting increase in property and related expenses of $2.1 million primarily resulting from:

•
An increase of $1.6 million in property expenses primarily resulting from an increase in certain recurring operating costs of approximately $0.6 million related to utilities, property management expenses, janitorial, insurance, other service-related costs and $1.0 million of non-recurring legal fees;

•
An increase of $0.6 million in real estate taxes primarily as a result of higher value assessments at several properties; and

•
An increase of $4.2 million attributable to the Stabilized Development and Redevelopment Properties.

Other Expenses and Income

General and Administrative Expenses

General and administrative expenses increased $1.1 million , or 11.8% , for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . The increase was primarily attributable to an increase in payroll and administrative costs and other professional service costs associated with the growth of the Company.

Depreciation and Amortization

Depreciation and amortization increased by $1.5 million , or 3.1% , for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 , primarily related to the Acquisition Properties.

Interest Expense

The following table sets forth our gross interest expense, including debt discounts/premiums and loan cost amortization, net of capitalized interest, including capitalized debt discounts/premiums and loan cost amortization for the three months ended March 31, 2014 and 2013 :

 
Three Months Ended March 31,
 
 
 
 
 
2014
 
2013
 
Dollar
Change
 
Percentage
Change  
 
(in thousands)
 
 
 
 
Gross interest expense
$
28,034

 
$
27,466

 
$
568

 
2.1
 %
Capitalized interest and loan fees
(10,782
)
 
(7,732
)
 
(3,050
)
 
39.4
 %
Interest expense
$
17,252

 
$
19,734

 
$
(2,482
)
 
(12.6
)%

Capitalized interest and loan fees increased $3.1 million , or 39.4% , for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . The increase was primarily attributable to an increase in our development and redevelopment activity, which resulted in higher average asset balances qualifying for interest capitalization.


39

Liquidity and Capital Resources of the Company

In this “Liquidity and Capital Resources of the Company” section, the term the “Company” refers only to Kilroy Realty Corporation on an unconsolidated basis and excludes the Operating Partnership and all other subsidiaries.

The Company’s business is operated primarily through the Operating Partnership. Distributions from the Operating Partnership are the Company’s source of capital. The Company believes that the Operating Partnership’s sources of working capital, specifically its cash flow from operations and borrowings available under its revolving credit facility, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make its dividend payments to its preferred and common stockholders for the next twelve months. Cash flows from operating activities generated by the Operating Partnership for the three  months ended March 31, 2014 were sufficient to cover the Company’s payment of cash dividends to its stockholders. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distributions to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to make distributions to the Company, which would in turn, adversely affect the Company’s ability to pay cash dividends to its stockholders.

The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depositary shares, warrants and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. When the Company receives proceeds from the sales of its preferred or common stock, it is required by the Operating Partnership’s partnership agreement to contribute the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.

As the sole general partner with control of the Operating Partnership, the Company consolidates the Operating Partnership for financial reporting purposes, and the Company does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities and the revenues and expenses of the Company and the Operating Partnership are substantially the same on their respective financial statements. The section entitled “Liquidity and Capital Resources of the Operating Partnership” should be read in conjunction with this section to understand the liquidity and capital resources of the Company on a consolidated basis and how the Company is operated as a whole.

Distribution Requirements

The Company is required to distribute 90% of its taxable income (subject to certain adjustments and excluding net capital gain) on an annual basis to maintain qualification as a REIT for federal income tax purposes and is required to pay income tax at regular corporate rates to the extent it distributes less than 100% of its taxable income (including capital gains). As a result of these distribution requirements, the Operating Partnership cannot rely on retained earnings to fund its on-going operations to the same extent as other companies whose parent companies are not REITs. In addition, the Company may be required to use borrowings under the Operating Partnership’s revolving credit facility, if necessary, to meet REIT distribution requirements and maintain its REIT status. The Company may also need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, as well as potential developments of new or existing properties or acquisitions.

The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders and common unitholders from cash flow from operating activities. All such distributions are at the discretion of the board of directors. The Company has historically distributed amounts in excess of its taxable income resulting in a return of capital to its stockholders and the Company currently believes it has the ability to maintain distributions at the 2014 levels to meet the REIT distribution requirements for 2014 . In addition, to the extent that the Company cannot successfully complete Section 1031 Exchanges to defer some or all of the taxable gains related to completed or future property dispositions, the Company may choose to distribute a special dividend to avoid having to pay income taxes on such gains. The Company considers market factors and its performance in addition to REIT requirements in determining our distribution levels. Amounts accumulated for distribution to stockholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which are consistent with the Company’s intention to maintain its qualification as a REIT. Such investments may include, for example, obligations of

40

the Government National Mortgage Association, other governmental agency securities, certificates of deposit and interest-bearing bank deposits.

On February 13, 2014 , the Board of Directors declared a regular quarterly cash dividend of $0.35  per share of common stock payable on April 16, 2014 to stockholders of record on March 31, 2014 and caused a $0.35  per Operating Partnership unit cash distribution to be paid in respect of the Operating Partnership’s common limited partnership interests, including those owned by the Company. The total cash quarterly dividends and distributions paid on April 16, 2014 was $29.4 million .

On February 13, 2014 , the Board of Directors declared a dividend of $0.42969 per share on the Series G Preferred Stock and $0.39844 per share on the Series H Preferred Stock for the period commencing on and including February 18, 2014 and ending on and including May 14, 2014. The dividend will be payable on May 15, 2014 to Series G Preferred and Series H Preferred stockholders of record on April 30, 2014 . The quarterly dividends payable on May 15, 2014 to Series G and Series H Preferred stockholders is expected to total $3.3 million .

Debt Covenants

The covenants contained within the revolving credit facility and the term loan facility prohibit the Company from paying dividends in excess of 95% of FFO.

Capitalization

As of March 31, 2014 , our total debt as a percentage of total market capitalization was 29.5% and our total debt and liquidation value of our preferred equity as a percentage of total market capitalization was 32.3% , which was calculated based on the closing price per share of the Company’s common stock of $58.58 on March 31, 2014 as shown in the following table:
 
Shares/Units at 
March 31, 2014
 
Aggregate
Principal
Amount or
$ Value
Equivalent
 
% of Total
Market
Capitalization
 
($ in thousands)
Debt:
 
 
 
 
 
Unsecured Term Loan Facility
 
 
$
150,000

 
2.1

4.25% Unsecured Exchangeable Notes due 2014 (1)
 
 
172,500

 
2.4

Unsecured Senior Notes due 2014
 
 
83,000

 
1.0

Unsecured Senior Notes due 2015 (1)
 
 
325,000

 
4.5

Unsecured Senior Notes due 2018 (1)
 
 
325,000

 
4.5

Unsecured Senior Notes due 2020 (1)
 
 
250,000

 
3.4

Unsecured Senior Notes due 2023 (1)
 
 
300,000

 
4.1

Secured debt (1)
 
 
543,454

 
7.5

Total debt
 
 
2,148,954

 
29.5

Equity and Noncontrolling Interests:
 
 
 
 
 
6.875% Series G Cumulative Redeemable Preferred stock (2)

4,000,000

 
100,000

 
1.4

6.375% Series H Cumulative Redeemable Preferred stock (2)

4,000,000

 
100,000

 
1.4

Common limited partnership units outstanding (3)(4)
1,804,200

 
105,690

 
1.5

Common shares outstanding (4)
82,218,332

 
4,816,350

 
66.2

Total equity and noncontrolling interests
 
 
5,122,040

 
70.5

Total Market Capitalization
 
 
$
7,270,994

 
100.0
%
________________________ 
(1)
Represents gross aggregate principal amount due at maturity before the effect of net unamortized premiums as of March 31, 2014 . The aggregate net unamortized premiums totaled approximately $8.7 million as of March 31, 2014 .
(2)
Value based on $25.00 per share liquidation preference.
(3)
Represents common units not owned by the Company.     
(4)
Value based on closing price per share of our common stock of $58.58 as of March 31, 2014 .


41

Liquidity and Capital Resources of the Operating Partnership

In this “Liquidity and Capital Resources of the Operating Partnership” section, the terms “we,” “our,” and “us” refer to the Operating Partnership or the Operating Partnership and the Company together, as the context requires.

General

Our primary liquidity sources and uses are as follows:

Liquidity Sources

•
Net cash flow from operations;
•
Borrowings under the Operating Partnership’s revolving credit facility and term loan facility;
•
Proceeds from additional secured or unsecured debt financings;
•
Proceeds from public or private issuance of debt or equity securities; and
•
Proceeds from the disposition of selective assets through our capital recycling program.

Liquidity Uses

•
Property or undeveloped land acquisitions;
•
Property operating and corporate expenses;
•
Capital expenditures, tenant improvement and leasing costs;
•
Debt service and principal payments, including debt maturities;
•
Distributions to common and preferred security holders;
•
Development and redevelopment costs; and
•
Outstanding debt repurchases.

General Strategy

Our general strategy is to maintain a conservative balance sheet with a robust credit profile and to maintain a capital structure that allows for financial flexibility and diversification of capital resources. We manage our capital structure to reflect a long-term investment approach and utilize multiple sources of capital to meet our long-term capital requirements. We believe that our current projected liquidity requirements for the next twelve-month period, as set forth above under the caption “—Liquidity Uses,” will be satisfied using a combination of the liquidity sources listed above. We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhances our ability to obtain additional sources of liquidity if necessary, and, therefore, we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities.

42

Liquidity Sources

Credit Facility

The following table summarizes the balance and terms of our revolving credit facility as of March 31, 2014 and December 31, 2013 , respectively:

 
March 31, 2014
 
December 31, 2013
 
(in thousands)
Outstanding borrowings
$
—

 
$
45,000

Remaining borrowing capacity
500,000

 
455,000

Total borrowing capacity (1)
$
500,000

 
$
500,000

Interest rate (2)
—
%
 
1.62
%
Facility fee-annual rate (3)
0.300%
Maturity date (4)
April 2017
________________________ 
(1)
We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $200.0 million under an accordion feature under the terms of the revolving credit facility.
(2)
The revolving credit facility interest rate was calculated based on an annual rate of LIBOR plus 1.450% as of both March 31, 2014 and December 31, 2013 . No interest rate is shown as of March 31, 2014 because no borrowings were outstanding.
(3)
The facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, from 2010 to 2012 we incurred debt origination and legal costs of which approximately, as of March 31, 2014 , $4.5 million remains to be amortized through the maturity date of the revolving credit facility.
(4)
Under the terms of the revolving credit facility, we may exercise an option to extend the maturity date by one year.

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

Capital Recycling Program

In connection with our capital recycling program, we continuously evaluate opportunities for the potential disposition of properties and undeveloped land in our portfolio with the intent of recycling the proceeds generated from the disposition of non-strategic properties or lower return assets into capital used to fund new operating and development acquisitions, to finance development and redevelopment expenditures, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes.

In connection with this strategy, during 2014 we completed the sale of twelve properties located in San Diego, California, to an unaffiliated third party, with gross sales proceeds of $294.7 million . During 2013, we completed the sale of three  office building to unaffiliated third parties in three separate transactions, for gross sales proceeds of $56.9 million . Additionally, in April 2014, we completed the sale of an undeveloped land parcel located in San Diego, California, with gross sales proceeds of $33.1 million . The timing of any potential future disposition transactions will depend on market conditions and other factors, including, but not limited to, our capital needs and our ability to defer some or all of the taxable gains on the sales. We cannot assure that we will dispose of any additional properties or that future acquisitions and/or dispositions, if any, will qualify as Section 1031 Exchanges.

At-The-Market Stock Offering Program

Under our at-the-market stock offering program, which commenced in July 2011, we may offer and sell shares of our common stock having an aggregate gross sales price of up to $200.0 million from time to time in “at-the-market” offerings. Since commencement of the program, we have sold 2,183,261 shares of common stock having an aggregate gross sales price of $105.3 million . As of March 31, 2014 , shares of common stock having an aggregate gross sales price of up to $94.7 million remain available to be sold under this program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of the Company’s common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program. There were no sales of our common stock under our at-the-market offering program for the three months ended March 31, 2014 .


43

Shelf Registration Statement

As discussed above under “—Liquidity and Capital Resources of the Company,” the Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depository shares and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. When the Company receives proceeds from the sales of its preferred or common stock, it is required by the Operating Partnership’s partnership agreement to contribute the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.

Exchangeable Notes, Unsecured Debt, and Secured Debt

The aggregate principal amount of our 4.25% Exchangeable Notes, unsecured debt, and secured debt of the Operating Partnership outstanding as of March 31, 2014 was as follows:

 
Aggregate Principal
 Amount Outstanding
 
(in thousands)
Unsecured Term Loan Facility due 2016
150,000

4.25% Exchangeable Notes due 2014   (1)
172,500

Unsecured Senior Notes due 2014
83,000

Unsecured Senior Notes due 2015   (1)
325,000

Unsecured Senior Notes due 2018   (1)
325,000

Unsecured Senior Notes due 2020 (1)
250,000

Unsecured Senior Notes due 2023 (1)
300,000

Secured Debt   (1)
543,454

Total Exchangeable Notes, Unsecured Debt, and Secured Debt
$
2,148,954

________________________
(1)
Represents gross aggregate principal amount before the effect of the unamortized discounts and premiums as of March 31, 2014 . The aggregate net unamortized premiums totaled approximately $8.7 million as of March 31, 2014 .

Debt Composition

The composition of the Operating Partnership’s aggregate debt balances between secured and unsecured and fixed-rate and variable-rate debt as of March 31, 2014 and December 31, 2013 was as follows:

 
Percentage of Total Debt
 
Weighted Average Interest Rate
 
March 31,
2014
 
December 31,
2013
 
March 31,
2014
 
December 31,
2013
Secured vs. unsecured:
 
 
 
 
 
 
 
Unsecured (1)
74.7
%
 
75.1
%
 
4.7
%
 
4.6
%
Secured
25.3

 
24.9

 
5.2
%
 
5.2
%
Variable-rate vs. fixed-rate:
 
 
 
 
 
 
 
Variable-rate
7.0

 
8.9

 
1.9
%
 
1.9
%
Fixed-rate (1)
93.0

 
91.1

 
5.0
%
 
5.0
%
Stated rate (1)
 
 
 
 
4.8
%
 
4.8
%
GAAP effective rate (2)
 
 
 
 
4.8
%
 
4.8
%
GAAP effective rate including debt issuance costs
 
 
 
 
5.2
%
 
5.1
%
________________________
(1)
Excludes the impact of the amortization of any debt discounts/premiums.
(2)
Includes the impact of the amortization of any debt discounts/premiums, excluding debt issuance costs.


44

Liquidity Uses

Contractual Obligations

The following table provides information with respect to our contractual obligations as of March 31, 2014 . The table: (i) indicates the maturities and scheduled principal repayments of our secured debt, 4.25% Exchangeable Notes and unsecured debt; (ii) indicates the scheduled interest payments of our fixed-rate and variable-rate debt as of March 31, 2014 ; (iii) provides information about the minimum commitments due in connection with our ground lease obligations and other lease and contractual commitments; and (iv) provides estimated redevelopment and development commitments as of March 31, 2014 . Note that the table does not reflect our available debt maturity extension options and reflects gross aggregate principal amounts before the effect of unamortized discounts/premiums.

 
Payment Due by Period
 
 
 
Less than
1 Year
(Remainder
of 2014)
 
1–3 Years
(2015-2016)
 
4–5 Years
(2017-2018)
 
More than
5 Years
(After 2019)
 
Total
 
(in thousands)
Principal payments: secured debt (1)
$
7,432

 
$
169,535

 
$
198,476

 
$
168,011

 
$
543,454

Principal payments: 4.25% Exchangeable Notes   (2)
172,500

 
—

 
—

 
—

 
172,500

Principal payments: unsecured debt   (3)
83,000

 
475,000

 
325,000

 
550,000

 
1,433,000

Interest payments: fixed-rate debt   (4)
72,296

 
147,747

 
104,291

 
106,191

 
430,525

Interest payments: variable-rate debt (5)
2,170

 
3,574

 
—

 
—

 
5,744

Ground lease obligations (6)
2,322

 
6,190

 
6,190

 
156,912

 
171,614

Lease and contractual commitments (7)
83,931

 
1,678

 
—

 
—

 
85,609

Redevelopment and development commitments   (8)
290,000

 
358,000

 
—

 
—

 
648,000

Total
$
713,651

 
$
1,161,724

 
$
633,957

 
$
981,114

 
$
3,490,446

________________________
(1)
Represents gross aggregate principal amount before the effect of the unamortized premium of approximately $13.5 million as of March 31, 2014 .
(2)
Represents gross aggregate principal amount before the effect of the unamortized discount of approximately $3.0 million as of March 31, 2014 .
(3)
Represents gross aggregate principal amount before the effect of the unamortized discount of approximately $1.8 million as of March 31, 2014 .
(4)
As of March 31, 2014 , 93.0% of our debt was contractually fixed. The information in the table above reflects our projected interest rate obligations for these fixed-rate payments based on the contractual interest rates, interest payment dates and scheduled maturity dates.
(5)
As of March 31, 2014 , 7.0% of our debt bore interest at variable rates which was incurred under the term loan facility. The variable interest rate payments are based on LIBOR plus a spread of 1.750% as of March 31, 2014 . The information in the table above reflects our projected interest rate obligations for these variable-rate payments based on outstanding principal balances as of March 31, 2014 , the scheduled interest payment dates and the contractual maturity dates.
(6)
Reflects minimum lease payments through the contractual lease expiration date before the impact of extension options.
(7)
Amounts represent commitments under signed leases and contracts for operating properties, excluding tenant-funded tenant improvements. The timing of these expenditures may fluctuate.     
(8)
Amounts represent commitments under signed leases for pre-leased development projects and contractual commitments for lease-up projects and projects under construction as of March 31, 2014 . The timing of these expenditures may fluctuate based on the ultimate progress of construction.

Other Liquidity Uses

Debt Maturities

As of March 31, 2014 , our 4.25% Exchangeable Notes and Series B unsecured senior notes with principal balances of $172.5 million and $83.0 million , respectively, are scheduled to mature in November 2014 and August 2014 , respectively. We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhances our ability to obtain additional sources of liquidity if necessary, and, therefore, we believe we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities. Furthermore, as of the date of this report, we have full availability under our $500 million bank line to refinance any short term maturities, including the two maturing debt noted above.

Potential Future Acquisitions

In 2014, we acquired one building for approximately $106.1 million in cash. In 2013, we acquired four buildings and two undeveloped land sites for approximately $305.5 million in cash. These transactions were funded through various capital raising activities and, in selected instances, the assumption of existing indebtedness. We expect to continue to monitor our target markets

45

and to pursue the acquisition of value add office properties and development and redevelopment opportunities that add immediate Net Operating Income to our portfolio or play a strategic role in our future growth.

Development and Redevelopment Opportunities

As of March 31, 2014 , we had six development projects under construction. These projects have a total estimated investment of approximately $1.5 billion , of which we have incurred approximately $689.2 million and committed an additional $648.0 million as of March 31, 2014 . In addition, we currently have additional development projects that we may commence construction on in 2014. This total estimated investment is based on market conditions and our anticipation of project approvals. Actual costs could vary depending on changes in circumstances. Ultimate timing of these expenditures may fluctuate given the ultimate progress and leasing status of the projects.

Other Potential Future Liquidity Uses

We remain a disciplined buyer of office properties and continue to focus on value add opportunities in West Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, entertainment and professional services. We expect that any material acquisitions or development activities will be funded with borrowings under the revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program or through the assumption of existing debt.

In addition, the amounts we are required to spend on tenant improvements and leasing costs we ultimately incur will depend on actual leasing activity. Tenant improvements and leasing costs generally fluctuate in any given period depending on factors such as the type of property, the term of the lease, the type of the lease, the involvement of external leasing agents and overall market conditions. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain or improve our properties.

Factors That May Influence Future Sources of Capital and Liquidity of the Company and the Operating Partnership

We continue to evaluate sources of financing for our business activities, including borrowings under the revolving credit facility, issuance of public and private equity securities, unsecured debt and fixed-rate secured mortgage financing and proceeds from the disposition of selective assets through our capital recycling program. However, our ability to obtain new financing or refinance existing borrowings on favorable terms could be impacted by various factors, including the state of economic conditions, the state of the credit and equity markets, significant tenant defaults, a decline in the demand for office properties, a decrease in market rental rates or market values of real estate assets in our submarkets and the amount of future borrowings. These events could result in the following:

•
Decreases in our cash flows from operations, which could create further dependence on the revolving credit facility;

•
An increase in the proportion of variable-rate debt, which could increase our sensitivity to interest rate fluctuations in the future; and

•
A decrease in the value of our properties, which could have an adverse effect on the Operating Partnership’s ability to incur additional debt, refinance existing debt at competitive rates or comply with its existing debt obligations.

In addition to the factors noted above, the Operating Partnership’s credit ratings are subject to ongoing evaluation by credit rating agencies and may be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. In the event that the Operating Partnership’s credit ratings are downgraded, we may incur higher borrowing costs and may experience difficulty in obtaining additional financing or refinancing existing indebtedness.


46

Debt Covenants

The revolving credit facility, term loan facility, unsecured senior notes and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Key existing financial covenants and their covenant levels include:

Unsecured Credit Facility and Term Loan Facility
(as defined in the applicable Credit Agreements):
 
Covenant Level
 
Actual Performance
as of March 31, 2014
Total debt to total asset value
 
less than 60%
 
34%
Fixed charge coverage ratio
 
greater than 1.5x
 
2.4x
Unsecured debt ratio
 
greater than 1.67x
 
2.63x
Unencumbered asset pool debt service coverage
 
greater than 2.0x
 
3.3x
 
 
 
 
 
 
 
 
 
 
Unsecured Senior Notes due 2015, 2018, 2020 and 2023
(as defined in the applicable Indentures):
 
 
 
 
Total debt to total asset value
 
less than 60%
 
38%
Interest coverage
 
greater than 1.5x
 
4.4x
Secured debt to total asset value
 
less than 40%
 
10%
Unencumbered asset pool value to unsecured debt
 
greater than 150%
 
282%

The Operating Partnership was in compliance with all its debt covenants as of March 31, 2014 . Our current expectation is that the Operating Partnership will continue to meet the requirements of its debt covenants in both the short and long term. However, in the event of a renewed economic slowdown or continued volatility in the credit markets, there is no certainty that the Operating Partnership will be able to continue to satisfy all of the covenant requirements.


47

Consolidated Historical Cash Flow Summary

The following summary discussion of our consolidated historical cash flow is based on the consolidated statements of cash flows in Item 1. “Financial Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below. The cash flow amounts shown below include the activities of discontinued operations. Our historical cash flow activity for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 is as follows:

 
Three Months Ended March 31,
 
2014
 
2013
 
Dollar
Change
 
Percentage
Change
 
($ in thousands)
Net cash provided by operating activities
$
45,081

 
$
56,499

 
$
(11,418
)
 
(20.2
)%
Net cash provided by investing activities
97,278

 
43,447

 
53,831

 
123.9
 %
Net cash (used in) provided by financing activities
(82,202
)
 
19,030

 
(101,232
)
 
(532.0
)%

Operating Activities

Our cash flows from operating activities depend on numerous factors including the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, the level of operating expenses, the impact of property acquisitions and related financing activities, and other general and administrative costs. Our net cash from operating activities decreased by $11.4 million , or 20.2% , for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily as a result of timing differences of the payment of accounts payable, accrued expenses and other liabilities. See additional information under the caption “—Results of Operations”

Investing Activities

Our cash flows from investing activities is generally used to fund property, development and redevelopment acquisitions, recurring and nonrecurring capital expenditures for our operating properties, and development and redevelopment projects, net of proceeds received from property dispositions. Our net cash provided by investing activities increased by $53.8 million , or 123.9% , for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 primarily as a result of the disposition of twelve properties located in San Diego, California in the first quarter of 2014.

Financing Activities

Our net cash from financing activities is principally impacted by our capital raising activities, net of dividends and distributions paid to common and preferred security holders. Net cash from financing activities decreased by $101.2 million , or 532.0% , for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 . This change was primarily due to the issuance of debt in 2013.

Off-Balance Sheet Arrangements

As of March 31, 2014 and as of the date this report was filed, we did not have any off-balance sheet transactions, arrangements or obligations, including contingent obligations.


48

Non-GAAP Supplemental Financial Measure: Funds From Operations

We calculate FFO in accordance with the White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. Our calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets.

We believe that FFO is a useful supplemental measure of our operating performance. The exclusion from FFO of gains and losses from the sale of operating real estate assets allows investors and analysts to readily identify the operating results of the assets that form the core of our activity and assists in comparing those operating results between periods. Also, because FFO is generally recognized as the industry standard for reporting the operations of REITs, it facilitates comparisons of operating performance to other REITs. However, other REITs may use different methodologies to calculate FFO, and accordingly, our FFO may not be comparable to all other REITs.

Implicit in historical cost accounting for real estate assets in accordance with GAAP is the assumption that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies using historical cost accounting alone to be insufficient. Because FFO excludes depreciation and amortization of real estate assets, we believe that FFO along with the required GAAP presentations provides a more complete measurement of our performance relative to our competitors and a more appropriate basis on which to make decisions involving operating, financing and investing activities than the required GAAP presentations alone would provide.

However, FFO should not be viewed as an alternative measure of our operating performance because it does not reflect either depreciation and amortization costs or the level of capital expenditures and leasing costs necessary to maintain the operating performance of our properties, which are significant economic costs and could materially impact our results from operations.

The following table presents our FFO for the three months ended March 31, 2014 and 2013 :

 
Three Months Ended March 31,
 
2014
 
2013
 
(in thousands)
Net income (loss) available to common stockholders
$
96,532

 
$
(903
)
Adjustments:
 
 
 
Net income (loss) attributable to noncontrolling
common units of the Operating Partnership
2,087

 
(22
)
Depreciation and amortization of real estate assets
48,717

 
50,011

Net gain on dispositions of discontinued operations
(90,115
)
 
—

Funds From Operations (1)(2)
$
57,221

 
$
49,086

________________________
(1)
Reported amounts are attributable to common stockholders and common unitholders.
(2)
FFO includes amortization of deferred revenue related to tenant-funded tenant improvements of $2.4 million and $2.4 million for the three months ended March 31, 2014 and 2013 , respectively.



49

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information about our market risk is disclosed in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and is incorporated herein by reference. There have been no material changes for the three months ended March 31, 2014, to the information provided in Part II, Item 7A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

ITEM  4.      CONTROLS AND PROCEDURES

Kilroy Realty Corporation

The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of March 31, 2014 , the end of the period covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded, as of that time, that disclosure controls and procedures were effective at the reasonable assurance level.

There have been no significant changes that occurred during the quarter covered by this report in the Company’s internal control over financial reporting identified in connection with the evaluation referenced above that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Kilroy Realty, L.P.

The Operating Partnership maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Operating Partnership’s reports under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), the Operating Partnership carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of March 31, 2014 , the end of the period covered by this report. Based on the foregoing, the Operating Partnership’s Chief Executive Officer and Chief Financial Officer concluded, as of that time, that disclosure controls and procedures were effective at the reasonable assurance level.

There have been no significant changes that occurred during the quarter covered by this report in the Operating Partnership’s internal control over financial reporting identified in connection with the evaluation referenced above that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


50

PART II – OTHER INFORMATION

ITEM  1.    LEGAL PROCEEDINGS

We and our properties are subject to routine litigation incidental to our business. These matters are generally covered by insurance. As of March 31, 2014 , we are not a defendant in, and our properties are not subject to, any legal proceedings that we believe, if determined adversely to us, would have a material adverse effect upon our financial condition, results of operations or cash flows.

ITEM 1A.
RISK FACTORS

There have been no material changes to the risk factors included in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2013.

ITEM  2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Recent Sales of Unregistered Securities: None.

(b) Use of Proceeds from Registered Securities: None.

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers: None.

ITEM  3.
DEFAULTS UPON SENIOR SECURITIES

None.

ITEM  4.
MINE SAFETY DISCLOSURES

None.

ITEM  5.
OTHER INFORMATION

None.

51

ITEM 6.
EXHIBITS
 
Exhibit
Number
 
Description
 
 
 
3.(i)1
 
Kilroy Realty Corporation Articles of Restatement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended June 30, 2012)

 
 
 
3.(i)2
 
Certificate of Limited Partnership of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)

 
 
 
3.(i)3
 
Amendment to the Certificate of Limited Partnership of Kilroy Realty, L.P. (previously filed by Kilroy Realty, L.P., as an exhibit to the General Form for Registration of Securities on Form 10 as filed with the Securities and Exchange Commission on August 18, 2010)

 
 
 
3.(i)4
 
Articles Supplementary designating Kilroy Realty Corporation's 6.375% Series H Cumulative Redeemable Preferred Stock (previously filed by Kilroy Realty Corporation on Form 8-A as filed with the Securities and Exchange Commission on August 10, 2012)

 
 
 
3.(ii).1
 
Second Amended and Restated Bylaws of Kilroy Realty Corporation (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 12, 2008)

 
 
 
3.(ii).2
 
Amendment No. 1 to Second Amended and Restated Bylaws of Kilroy Realty Corporation (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 27, 2009)

 
 
 
3.(ii).3
 
Seventh Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P. dated as of August 15, 2012 (previously filed by Kilroy Realty Corporation on Form 8-K as filed with the Securities and Exchange Commission on August 17, 2012)

 
 
 
10.1*
 
Form of Performance-Vest Restricted Stock Unit Agreement
 
 
 
10.2*
 
Form of Restricted Stock Unit Agreement
 
 
 
10.3*
 
Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors
 
 
 
31.1*
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty Corporation
 
 
 
31.2*
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty Corporation
 
 
 
31.3*
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty, L.P.
 
 
 
31.4*
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty, L.P.
 
 
 
32.1*
 
Section 1350 Certification of Chief Executive Officer of Kilroy Realty Corporation
 
 
 
32.2*
 
Section 1350 Certification of Chief Financial Officer of Kilroy Realty Corporation
 
 
 
32.3*
 
Section 1350 Certification of Chief Executive Officer of Kilroy Realty, L.P.
 
 
 
32.4*
 
Section 1350 Certification of Chief Financial Officer of Kilroy Realty, L.P.
 
 
 
101.1
 
The following Kilroy Realty Corporation and Kilroy Realty, L.P. financial information for the quarter ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Capital (unaudited), (v) Consolidated Statements of Cash Flows (unaudited) and (vi) Notes to the Consolidated Financial Statements (unaudited). (1)
_______________
*
Filed herewith

(1)
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under these sections.

52

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 1, 2014 .
 KILROY REALTY CORPORATION
 
 
 
 
By:
/s/ John B. Kilroy, Jr.
 
 
John B. Kilroy, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
By:
/s/ Tyler H. Rose
 
 
Tyler H. Rose
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
By:
/s/ Heidi R. Roth
 
 
Heidi R. Roth
Senior Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
 

53


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 1, 2014 .
 KILROY REALTY, L.P.
 
 
BY:
KILROY REALTY CORPORATION
 
Its general partner
 
 
 
 
By:
/s/ John B. Kilroy, Jr.
 
 
John B. Kilroy, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
By:
/s/ Tyler H. Rose
 
 
Tyler H. Rose
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
By:
/s/ Heidi R. Roth
 
 
Heidi R. Roth
Senior Vice President, Chief Accounting Officer and Controller
(Principal Accounting Officer)
 


54
Exhibit 10.1


KILROY REALTY CORPORATION
2006 INCENTIVE AWARD PLAN
RESTRICTED STOCK UNIT AGREEMENT

GRANT NOTICE

Pursuant to this Restricted Stock Unit Agreement (together with Appendices A and B attached hereto, this “ Agreement ”), effective as of the Grant Date (as defined below), Kilroy Realty Corporation (the “ Company ”) hereby grants to [______________] (the “ Participant ”) the following award of Restricted Stock Units (“ RSUs ”), subject to the terms and conditions of the Company’s 2006 Incentive Award Plan (as amended, and as may be amended from time to time, the “ Plan ”), the terms and conditions of each of which are hereby incorporated into this Agreement by reference. Each RSU is hereby granted in tandem with a corresponding Dividend Equivalent right, as further described in Section 3 of Appendix A attached hereto. Except as otherwise expressly provided herein, all capitalized terms used in this Agreement shall have the meanings provided in the Plan. Subject to the terms and conditions of this Agreement, the principal features of this award of RSUs are as follows:
Number of RSUs : [_______]
Grant Date : [___________] (the “ Grant Date ”)
Vesting of RSUs : [____%] of the total number of RSUs (rounded down to the nearest whole RSU) will be “ Time-Vest RSUs ” and the remaining [____%] of the total number of RSUs (rounded up to the nearest whole RSU) will be “ Performance-Vest RSUs ,” which shall vest and become nonforfeitable, as follows:
(i)
Time-Vest RSUs . The Time-Vest RSUs shall vest in four substantially equal installments (rounded down to the nearest whole RSU until the last installment) on each applicable Vesting Date.
(ii)
Performance-Vest RSUs . The Performance-Vest RSUs are subject to performance- and time-based vesting requirements. The performance-based vesting requirements are set forth on Appendix B hereto, and to the extent such performance requirements are satisfied, the Eligible Performance-Vest RSUs (as defined in Appendix B ) shall vest in one lump sum (rounded down to the nearest whole RSU) on the applicable Vesting Date.
(iii)
Accelerated Vesting in Connection With Qualifying Terminations . Notwithstanding the foregoing or anything contained herein to the contrary, the RSUs shall be subject to accelerated vesting as provided below in this Grant Notice.
“ Vesting Date ” means (i) with respect to Time-Vest RSUs, each of January 5, 2015, January 5, 2016, January 5, 2017, and January 5, 2018, (ii) with respect to Performance-Vest RSUs, the first date on which the Committee determines that the performance vesting conditions


applicable to such RSUs have been achieved by the Company following December 31, 2016 (which determination shall be made by the Committee during the first quarter of 2017), provided that if a “change of control event” (within the meaning of Code Section 409A) with respect to the Company occurs before such date, then the Vesting Date of the Performance-Vest RSUs shall be December 31, 2016, and (iii) with respect to all RSUs, any date on which accelerated vesting occurs with respect to such RSUs as provided below in this Grant Notice.
Certain Terminations of Employment or Service : Except as described below in connection with certain terminations of the Participant’s employment or services, the Participant must continue to provide services as an Employee, Consultant or member of the Board through each applicable Vesting Date in order to vest in the applicable installment of Time-Vest RSUs and Eligible Performance-Vest RSUs.
The rules set forth below shall apply in the event of a Qualifying Termination. A “ Qualifying Termination ” means that (1) the Participant’s employment by the Company is terminated by the Company without Cause (as such term is defined in the Participant’s employment agreement with the Company (the “ Employment Agreement ”)) or by the Participant with Good Reason (as defined in the Employment Agreement), (3) while employed by the Company, the Participant dies or becomes “disabled” (within the meaning of Code Section 409A), [or (3) in the event of the Participant’s Retirement (as defined in the Employment Agreement).] [Include only if the Participant is a party to an Employment Agreement that provides for accelerated vesting of the Company's time-based equity awards granted to the Participant in the event of the Participant’s Retirement.]
Subject to the release requirement set forth below, in the event of the Participant’s Qualifying Termination:
•
The unvested Time-Vest RSUs that are outstanding immediately prior to such Qualifying Termination shall fully vest and become nonforfeitable immediately prior to such Qualifying Termination, and, as to the time-based vesting requirements applicable to the unvested Performance-Vest RSUs that are outstanding immediately prior to such Qualifying Termination, such time-based vesting requirements shall be considered fully satisfied immediately prior to such Qualifying Termination.
•
In the event of a Qualifying Termination before December 31, 2016 and prior to a “change of control event” (within the meaning of Code Section 409A) with respect to the Company, the performance period applicable to the Performance-Vest RSUs shall end in connection with such Qualifying Termination and the number of Eligible Performance-Vest RSUs shall be determined in accordance with Appendix B hereto, as modified by this paragraph. (Capitalized terms used in this paragraph and not otherwise defined are used as defined in Appendix B .) If the Qualifying Termination occurs on or before June 30, 2014, the applicable percentage based on the Company’s FFO Per Share performance shall be deemed to be 100%. If the Qualifying Termination occurs after June 30, 2014, and before December 31, 2014, the FFO Per Share measurement/target levels set forth in Appendix B shall be pro-rated for a short performance period ending with the

2

quarter prior to the quarter in which the Qualifying Termination occurs, and the applicable percentage based on the Company’s FFO Per Share performance shall be determined based on the Company’s actual FFO Per Share for that short performance period against such pro-rated measurement/target levels. In addition, the applicable percentage determined based on the Company’s TSR Percentile Ranking shall be based on any year of the three (3)-year period relevant for such determinations that are completed prior to the date of the Qualifying Termination, and the short year in which the Qualifying Termination occurs (with the applicable Ending Prices determined as of the date of the Qualifying Termination for purposes of determining TSRs and the TSR Percentile for such short year). (For purposes of clarity, if a Qualifying Termination occurred on June 30, 2014, for example, there would be no completed year of the three (3)-year period and the TSR Percentile Ranking would be determined solely with respect to the short period of approximately six (6) months ending with the date of the Qualifying Termination.)
•
The benefits provided by the preceding two paragraphs are subject to the condition that the Participant (or, in the event of the Participant’s death or disability, the Participant’s estate or personal representative, as the case may be) provide the Company with, and the Participant (or his estate or personal representative, as the case may be) does not revoke, a general release in substantially the form attached to the Participant’s Employment Agreement (or, if no such form is attached to the Employment Agreement, in a form prescribed by the Company). Such general release shall be provided to the Participant (or his estate or personal representative, as the case may be) within five (5) days of the Qualifying Termination date and the Participant (or his estate or personal representative, as the case may be) shall execute and deliver to the Company the general release within thirty (30) days after the Company provides the release to the Participant. In the event this paragraph applies and the general release (and the expiration of any revocation rights provided therein or pursuant to applicable law) could become effective in one of two taxable years depending on when the Participant (or his estate or personal representative, as the case may be) executes and delivers the release, any payment conditioned on the release shall not be earlier than the first business day of the later of such two tax years. (For purposes of this Agreement, “ business day ” means a calendar day other than a Saturday, Sunday or Federal holiday.)
Payment of RSUs : Vested RSUs shall be paid to the Participant in the form of shares of Stock or in cash in an amount equal to the value of the shares of Stock otherwise deliverable, in any case, as set forth in Section 6 of Appendix A attached hereto.
Employment Agreement : The Time-Vest RSUs shall be subject to any accelerated vesting protections afforded to the Participant in his Employment Agreement, in addition to the protections set forth above in this Grant Notice. The Performance-Vest RSUs, however, shall be subject to the termination of employment rules set forth in this Agreement (including Appendix A ) and not any severance, accelerated vesting, or similar provisions of any Employment Agreement. As to the Performance-Vest RSUs, any provision of an Employment Agreement

3

giving the Participant “better of” (or similar) treatment (e.g., the better of the severance protections afforded in the Employment Agreement or the applicable award agreement) shall not apply. To the extent the Participant’s Employment Agreement includes, as a component of any severance that may be payable to the Participant pursuant to the Employment Agreement, a measure based on “Annual Incentives” or similar measure that includes the value of equity awards granted during a prescribed period of time, in determining such Annual Incentives (or similar) for the Participant, the grant date fair value of the RSUs (as determined by the Company as of the Grant Date based on its customary accounting principles, and assuming that the RSUs were accounted for under FASB ASC Topic 718) shall be taken into account (to the extent that the value of equity awards granted during the year in which the Grant Date occurs are relevant such purposes), and in no event shall the actual payment of the RSUs be taken into account for purposes of any determination of such Annual Incentives (or similar). The provisions of this paragraph control in the event of any inconsistency with an Employment Agreement and notwithstanding anything in an Employment Agreement to the contrary. Each Employment Agreement is deemed amended to the extent (if any) necessary to give effect to this paragraph. The Participant specifically agrees with this paragraph and agrees that the grant of the RSUs satisfies the Company’s equity award grant obligations to the Participant through 2014.
The Participant’s signature below indicates the Participant’s agreement with and understanding that this award of RSUs is subject to all of the terms and conditions contained in the Plan and in this Agreement (including Appendix A ). In addition, by signing below, the Participant acknowledges that the Company, in its sole discretion, may satisfy any withholding obligations in accordance with Section 7 of Appendix A attached to this Agreement by (i) withholding shares of Stock otherwise issuable to the Participant upon payment of the RSUs in accordance with Appendix A attached to this Agreement (if any) or (ii) using any other method permitted by Section 7 of Appendix A attached to this Agreement or the Plan. If the Participant is married, his or her spouse has signed the Consent of Spouse attached to this Agreement as Exhibit A . THE PARTICIPANT FURTHER ACKNOWLEDGES THAT THE PARTICIPANT HAS READ AND UNDERSTANDS THE PLAN AND THIS AGREEMENT, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS GRANT OF RSUs AND DIVIDEND EQUIVALENT RIGHTS.
KILROY REALTY CORPORATION ,
a Maryland corporation

________________________________

PARTICIPANT :


_________________________________

KILROY REALTY CORPORATION ,
a Maryland corporation    

________________________________



4

APPENDIX A
TERMS AND CONDITIONS OF
RESTRICTED STOCK UNITS AND DIVIDEND EQUIVALENT RIGHTS

1.     Grant . The Company hereby grants to the Participant, as of the Grant Date, an award of [__________] RSUs and corresponding Dividend Equivalent rights, subject to the terms and conditions contained in this Agreement and the Plan.
2.     RSUs . Each RSU that vests on an applicable Vesting Date shall represent the right to receive, as determined by the Committee in accordance with Section 6 below, either (i) a payment of one share of Stock or (ii) a payment in cash equal to the Fair Market Value of one share of Stock on the applicable Distribution Date (as defined below). (“ Fair Market Value ” for purposes of the RSUs means the closing price, in regular trading, of a share of Stock on the relevant date on the principal national securities exchange on which the Stock is then listed. If Fair Market Value is to be determined as of a particular date with respect to the RSUs, and such date falls on a weekend or other date on which such exchange is not open for trading, Fair Market Value shall be determined as of the immediately preceding day on which such exchange was open for trading. In the event the Stock is not listed on a national securities exchange on the relevant date, Fair Market Value shall be such fair market value established for the Stock by the Committee, acting in good faith, as of the relevant date.) Unless and until an RSU vests, the Participant will have no right to payment in respect of any such RSU (other than with respect to any Dividend Equivalent rights). Prior to actual payment in respect of any vested RSU, such RSU will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
3.     Dividend Equivalent Rights .
(a)    Each RSU granted hereunder is hereby granted in tandem with a corresponding Dividend Equivalent right. Such Dividend Equivalent right shall entitle the Participant to have a hypothetical bookkeeping account (established and maintained for purposes of tracking the RSUs and any additional RSUs credited to such account in respect of Dividend Equivalent rights in accordance with this Section 3 (the “ Account ”)) that is credited upon the Company’s payment of dividends to stockholders of outstanding shares of Stock if the Dividend Equivalent right is or was outstanding on the applicable Stock record date. Subject to Section 3(c ) below, when such dividends are so declared, the following shall occur:
(i)    on the date that the Company pays a cash dividend in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account with a number of full and fractional RSUs equal to the quotient of (A) the total number of RSUs credited to the Account but not yet distributed (including any RSUs granted hereunder and any additional RSUs credited with respect to Dividend Equivalent rights), multiplied by the per share dollar amount of such dividend, divided by (B) the Fair Market Value of a share of Stock on the date such dividend is paid,
(ii)    on the date that the Company pays a Stock dividend in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account with a number

A-1

of full and fractional RSUs equal to the product of (A) the total number of RSUs credited to the Account but not yet distributed (including any RSUs granted hereunder and any additional RSUs credited with respect to Dividend Equivalent rights), multiplied by (B) the number of shares of Stock distributed with respect to such dividend per share of Stock, or
(iii)    on the date that the Company pays any other type of distribution in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account in an equitable manner based on the total number of RSUs held in the Account, as determined in the sole discretion of the Committee.
(b)    To the extent that any additional RSUs are credited to the Participant’s Account in respect of the Participant’s Dividend Equivalent rights, such additional RSUs shall be subject to the same vesting terms as the original RSUs to which they relate (e.g., additional RSUs credited in respect of Time-Vest RSUs will be subject to the same time-based vesting requirements as the underlying Time-Vest RSUs, while additional RSUs credited in respect of Performance-Vest RSUs will be subject to the same performance- and time-based vesting requirements as the underlying Performance-Vest RSUs) and shall also carry corresponding Dividend Equivalent rights.
(c)    Dividend Equivalent rights shall remain outstanding from the Grant Date (or later date of grant of such Dividend Equivalent right in connection with the Company’s payment of a dividend) through the earlier to occur of (i) the termination or forfeiture for any reason of the RSU to which such Dividend Equivalent right corresponds, or (ii) the delivery to the Participant of payment for the RSU (in accordance with Section 6 below) to which such Dividend Equivalent right corresponds. For the avoidance of doubt, if a Dividend Equivalent right terminates after the applicable Stock record date for a Company dividend (other than due to the termination or forfeiture of the RSU to which such Dividend Equivalent right corresponds) and prior to the corresponding payment date thereof, the Participant shall still be entitled to payment of the Dividend Equivalent right amount determined in accordance with this Section 3 , if and when the Company pays the underlying dividend; provided , however , that such Dividend Equivalent right amount shall be made in cash (rather than RSUs).
(d)    Dividend Equivalent rights and any amounts that may become distributable in respect thereof shall be treated separately from the RSUs and the rights arising in connection therewith for purposes of the designation of time and form of payments required by Code Section 409A.
4.     Vesting . The RSUs shall vest in accordance with the vesting schedule provided in the Grant Notice to which this Appendix is attached.
5.     Termination of RSUs . Upon the Participant’s termination as an Employee, Consultant or member of the Board, as applicable, all RSUs that have not vested as of such termination (taking into consideration any vesting that may occur in connection with such termination as provided in the Grant Notice) shall automatically be forfeited and canceled without payment of consideration therefor.

A-2

6.     Distribution .
(a)     Distribution Date . [Subject to Sections 6(d) and Section 10 below, payment with respect to RSUs issued under this Agreement (including any RSUs issued in respect of Dividend Equivalent rights) shall, to the extent vested, be paid to the Participant on or within sixty (60) days following the earliest to occur of (i) the date of the Participant’s “separation from service” within the meaning of Code Section 409A (a “ Separation from Service ”); (ii) the date of the occurrence of a “change of control event” (within the meaning of Code Section 409A) with respect to the Company; [and] (iii) the date of the Participant’s death or “disability” (within the meaning of Code Section 409A) [ Add if Company elects a fixed date distribution :, and (iv) [______________]] (any such date, a “ Distribution Date ”).]
(b)     Distribution Payments . All distributions upon payment of the RSUs shall be made by the Company in the form of whole shares of Stock, and to the extent that any fractional RSUs become payable on a Distribution Date, such fractional RSUs shall be paid in cash (unless otherwise determined under Section 15.10 of the Plan); provided , however , that if, as of the applicable Distribution Date, insufficient shares of Stock remain available under the Share Limit to cover payment of any or all of the RSUs for which payment is required (including with respect to Dividend Equivalent rights), as determined by the Committee, such RSUs shall be paid in cash in an amount equal to the Fair Market Value as of the Distribution Date of the shares of Stock otherwise distributable on such Distribution Date. To the extent that any outstanding RSUs remain unvested as of an applicable Distribution Date (after taking into consideration any vesting which may occur in connection with the occurrence of such Distribution Date), then such RSUs shall, to the extent not forfeited in connection with such distribution, be paid as Restricted Stock, and the vesting schedule that applied to such RSUs immediately prior to such distribution shall continue to apply to such Restricted Stock; provided , however , that to the extent any such distributions are payable in cash in accordance with this Section 6(b) , such cash amounts (determined as of the Distribution Date) shall instead be paid to the Participant on or within sixty (60) days after the date(s) on which the shares of Restricted Stock to which such cash payments relate would have vested in accordance with this Section 6(b) (and such cash payments shall be forfeitable on the same terms that would otherwise apply to such Restricted Stock).
(c)     Unforeseeable Emergency . If the Participant experiences an “unforeseeable emergency” within the meaning of Code Section 409A (an “ Unforeseeable Emergency ”), the Committee may, in its sole discretion, permit an early distribution of that portion of the Participant’s vested RSUs reasonably necessary to satisfy the emergency need giving rise to the Unforeseeable Emergency, including any taxes or penalties reasonably anticipated to result from such distribution and taking into consideration any funds that may become available as a result of the termination of the applicable deferral election in connection with such distribution.
(d)     Distributions Following Separations from Service . Notwithstanding anything herein to the contrary, no distribution hereunder shall be made to the Participant during the six (6)-month period following the Participant’s Separation from Service to the extent that the Company determines that paying such amounts at the time set forth in this Section 6 would

A-3

be a prohibited distribution under Code Section 409A(a)(2)(B)(i). If the payment of any such amounts is delayed as a result of the previous sentence, then on the first business day following the end of such six (6)-month period (or such earlier date upon which such amount can be paid under Code Section 409A without resulting in a prohibited distribution, including as a result of the Participant’s death), the Company shall pay the Participant the cumulative amounts that would have otherwise been payable to the Participant during such period.
(e)     Distribution Timing . The time of distribution of the RSUs under this Agreement may not be changed except as may be permitted by the Committee in accordance with the Plan and Code Section 409A and the applicable Treasury Regulations promulgated thereunder. For purposes of clarity, no provision of the Plan (including, without limitation, Section 11.2 thereof) shall alter the time of distribution of the RSUs under this Agreement, except as the Committee may provide consistent with the preceding sentence.
7.     Tax Withholding . The Company shall have the authority and the right to deduct, withhold or require the Participant or Beneficiary to remit to the Company an amount sufficient to satisfy federal, state, local and foreign taxes (including without limitation any income and employment tax obligations) required by law to be withheld with respect to any taxable event arising in connection with the RSUs and/or the Dividend Equivalent rights. To the extent that such obligations arise at the time that the RSUs are paid to the Participant in shares of Stock, the Company may, in its sole discretion and in satisfaction of the foregoing requirement, require the Participant to deliver shares of Stock otherwise issuable under this Agreement (or allow the return of shares of Stock) having a Fair Market Value equal to the sums required to be withheld, provided, that the number of shares of Stock which may be so withheld (or returned) with respect to a taxable event arising in connection with the RSUs and/or the Dividend Equivalent rights shall be limited to the number of shares which have a Fair Market Value on the date of withholding equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state and local income tax and payroll tax purposes that are applicable to such supplemental taxable income.
8.     Rights as Stockholder . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any shares of Stock deliverable hereunder unless and until certificates representing such shares of Stock will have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant or any person claiming under or through the Participant.
9.     Non-Transferability . Neither the RSUs or Dividend Equivalent rights nor any interest or right therein or part thereof shall be transferred, assigned, pledged or hypothecated by the Participant in any way in favor of any party other than the Company or a Subsidiary (whether by operation of law or otherwise) and shall not be subjected to any lien, obligation or liability of the Participant to any party other than the Company or a Subsidiary, other than by the laws of descent and distribution. Upon any attempt by the Participant to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale by the Participant under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby shall immediately become null and void. Notwithstanding the foregoing, the Company may assign any of its rights under this Agreement

A-4

to single or multiple assignees and this Agreement shall inure to the benefit of the successors and assigns of the Company.
10.     Distribution of Stock . In the event shares of Stock are paid to the Participant in accordance herewith, the Company shall not be required to record any shares of Stock in the name of the Participant in the books and records of the Company’s transfer agent, and the Company shall not be required to issue or deliver any certificate or certificates for any shares of Stock prior to the fulfillment of all of the following conditions: (a) the admission of such shares to listing on all stock exchanges on which the Company’s common stock is then listed, (b) the completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or other governmental regulatory body, which the Company shall, in its sole and absolute discretion, deem necessary and advisable, (c) the obtaining of any approval or other clearance from any state or federal governmental agency that the Company shall, in its absolute discretion, determine to be necessary or advisable, and (d) the lapse of any such reasonable period of time following the Distribution Date as the Company may from time to time establish for reasons of administrative convenience. In the event that the Company delays a distribution or payment in settlement of RSUs because it determines that the issuance of shares of Stock in settlement of such RSUs will violate federal securities laws or other applicable law, such distribution or payment shall be made at the earliest date at which the Company reasonably determines that the making of such distribution or payment will not cause such violation, as required by Treasury Regulation Section 1.409A-2(b)(7)(ii). No payment shall be delayed under this Section 10 if such delay will result in a violation of Code Section 409A.
11.     No Right to Continued Service . Nothing in the Plan or in this Agreement shall confer upon the Participant any right to continue as an Employee, Consultant, member of the Board, or other service provider of the Company or any Subsidiary, or shall interfere with or restrict in any way the rights of the Company or any Subsidiary, which are hereby expressly reserved, to discharge the Participant at any time for any reason whatsoever, with or without Cause, except to the extent expressly provided otherwise in a written agreement between the Participant and the Company or any Subsidiary.
12.     Severability . In the event that any provision in this Agreement is held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement, which shall remain in full force and effect.
13.     Tax Consultation . The Participant understands that he or she may suffer adverse tax consequences in connection with the RSUs and Dividend Equivalent rights granted pursuant to this Agreement. The Participant represents that the Participant has consulted with any tax consultants that he or she deems advisable in connection with the RSUs and the Dividend Equivalent rights and that the Participant is not relying on the Company for tax advice.
14.     Amendment . Subject to Sections 16 and 18 below, this Agreement may only be amended, modified or terminated by a writing executed by the Participant and by a duly authorized representative of the Company.

A-5

15.     Relationship to other Benefits . Neither the RSUs, the Dividend Equivalent rights, nor payment in respect of the foregoing shall be taken into account in determining any benefits pursuant to any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary.
16.     Code Section 409A . To the extent that the Company determines that any RSUs and/or Dividend Equivalent rights may not be compliant with or exempt from Code Section 409A, the Company may amend this Agreement in a manner intended to comply with the requirements of Code Section 409A or an exemption therefrom (including amendments with retroactive effect), or take any other actions as it deems necessary or appropriate to (a) comply with the requirements of Code Section 409A and/or (b) exempt the RSUs and/or the Dividend Equivalent rights from Code Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the RSUs. To the extent applicable, this Agreement shall be interpreted in accordance with the provisions of Code Section 409A.
17.     Clawback . The Participant agrees that all compensation paid or payable to the Participant pursuant to this Agreement shall be subject to (a) the provisions of any claw-back policy implemented by the Company to comply with applicable law or regulation (including stock exchange rules), including, without limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, and (b) any other claw-back required by applicable law.
18.     Conformity to Securities Laws . The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act, and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, as well as all applicable state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the RSUs are granted, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.
19.     Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company at the Company’s principal office, and any notice to be given to the Participant shall be addressed to the Participant at the Participant’s last address reflected on the Company’s records. Any notice shall be deemed duly given when sent via email or when sent by reputable overnight courier or by certified mail (return receipt requested) through the United States Postal Service.
20.     Entire Agreement . The Plan and this Agreement (including all exhibits and appendices hereto) constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof.
21.     Governing Law . The laws of the State of Maryland shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.
22.     Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.


A-6

EXHIBIT A
CONSENT OF SPOUSE
I, ____________________, spouse of _______________, have read and approve the foregoing Agreement. In consideration of issuing to my spouse the Restricted Stock Units and Dividend Equivalent rights set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement and any Restricted Stock Units, Dividend Equivalent rights, shares of Kilroy Realty Corporation or cash issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement.
Dated: _______________, _____            ________________________________
Signature of Spouse



APPENDIX B
PERFORMANCE VESTING REQUIREMENTS
The percentage of the Performance-Vest RSUs (if any) that will be eligible to vest on the Vesting Date as set forth in the Agreement (i.e., the number of “ Eligible Performance-Vest RSUs ”) will be determined as follows:
(1)
the number of Performance-Vest RSUs (as set forth in or determined under the Grant Notice) will be multiplied by the applicable percentage determined in accordance with the following table based on the Company’s FFO Per Share for its 2014 year:
If the Company’s FFO Per Share for 2014 is:
The applicable percentage is:
[___]
150%
[___]
100%
[___]
50%
[___]
0% (Zero)

For FFO Per Share amounts between the levels indicated, the applicable percentage will be determined on a pro-rata basis between points.

(2)
the number of RSUs determined as provided in clause (1) above will be multiplied by the applicable percentage determined in accordance with the following table based on the Company’s TSR Percentile Ranking (for the period 2014-2016):
If the Company’s TSR Percentile Ranking is:
The applicable percentage is:
The 80 th  percentile or greater.
133.3333%
The 40 th  percentile or greater, but equal to or less than the 60 th  percentile.
100% (no modification)
The 20 th  percentile or lower
66.6666%

For a TSR Percentile Ranking between the levels indicated, the applicable percentage will be determined on a pro-rata basis between points.

(3)
the number of RSUs determined as provided in clause (2) above will be rounded down to the nearest whole RSU.

B-1

For example, if the Company’s FFO Per Share for 2014 is $[___], and 100 Performance-Vest RSUs are subject to the award as determined in accordance with the Grant Notice, the number of RSUs determined pursuant to clause (1) above would be 125 (100 multiplied by the applicable percentage of 125% corresponding to that FFO Per Share amount). If the Company’s TSR Percentile Ranking was at the 70 th percentile, then the number of Eligible Performance-Vest RSUs would be 146 (125 multiplied by the applicable percentage of 116.66665% corresponding to that TSR Percentile Ranking, rounded to the nearest whole RSU). On the other hand, if the Company’s TSR Percentile Ranking was at the 20 th percentile or lower, then the number of Eligible Performance-Vest RSUs would be 83 (125 multiplied by the applicable percentage of 66.6666% corresponding to that TSR Percentile Ranking, rounded to the nearest whole RSU). For purposes of clarity, if the Company’s FFO Per Share for 2014 is less than $[___], then none of the Performance-Vest RSUs will be eligible for vesting on the Vesting Date (i.e., the number of Eligible Performance-Vest RSUs is zero).
Determination . The Committee will determine the number of Eligible Performance-Vest RSUs in accordance with the provisions of this Appendix B and, in the event of any ambiguity or discrepancy, the determination of the Committee shall be final and binding.
Defined Terms . For purposes of this Appendix B , the following definitions shall apply:
“ FFO Per Share ” shall mean the Company’s funds from operations, determined in accordance with the White Paper on funds from operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts, adjusted as provided below, divided by the weighted average common shares of the Company outstanding for 2014, calculated on a diluted basis, including participating share-based awards (i.e. nonvested stock and time-based restricted stock units), the dilutive impact of stock options and contingently issuable shares and assuming the exchange of all common limited partnership units outstanding. Funds from operations shall be equitably and proportionately adjusted to include or exclude, as applicable, the following:
•
exclude expenses associated with variable accounting for equity-based awards to the extent that such expenses exceed the expense that would have been produced had such awards originally been granted as equity awards accounted for under FASB ASC Topic 718;
•
exclude unbudgeted compensation expenses;
•
exclude non-cash charges;
•
exclude acquisition-related expenses;
•
include revenue that would have been included in earnings but is not recognized due to tenant delays;
•
exclude the impact of mergers and similar corporate transactions; and
•
exclude the impact of similar extraordinary items not contemplated by the Committee on the Grant Date.

B-2

“ TSR Percentile ” will be determined for each of 2014, 2015, and 2016, and, for each such year, means the percentile ranking of the Company’s TSR for such year among the TSRs for the Comparison Group members for such year.
“ TSR Percentile Ranking ” means the average of the TSR Percentile determined for 2014, the TSR Percentile determined for 2015, and the TSR Percentile determined for 2016.
“ Comparison Group ” means, with respect to a particular year, the Company and each other company included in the SNL US REIT Office Index on the Grant Date that remains included in such Index (or a successor index, in the event that the SNL US REIT Office Index ceases to exist) through the last day of that year.
“ TSR ” means total shareholder return and shall be determined with respect to the Company and any other Comparison Group member for a particular year by dividing: (a) the sum of (i) the difference obtained by subtracting the applicable Beginning Price for such year from the applicable Ending Price for such year plus (ii) all dividends and other distributions during the applicable year by (b) the applicable Beginning Price for such year. Any non-cash distributions shall be valued at fair market value. For purposes of determining TSR, the value of dividends and other distributions shall be determined by treating them as reinvested in additional shares of stock at the closing market price on the date of distribution.
“ Beginning Price ” means, with respect to the Company and any other Comparison Group member for a particular year, the average of the closing market prices of such company’s common stock on the principal exchange on which such stock is traded for the twenty (20) consecutive trading days ending with the last trading day immediately prior to such year. As to a stock which goes ex-dividend during such twenty (20)-trading day period, the closing market prices as to such stock for the portion of such period preceding the ex-dividend date shall be equitably and proportionately adjusted to exclude the amount of the related dividend.
“ Ending Price ” means, with respect to the Company and any other Comparison Group member for a particular year, the average of the closing market prices of such company’s common stock on the principal exchange on which such stock is traded for the twenty (20) consecutive trading days ending with the last trading day of such year. As to a stock which goes ex-dividend during such twenty (20)-trading day period, the closing market prices as to such stock for the portion of such period preceding the ex-dividend date shall be equitably and proportionately adjusted to exclude the amount of the related dividend.
With respect to the computation of TSR, Beginning Price, and Ending Price, there shall also be an equitable and proportionate adjustment to the extent (if any) necessary to preserve the intended incentives of the awards and mitigate the impact of any stock split, stock dividend or reverse stock split occurring during the applicable year. In determining the Company’s TSR Percentile for a particular year, in the event that the Company’s TSR for that year is equal to the TSR(s) of one or more other Comparison Group members for that same period, the Company’s TSR will be deemed to be greater than the TSR of such other Comparison Group member(s) for that year.

B-3

Change of Control . In the event of a “change of control event” (within the meaning of Code Section 409A) with respect to the Company before December 31, 2016, the performance period applicable to the Performance-Vest RSUs shall end in connection with such change of control event and the foregoing provisions of this Appendix B shall be applied as modified by this paragraph. (For purposes of clarity, the Performance-Vest RSUs shall continue to be subject to the applicable time-based vesting requirement, and the severance protections afforded the Participant in the Grant Notice shall continue to apply.) If the change of control event occurs on or before March 31, 2014, the applicable percentage based on the Company’s FFO Per Share performance shall be deemed to be 100%. If the change of control event occurs after March 31, 2014, and before December 31, 2014, the FFO Per Share measurement/target levels set forth above in this Appendix B shall be pro-rated for a short performance period ending with the quarter prior to the quarter in which the change of control event occurs, and the applicable percentage based on the Company’s FFO Per Share performance shall be the greater of (1) the applicable percentage determined based on the Company’s actual FFO Per Share for that short performance period against such pro-rated measurement/target levels, and (2) 100%. In addition, the applicable percentage determined based on the Company’s TSR Percentile Ranking shall be based on any year of the three (3)-year period relevant for such determinations that is completed prior to the date of the change of control event, and the short year in which the change of control event occurs (with the applicable Ending Prices determined as of the date of the change of control event for purposes of determining TSRs and the TSR Percentile for such short year, and the Ending Price of the Company’s common stock for purposes of such determination shall be the last closing market price for a share of the Company’s common stock on the principal exchange on which such stock is traded immediately prior to such event (for clarity, a twenty (20)-day average will not be used to determine the Ending Price of the Company’s common stock in such circumstances)).
* * * * *

B-4
Exhibit 10.2


KILROY REALTY CORPORATION
2006 INCENTIVE AWARD PLAN
RESTRICTED STOCK UNIT AGREEMENT
GRANT NOTICE
[In accordance with the deferral election made by the Participant named below on [_________] (the “ Initial Deferral Election ”), pursuant] 1 [Pursuant] to this Restricted Stock Unit Agreement effective as of the Grant Date, as such term is defined below (including Appendix A hereto, the “ Agreement ”), Kilroy Realty Corporation (the “ Company ”) hereby grants to [________] (the “ Participant ”) the following award of Restricted Stock Units (“ RSUs ”) pursuant and subject to the terms and conditions of this Agreement and the Company’s 2006 Incentive Award Plan, as amended (the “ Plan ”), the terms and conditions of each of which are hereby incorporated into this Agreement by reference. Each RSU is hereby granted in tandem with a corresponding Dividend Equivalent right, as further described in Section 3 below. Except as otherwise expressly provided herein, all capitalized terms used in this Agreement shall have the meanings provided in the Plan . Subject to the terms and conditions of this Agreement, the principal features of this award of RSUs are as follows:
Number of RSUs : [__________]
Grant Date : [________] (the “ Grant Date ”)
Vesting of RSUs : [Specify schedule and circumstances on which vesting of the RSUs would occur. Vesting could include time-based, performance-based or other conditions.] 2 , provided , however , that if the Participant’s service relationship with the Company is terminated by the Company without Cause or by the Participant with Good Reason (each, as defined in Appendix A hereto), [in either such case, on or after ________, 2 ] 1 or due to the Participant’s death or “disability” (within the meaning of Code Section 409A), all then-unvested RSUs will vest and become nonforfeitable immediately prior to such termination [(it being understood that no accelerated vesting shall apply in connection with a termination by the Company without Cause, or by the Participant with Good Reason, occurring prior to ________ 2 )] 1 (any date on which any RSUs vest in accordance herewith, a “ Vesting Date ”). In addition, the RSUs may be subject to accelerated vesting under certain circumstances to the extent set forth in Section 11.2 of the Plan.
Payment of RSUs : Vested RSUs shall be paid to the Participant in the form of shares of Stock or in cash in an amount equal to the value of the shares of Stock otherwise deliverable, in any case, as set forth in Section 6 of Appendix A attached hereto.
Termination of RSUs : In the event that the Participant ceases to be an Employee, Consultant or member of the Board, as applicable, for any reason prior to the applicable Vesting Date, all RSUs that have not vested as of the date of such termination (after taking into consideration any accelerated vesting that may apply, if any, as provided above ) shall thereupon automatically be forfeited by the Participant as of such date of termination without payment of any consideration therefor.


_________________
(1)
Include as to a Participant who is eligible and makes a deferral election.
(2)
In the event the Participant is eligible to make a deferral election and makes a deferral election in the 30-day period following the Grant Date, this date to be no earlier than one year following the end of that 30-day period.


The Participant’s signature below indicates the Participant’s agreement with and understanding that this award of RSUs is subject to all of the terms and conditions contained in the Plan and in this Agreement (including Appendix A ), and that, in the event that there are any inconsistencies between the terms of the Plan and the terms of this Agreement, the terms of the Plan shall control. In addition, by signing below, the Participant acknowledges that the Company, in its sole discretion, may satisfy any withholding obligations in accordance with Section 7 of Appendix A attached to this Agreement by (i) withholding shares of Stock otherwise issuable to the Participant upon payment of the RSUs in accordance with Appendix A attached to this Agreement (if any) or (ii) using any other method permitted by Section 7 of Appendix A attached to this Agreement or the Plan. If the Participant is married, his or her spouse has signed the Consent of Spouse attached to this Agreement as Exhibit A . THE PARTICIPANT FURTHER ACKNOWLEDGES THAT THE PARTICIPANT HAS READ AND UNDERSTANDS THE PLAN AND THIS AGREEMENT, INCLUDING APPENDIX A HERETO, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS GRANT OF RSUs AND DIVIDEND EQUIVALENT RIGHTS.
KILROY REALTY CORPORATION ,
a Maryland corporation


________________________________

PARTICIPANT :



_________________________________

KILROY REALTY CORPORATION ,
a Maryland corporation    
________________________________


2

APPENDIX A

TERMS AND CONDITIONS OF
RESTRICTED STOCK UNITS AND DIVIDEND EQUIVALENT RIGHTS

1.     Grant . The Company hereby grants to the Participant, as of the Grant Date, an award of [__________] RSUs and corresponding Dividend Equivalent rights, subject to the terms and conditions contained in this Agreement and the Plan .
2.     RSUs . Each RSU that vests on an applicable Vesting Date shall represent the right to receive, as determined by the Committee in accordance with Section 6 below, either (i) a payment of one share of Stock or (ii) a payment in cash equal to the Fair Market Value of one share of Stock on the applicable Distribution Date (as defined below). Unless and until an RSU vests, the Participant will have no right to payment in respect of any such RSU (other than with respect to any Dividend Equivalent rights). Prior to actual payment in respect of any vested RSU, such RSU will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
3.     Dividend Equivalent Rights .
(a)    Each RSU granted hereunder is hereby granted in tandem with a corresponding Dividend Equivalent right. Such Dividend Equivalent right shall entitle the Participant to have a hypothetical bookkeeping account (established and maintained for purposes of tracking the RSUs and any additional RSUs credited to such account in respect of Dividend Equivalent rights in accordance with this Section 3 ) (the “ Account ”) that is credited upon the Company’s payment of dividends to stockholders of outstanding shares of Stock if the Dividend Equivalent right is or was outstanding on the applicable Stock record date. Subject to Section 3(c) below, when such dividends are so declared, the following shall occur :
(i) on the date that the Company pays a cash dividend in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account with a number of full and fractional RSUs equal to the quotient of (A) the total number of RSUs credited to the Account but not yet distributed (including any RSUs granted hereunder and any additional RSUs credited with respect to Dividend Equivalent rights), multiplied by the per share dollar amount of such dividend, divided by (B) the Fair Market Value of a share of Stock on the date such dividend is paid,
(ii) on the date that the Company pays a Stock dividend in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account with a number of full and fractional RSUs equal to the product of (A) the total number of RSUs credited to the Account but not yet distributed (including any RSUs granted hereunder and any additional RSUs credited with respect to Dividend Equivalent rights), multiplied by (B) the number of shares of Stock distributed with respect to such dividend per share of Stock, or
(iii) on the date that the Company pays any other type of distribution in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account in an equitable manner based on the total number of RSUs held in the Account, as determined in the sole discretion of the Committee.
(b)    To the extent that any additional RSUs are credited to the Participant’s Account in respect of the Participant’s Dividend Equivalent rights, such additional RSUs shall be subject to the same vesting terms as the original RSUs to which they relate and shall also carry corresponding Dividend Equivalent rights.

A-1

(c)    Dividend Equivalent rights shall remain outstanding from the Grant Date (or later date of grant of such Dividend Equivalent right in connection with the Company’s payment of a dividend) through the earlier to occur of (i) the termination or forfeiture for any reason of the RSU to which such Dividend Equivalent right corresponds, or (ii) the delivery to the Participant of payment for the RSU (in accordance with Section 6 below) to which such Dividend Equivalent right corresponds. For the avoidance of doubt, if a Dividend Equivalent right terminates after the applicable Stock record date for a Company dividend and prior to the corresponding payment date thereof, the Participant shall still be entitled to payment of the Dividend Equivalent right amount determined in accordance with this Section 3 , if and when the Company pays the underlying dividend; provided , however , that such Dividend Equivalent right amount shall be made in cash (rather than RSUs).
(d)    Dividend Equivalent rights and any amounts that may become distributable in respect thereof shall be treated separately from the RSUs and the rights arising in connection therewith for purposes of the designation of time and form of payments required by Code Section 409A.
4.     Vesting . The RSUs shall vest in accordance with the vesting schedule provided in the Grant Notice to which this Appendix is attached. For purposes of vesting, Cause and Good Reason shall be defined as follows:
(a)    “ Cause ” shall mean “cause” as defined in an applicable employment agreement between the Company and the Participant or, if no such employment agreement exists or such employment agreement does not contain a definition of “cause,” then Cause shall mean: (i) the Participant’s conviction for commission of a felony or a crime involving moral turpitude; (ii) the Participant’s willful commission of any act of theft, embezzlement or misappropriation against the Company; or (iii) the Participant’s willful and continued failure to substantially perform the Participant’s duties as an Employee, Consultant or member of the Board of the Company (other than such failure resulting from the Participant’s incapacity due to physical or mental illness), which failure is not remedied within a reasonable time after written demand for substantial performance is delivered by the Company which specifically identifies the manner in which the Company believes that the Participant has not substantially performed the Participant’ s duties.
(b)    “ Good Reason ” shall mean “good reason” as defined in an applicable employment agreement between the Company and the Participant or, if no such employment agreement exists or such employment agreement does not contain a definition of “good reason,” then Good Reason shall mean: (i) the Company’s material breach of any of its obligations under any written, applicable employment agreement between the Company and the Participant, if any, or (ii) any material diminution in the Participant’s authority, duties or responsibilities as an Employee, Consultant or member of the Board of the Company without the Participant’s prior written consent. Notwithstanding the foregoing, the Participant will not be deemed to have resigned for Good Reason unless (A) the Participant provides the Company with written notice setting forth in reasonable detail the facts and circumstances claimed by the Participant to constitute Good Reason within ninety (90) days after the date of the occurrence of any event that the Participant knows to constitute Good Reason, (B) the Company fails to cure such acts or omissions within thirty (30) days following its receipt of such notice, and (C) the effective date of the Participant’s termination for Good Reason occurs no later than ninety (90) days after the expiration of the Company’ s cure period.
5.     Termination of RSUs . Upon the Participant’s termination as an Employee, Consultant or member of the Board, as applicable, all RSUs that have not vested as of such termination (taking into consideration any vesting that may occur in connection with such termination as provided in the Grant Notice) shall automatically be forfeited and canceled without payment of consideration therefor.

A-2

6.     Distribution .
(a)    Subject to Sections 6(d) and 10 below, payment with respect to RSUs issued under this Agreement (including any RSUs issued in respect of Dividend Equivalent rights) shall, to the extent vested, be paid to the Participant on or within fifteen (15) days following [the date on which such RSUs become vested pursuant to this Agreement] 3 [the earliest to occur of (i) the date of the Participant’s “separation from service” within the meaning of Code Section 409A (a “ Separation from Service ”); (ii) the date of the occurrence of a “change of control event” (within the meaning of Code Section 409A) with respect to the Company; [and] (iii) the date of the Participant’s death or “disability” (within the meaning of Code Section 409A) [ Add if a fixed date distribution is elected : ; and (iv) [____________]] 1 (any such date, a “ Distribution Date ”).
(b)    All distributions upon payment of the RSUs shall be made by the Company in the form of whole shares of Stock, and to the extent that any fractional RSUs become payable on a Distribution Date, such fractional RSUs shall be paid in cash (unless otherwise determined under Section 15.10 of the Plan), provided , however , that if, as of the applicable Distribution Date, insufficient shares of Stock remain available under the Share Limit to cover distribution of any or all of the RSUs for which payment is required (including with respect to Dividend Equivalent rights), as determined by the Committee, such RSUs shall be paid in cash in an amount equal to the Fair Market Value as of the Distribution Date of the shares of Stock otherwise distributable on such Distribution Date. To the extent that any outstanding RSUs remain unvested as of an applicable Distribution Date (after taking into consideration any vesting which may occur in connection with the occurrence of such Distribution Date), then such RSUs shall, to the extent not forfeited in connection with such distribution, be paid as Restricted Stock, and the vesting schedule that applied to such RSUs immediately prior to such distribution shall continue to apply to such Restricted Stock, provided , however , that to the extent any such distributions are payable in cash in accordance with this Section 6(b) , such cash amounts (determined as of the Distribution Date) shall instead be paid to the Participant on or within fifteen (15) days after the date(s) on which the shares of Restricted Stock to which such cash payments relate would have vested in accordance with this Section 6(b) (and such cash payments shall be forfeitable on the same terms that would otherwise apply to such Restricted Stock) .] 1  
(c)    [Reserved] 3 [If the Participant experiences an “unforeseeable emergency” within the meaning of Code Section 409A (an “ Unforeseeable Emergency ”), the Committee may, in its sole discretion, permit an early distribution of that portion of the Participant’s Account reasonably necessary to satisfy the emergency need giving rise to the Unforeseeable Emergency, including any taxes or penalties reasonably anticipated to result from such distribution and taking into consideration any funds that may become available as a result of the termination of the applicable deferral election in connection with such distribution.] 1
(d)    Notwithstanding anything herein to the contrary, no distribution hereunder shall be made to the Participant during the six (6)-month period following the Participant’s Separation from Service to the extent that the Company determines that paying such amounts at the time set forth in this Section 6 would be a prohibited distribution under Code Section 409A(a)(2)(B)(i). If the payment of any such amounts is delayed as a result of the previous sentence, then on the first business day following the end of such six (6)-month period (or such earlier date upon which such amount can be paid under Code Section 409A without resulting in a prohibited distribution, including as a result of the Participant’ s death), the Company shall pay the Participant the cumulative amounts that would have otherwise been payable to the Participant during such period.








______________
(3)
Include if payment of the RSUs is not deferred.

A-3

(e)    The time of distribution of the RSUs under this Agreement may not be changed except as may be permitted by the Committee in accordance with the Plan and Code Section 409A and the applicable Treasury Regulations promulgated thereunder.
7.     Tax Withholding . The Company shall have the authority and the right to deduct, withhold or require the Participant or beneficiary to remit to the Company an amount sufficient to satisfy federal, state, local and foreign taxes (including without limitation any income and employment tax obligations) required by law to be withheld with respect to any taxable event arising in connection with the RSUs and/or the Dividend Equivalent rights. To the extent that such obligations arise at the time that the RSUs are paid to the Participant in shares of Stock, the Company may, in its sole discretion and in satisfaction of the foregoing requirement, require the Participant to deliver shares of Stock otherwise issuable under this Agreement (or allow the return of shares of Stock) having a Fair Market Value equal to the sums required to be withheld, provided, that the number of shares of Stock which may be so withheld (or returned) with respect to a taxable event arising in connection with the RSUs and/or the Dividend Equivalent rights shall be limited to the number of shares which have a Fair Market Value on the date of withholding equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state and local income tax and payroll tax purposes that are applicable to such supplemental taxable income.
8.     Rights as Stockholder . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any shares of Stock deliverable hereunder unless and until certificates representing such shares of Stock will have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant or any person claiming under or through the Participant.
9.     Non-Transferability . Neither the RSUs or Dividend Equivalent rights nor any interest or right therein or part thereof shall be transferred, assigned, pledged or hypothecated by the Participant in any way in favor of any party other than the Company or a Subsidiary (whether by operation of law or otherwise) and shall not be subjected to any lien, obligation or liability of the Participant to any party other than the Company or a Subsidiary, other than by the laws of descent and distribution. Upon any attempt by the Participant to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale by the Participant under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby shall immediately become null and void. Notwithstanding the foregoing, the Company may assign any of its rights under this Agreement to single or multiple assignees and this Agreement shall inure to the benefit of the successors and assigns of the Company.
10.     Distribution of Stock . In the event shares of Stock are paid to the Participant in accordance herewith, the Company shall not be required to record any shares of Stock in the name of the Participant in the books and records of the Company’s transfer agent, and the Company shall not be required to issue or deliver any certificate or certificates for any shares of Stock prior to the fulfillment of all of the following conditions: (a) the admission of such shares to listing on all stock exchanges on which the Company’s common stock is then listed, (b) the completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or other governmental regulatory body, which the Company shall, in its sole and absolute discretion, deem necessary and advisable, (c) the obtaining of any approval or other clearance from any state or federal governmental agency that the Company shall, in its absolute discretion, determine to be necessary or advisable, and (d) the lapse of any such reasonable period of time following the Distribution Date as the Company may from time to time establish for reasons of administrative convenience. In the event that the Company delays a distribution or payment in settlement of RSUs because it determines that the issuance of shares of Stock in settlement of such RSUs will violate

A-4

federal securities laws or other applicable law, such distribution or payment shall be made at the earliest date at which the Company reasonably determines that the making of such distribution or payment will not cause such violation, as required by Treasury Regulation Section 1.409A-2(b)(7)(ii). No payment shall be delayed under this Section 10 if such delay will result in a violation of Code Section 409A.
11.     No Right to Continued Service . Nothing in the Plan or in this Agreement shall confer upon the Participant any right to continue as an Employee, Consultant, member of the Board, or other service provider of the Company or any Subsidiary, or shall interfere with or restrict in any way the rights of the Company or any Subsidiary, which are hereby expressly reserved, to discharge the Participant at any time for any reason whatsoever, with or without Cause, except to the extent expressly provided otherwise in a written agreement between the Participant and the Company or any Subsidiary.
12.     Severability . In the event that any provision in this Agreement is held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement, which shall remain in full force and effect.
13.     Tax Consultation . The Participant understands that he or she may suffer adverse tax consequences in connection with the RSUs and Dividend Equivalent rights granted pursuant to this Agreement. The Participant represents that the Participant has consulted with any tax consultants that he or she deems advisable in connection with the RSUs and the Dividend Equivalent rights and that the Participant is not relying on the Company for tax advice.
14.     Amendment . Subject to Sections 16 and 18 below, this Agreement may only be amended, modified or terminated by a writing executed by the Participant and by a duly authorized representative of the Company.
15.     Relationship to other Benefits . Neither the RSUs, the Dividend Equivalent rights, nor payment in respect of the foregoing shall be taken into account in determining any benefits pursuant to any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary.
16.     Code Section 409A . To the extent that the Company determines that any RSUs and/or Dividend Equivalent rights may not be compliant with or exempt from Code Section 409A, the Company may amend this Agreement in a manner intended to comply with the requirements of Code Section 409A or an exemption therefrom (including amendments with retroactive effect), or take any other actions as it deems necessary or appropriate to (a) comply with the requirements of Code Section 409A and/or (b) exempt the RSUs and/or the Dividend Equivalent rights from Code Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the RSUs. To the extent applicable, this Agreement shall be interpreted in accordance with the provisions of Code Section 409A.
17.     Clawback . The Participant agrees that all compensation paid or payable to the Participant pursuant to this Agreement shall be subject to (a) the provisions of any claw-back policy implemented by the Company to comply with applicable law or regulation (including stock exchange rules), including, without limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, and (b) any other claw-back required by applicable law.
18.     Conformity to Securities Laws . The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act, and any and all regulations and rules promulgated by the Securities and Exchange

A-5

Commission thereunder, as well as all applicable state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the RSUs are granted, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.
19.     Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company at the Company’s principal office, and any notice to be given to the Participant shall be addressed to the Participant at the Participant’s last address reflected on the Company’s records. Any notice shall be deemed duly given when sent via email or when sent by reputable overnight courier or by certified mail (return receipt requested) through the United States Postal Service.
20.     Entire Agreement . The Plan and this Agreement (including this Appendix A and all Exhibits hereto) constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof.
21.     Governing Law . The laws of the State of Maryland shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.
22.     Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.


A-6



EXHIBIT A
CONSENT OF SPOUSE
I, ________________________________, spouse of _______________________________, have read and approve the foregoing Agreement. In consideration of issuing to my spouse the Restricted Stock Units and Dividend Equivalent rights set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement and any Restricted Stock Units, Dividend Equivalent rights, shares of Kilroy Realty Corporation or cash issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement.
Dated: _______________, _____            ________________________________
Signature of Spouse








Exhibit 10.3

KILROY REALTY CORPORATION
2006 INCENTIVE AWARD PLAN
RESTRICTED STOCK UNIT AGREEMENT
GRANT NOTICE
[In accordance with the deferral election made by the Participant named below on [_________] (the “ Initial Deferral Election ”), pursuant] 1 [Pursuant] to this Restricted Stock Unit Agreement effective as of the Grant Date, as such term is defined below, (including Appendix A hereto, the “ Agreement ”), Kilroy Realty Corporation (the “ Company ”) hereby grants to [________] (the “ Participant ”) the following award of Restricted Stock Units (“ RSUs ”) pursuant and subject to the terms and conditions of this Agreement and the Company’s 2006 Incentive Award Plan, as amended (the “ Plan ”), the terms and conditions of each of which are hereby incorporated into this Agreement by reference. Each RSU is hereby granted in tandem with a corresponding Dividend Equivalent right, as further described in Section 3 below. Except as otherwise expressly provided herein, all capitalized terms used in this Agreement shall have the meanings provided in the Plan . Subject to the terms and conditions of this Agreement, the principal features of this award of RSUs are as follows:
Number of RSUs : [__________]
Grant Date : [________] (the “ Grant Date ”)
Vesting of RSUs : The RSUs will vest and become nonforfeitable as to 100% of the RSUs on the date of the Company’s 2015 Annual Meeting of Stockholders or, if earlier, upon the occurrence of a Change in Control, in either case, subject to the Participant’s continued service with the Company as an Employee, Consultant or member of the Board through such date, provided , however , that if the Participant’s service relationship with the Company terminates due to the Participant’s death or “disability” (within the meaning of Code Section 409A), all then-unvested RSUs will vest and become nonforfeitable immediately prior to such termination (any date on which any RSUs vest in accordance herewith, a “ Vesting Date ”).
Payment of RSUs : Vested RSUs shall be paid to the Participant in the form of shares of Stock or in cash in an amount equal to the value of the shares of Stock otherwise deliverable, in any case, as set forth in Section 6 of Appendix A attached hereto.
Termination of RSUs : In the event that the Participant ceases to be an Employee, Consultant or member of the Board, as applicable, for any reason prior to the applicable Vesting Date, all RSUs that have not vested as of the date of such termination (after taking into consideration any accelerated vesting that may apply, if any, as provided above ) shall thereupon automatically be forfeited by the Participant as of such date of termination without payment of any consideration therefor.
The Participant’s signature below indicates the Participant’s agreement with and understanding that this award of RSUs is subject to all of the terms and conditions contained in the Plan and in this Agreement (including Appendix A ), and that, in the event that there are any inconsistencies between the terms of the Plan and the terms of this Agreement, the terms of the Plan shall control. In addition, by signing below, the Participant acknowledges that the Company, in its sole discretion, may satisfy any withholding obligations in accordance with Section 7 of Appendix A attached to this Agreement by (i) withholding shares of Stock otherwise issuable to the Participant upon payment of the RSUs in

______________
(1)
Include as to a Participant who is eligible and makes a deferral election within 30 days after the Grant Date.



accordance with Appendix A attached to this Agreement (if any) or (ii) using any other method permitted by Section 7 of Appendix A attached to this Agreement or the Plan. If the Participant is married, his or her spouse has signed the Consent of Spouse attached to this Agreement as Exhibit A . THE PARTICIPANT FURTHER ACKNOWLEDGES THAT THE PARTICIPANT HAS READ AND UNDERSTANDS THE PLAN AND THIS AGREEMENT, INCLUDING APPENDIX A HERETO, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS GRANT OF RSUs AND DIVIDEND EQUIVALENT RIGHTS.
KILROY REALTY CORPORATION ,
a Maryland corporation


________________________________


PARTICIPANT :



_________________________________

KILROY REALTY CORPORATION ,
a Maryland corporation    


________________________________



2

APPENDIX A
TERMS AND CONDITIONS OF
RESTRICTED STOCK UNITS AND DIVIDEND EQUIVALENT RIGHTS
1.     Grant . The Company hereby grants to the Participant, as of the Grant Date, an award of [__________] RSUs and corresponding Dividend Equivalent rights, subject to the terms and conditions contained in this Agreement and the Plan .
2.     RSUs . Each RSU that vests on an applicable Vesting Date shall represent the right to receive, as determined by the Committee in accordance with Section 6 below, either (i) a payment of one share of Stock or (ii) a payment in cash equal to the Fair Market Value of one share of Stock on the applicable Distribution Date (as defined below). Unless and until an RSU vests, the Participant will have no right to payment in respect of any such RSU (other than with respect to any Dividend Equivalent rights). Prior to actual payment in respect of any vested RSU, such RSU will represent an unsecured obligation of the Company, payable (if at all) only from the general assets of the Company.
3.     Dividend Equivalent Rights .
(a)    Each RSU granted hereunder is hereby granted in tandem with a corresponding Dividend Equivalent right. Such Dividend Equivalent right shall entitle the Participant to have a hypothetical bookkeeping account (established and maintained for purposes of tracking the RSUs and any additional RSUs credited to such account in respect of Dividend Equivalent rights in accordance with this Section 3 ) (the “ Account ”) that is credited upon the Company’s payment of dividends to stockholders of outstanding shares of Stock if the Dividend Equivalent right is or was outstanding on the applicable Stock record date. Subject to Section 3(c) below, when such dividends are so declared, the following shall occur :
(i) on the date that the Company pays a cash dividend in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account with a number of full and fractional RSUs equal to the quotient of (A) the total number of RSUs credited to the Account but not yet distributed (including any RSUs granted hereunder and any additional RSUs credited with respect to Dividend Equivalent rights), multiplied by the per share dollar amount of such dividend, divided by (B) the Fair Market Value of a share of Stock on the date such dividend is paid,
(ii) on the date that the Company pays a Stock dividend in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account with a number of full and fractional RSUs equal to the product of (A) the total number of RSUs credited to the Account but not yet distributed (including any RSUs granted hereunder and any additional RSUs credited with respect to Dividend Equivalent rights), multiplied by (B) the number of shares of Stock distributed with respect to such dividend per share of Stock, or
(iii) on the date that the Company pays any other type of distribution in respect of outstanding shares of Stock, the Company shall credit the Participant’s Account in an equitable manner based on the total number of RSUs held in the Account, as determined in the sole discretion of the Committee.
(b)    To the extent that any additional RSUs are credited to the Participant’s Account in respect of the Participant’s Dividend Equivalent rights, such additional RSUs shall be subject to the same vesting terms as the original RSUs to which they relate and shall also carry corresponding Dividend Equivalent rights.

A-1

(c)    Dividend Equivalent rights shall remain outstanding from the Grant Date (or later date of grant of such Dividend Equivalent right in connection with the Company’s payment of a dividend) through the earlier to occur of (i) the termination or forfeiture for any reason of the RSU to which such Dividend Equivalent right corresponds, or (ii) the delivery to the Participant of payment for the RSU (in accordance with Section 6 below) to which such Dividend Equivalent right corresponds. For the avoidance of doubt, if a Dividend Equivalent right terminates after the applicable Stock record date for a Company dividend and prior to the corresponding payment date thereof, the Participant shall still be entitled to payment of the Dividend Equivalent right amount determined in accordance with this Section 3 , if and when the Company pays the underlying dividend; provided , however , that such Dividend Equivalent right amount shall be made in cash (rather than RSUs).
(d)    Dividend Equivalent rights and any amounts that may become distributable in respect thereof shall be treated separately from the RSUs and the rights arising in connection therewith for purposes of the designation of time and form of payments required by Code Section 409A.
4.     Vesting . The RSUs shall vest in accordance with the vesting schedule provided in the Grant Notice to which this Appendix is attached.
5.     Termination of RSUs . Upon the Participant’s termination as an Employee, Consultant or member of the Board, as applicable, all RSUs that have not vested as of such termination (taking into consideration any vesting that may occur in connection with such termination as provided in the Grant Notice) shall automatically be forfeited and canceled without payment of consideration therefor.
6.     Distribution .
(a)    [Subject to Sections 6(d) and 10 below, payment with respect to RSUs issued under this Agreement (including any RSUs issued in respect of Dividend Equivalent rights) shall, to the extent vested, be paid to the Participant on or within fifteen (15) days following the earliest to occur of (i) the date of the Participant’s “separation from service” within the meaning of Code Section 409A (a “ Separation from Service ”); (ii) the date of the occurrence of a “change of control event” (within the meaning of Code Section 409A) with respect to the Company; [and] (iii) the date of the Participant’s death or “disability” (within the meaning of Code Section 409A) [ Add if a fixed date distribution is elected : ; and (iv) [______________]] (any such date, a “ Distribution Date ”).]
(b)    All distributions upon payment of the RSUs shall be made by the Company in the form of whole shares of Stock, and to the extent that any fractional RSUs become payable on a Distribution Date, such fractional RSUs shall be paid in cash (unless otherwise determined under Section 15.10 of the Plan), provided , however , that if, as of the applicable Distribution Date, insufficient shares of Stock remain available under the Share Limit to cover distribution of any or all of the RSUs for which payment is required (including with respect to Dividend Equivalent rights), as determined by the Committee, such RSUs shall be paid in cash in an amount equal to the Fair Market Value as of the Distribution Date of the shares of Stock otherwise distributable on such Distribution Date. To the extent that any outstanding RSUs remain unvested as of an applicable Distribution Date (after taking into consideration any vesting which may occur in connection with the occurrence of such Distribution Date), then such RSUs shall, to the extent not forfeited in connection with such distribution, be paid as Restricted Stock, and the vesting schedule that applied to such RSUs immediately prior to such distribution shall continue to apply to such Restricted Stock, provided , however , that to the extent any such distributions are payable in cash in accordance with this Section 6(b) , such cash amounts (determined as of the Distribution Date) shall instead be paid to the Participant on or within fifteen (15) days after the date(s) on which the shares of Restricted Stock to which such cash payments relate would have vested in accordance with this Section

A-2

6(b) (and such cash payments shall be forfeitable on the same terms that would otherwise apply to such Restricted Stock) .
(c)    If the Participant experiences an “unforeseeable emergency” within the meaning of Code Section 409A (an “ Unforeseeable Emergency ”), the Committee may, in its sole discretion, permit an early distribution of that portion of the Participant’s Account reasonably necessary to satisfy the emergency need giving rise to the Unforeseeable Emergency, including any taxes or penalties reasonably anticipated to result from such distribution and taking into consideration any funds that may become available as a result of the termination of the applicable deferral election in connection with such distribution.
(d)    Notwithstanding anything herein to the contrary, no distribution hereunder shall be made to the Participant during the six (6)-month period following the Participant’s Separation from Service to the extent that the Company determines that paying such amounts at the time set forth in this Section 6 would be a prohibited distribution under Code Section 409A(a)(2)(B)(i). If the payment of any such amounts is delayed as a result of the previous sentence, then on the first business day following the end of such six (6)-month period (or such earlier date upon which such amount can be paid under Code Section 409A without resulting in a prohibited distribution, including as a result of the Participant’ s death), the Company shall pay the Participant the cumulative amounts that would have otherwise been payable to the Participant during such period.
(e)    The time of distribution of the RSUs under this Agreement may not be changed except as may be permitted by the Committee in accordance with the Plan and Code Section 409A and the applicable Treasury Regulations promulgated thereunder.
7.     Tax Withholding . The Company shall have the authority and the right to deduct, withhold or require the Participant or beneficiary to remit to the Company an amount sufficient to satisfy federal, state, local and foreign taxes (including without limitation any income and employment tax obligations) required by law to be withheld with respect to any taxable event arising in connection with the RSUs and/or the Dividend Equivalent rights. To the extent that such obligations arise at the time that the RSUs are paid to the Participant in shares of Stock, the Company may, in its sole discretion and in satisfaction of the foregoing requirement, require the Participant to deliver shares of Stock otherwise issuable under this Agreement (or allow the return of shares of Stock) having a Fair Market Value equal to the sums required to be withheld, provided, that the number of shares of Stock which may be so withheld (or returned) with respect to a taxable event arising in connection with the RSUs and/or the Dividend Equivalent rights shall be limited to the number of shares which have a Fair Market Value on the date of withholding equal to the aggregate amount of such liabilities based on the minimum statutory withholding rates for federal, state and local income tax and payroll tax purposes that are applicable to such supplemental taxable income.
8.     Rights as Stockholder . Neither the Participant nor any person claiming under or through the Participant will have any of the rights or privileges of a stockholder of the Company in respect of any shares of Stock deliverable hereunder unless and until certificates representing such shares of Stock will have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant or any person claiming under or through the Participant.
9.     Non-Transferability . Neither the RSUs or Dividend Equivalent rights nor any interest or right therein or part thereof shall be transferred, assigned, pledged or hypothecated by the Participant in any way in favor of any party other than the Company or a Subsidiary (whether by operation of law or otherwise) and shall not be subjected to any lien, obligation or liability of the Participant to any party other than the Company or a Subsidiary, other than by the laws of descent and distribution. Upon any

A-3

attempt by the Participant to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale by the Participant under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby shall immediately become null and void. Notwithstanding the foregoing, the Company may assign any of its rights under this Agreement to single or multiple assignees and this Agreement shall inure to the benefit of the successors and assigns of the Company.
10.     Distribution of Stock . In the event shares of Stock are paid to the Participant in accordance herewith, the Company shall not be required to record any shares of Stock in the name of the Participant in the books and records of the Company’s transfer agent, and the Company shall not be required to issue or deliver any certificate or certificates for any shares of Stock prior to the fulfillment of all of the following conditions: (a) the admission of such shares to listing on all stock exchanges on which the Company’s common stock is then listed, (b) the completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or other governmental regulatory body, which the Company shall, in its sole and absolute discretion, deem necessary and advisable, (c) the obtaining of any approval or other clearance from any state or federal governmental agency that the Company shall, in its absolute discretion, determine to be necessary or advisable, and (d) the lapse of any such reasonable period of time following the Distribution Date as the Company may from time to time establish for reasons of administrative convenience. In the event that the Company delays a distribution or payment in settlement of RSUs because it determines that the issuance of shares of Stock in settlement of such RSUs will violate federal securities laws or other applicable law, such distribution or payment shall be made at the earliest date at which the Company reasonably determines that the making of such distribution or payment will not cause such violation, as required by Treasury Regulation Section 1.409A-2(b)(7)(ii). No payment shall be delayed under this Section 10 if such delay will result in a violation of Code Section 409A.
11.     No Right to Continued Service . Nothing in the Plan or in this Agreement shall confer upon the Participant any right to continue as an Employee, Consultant, member of the Board, or other service provider of the Company or any Subsidiary, or shall interfere with or restrict in any way the rights of the Company or any Subsidiary, which are hereby expressly reserved, to discharge the Participant at any time for any reason whatsoever, with or without cause, except to the extent expressly provided otherwise in a written agreement between the Participant and the Company or any Subsidiary.
12.     Severability . In the event that any provision in this Agreement is held invalid or unenforceable, such provision will be severable from, and such invalidity or unenforceability will not be construed to have any effect on, the remaining provisions of this Agreement, which shall remain in full force and effect.
13.     Tax Consultation . The Participant understands that he or she may suffer adverse tax consequences in connection with the RSUs and Dividend Equivalent rights granted pursuant to this Agreement. The Participant represents that the Participant has consulted with any tax consultants that he or she deems advisable in connection with the RSUs and the Dividend Equivalent rights and that the Participant is not relying on the Company for tax advice.
14.     Amendment . Subject to Sections 16 and 18 below, this Agreement may only be amended, modified or terminated by a writing executed by the Participant and by a duly authorized representative of the Company.
15.     Relationship to other Benefits . Neither the RSUs, the Dividend Equivalent rights, nor payment in respect of the foregoing shall be taken into account in determining any benefits pursuant to

A-4

any pension, retirement, savings, profit sharing, group insurance, welfare or other benefit plan of the Company or any Subsidiary.
16.     Code Section 409A . To the extent that the Company determines that any RSUs and/or Dividend Equivalent rights may not be compliant with or exempt from Code Section 409A, the Company may amend this Agreement in a manner intended to comply with the requirements of Code Section 409A or an exemption therefrom (including amendments with retroactive effect), or take any other actions as it deems necessary or appropriate to (a) comply with the requirements of Code Section 409A and/or (b) exempt the RSUs and/or the Dividend Equivalent rights from Code Section 409A and/or preserve the intended tax treatment of the benefits provided with respect to the RSUs. To the extent applicable, this Agreement shall be interpreted in accordance with the provisions of Code Section 409A.
17.     Clawback . The Participant agrees that all compensation paid or payable to the Participant pursuant to this Agreement shall be subject to (a) the provisions of any claw-back policy implemented by the Company to comply with applicable law or regulation (including stock exchange rules), including, without limitation, any claw-back policy adopted to comply with the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and any rules or regulations promulgated thereunder, and (b) any other claw-back required by applicable law.
18.     Conformity to Securities Laws . The Participant acknowledges that the Plan and this Agreement are intended to conform to the extent necessary with all provisions of the Securities Act and the Exchange Act, and any and all regulations and rules promulgated by the Securities and Exchange Commission thereunder, as well as all applicable state securities laws and regulations. Notwithstanding anything herein to the contrary, the Plan shall be administered, and the RSUs are granted, only in such a manner as to conform to such laws, rules and regulations. To the extent permitted by applicable law, the Plan and this Agreement shall be deemed amended to the extent necessary to conform to such laws, rules and regulations.
19.     Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of the Secretary of the Company at the Company’s principal office, and any notice to be given to the Participant shall be addressed to the Participant at the Participant’s last address reflected on the Company’s records. Any notice shall be deemed duly given when sent via email or when sent by reputable overnight courier or by certified mail (return receipt requested) through the United States Postal Service.
20.     Entire Agreement . The Plan and this Agreement (including this Appendix A and all Exhibits hereto) constitute the entire agreement of the parties and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof.
21.     Governing Law . The laws of the State of Maryland shall govern the interpretation, validity, administration, enforcement and performance of the terms of this Agreement regardless of the law that might be applied under principles of conflicts of laws.
22.     Captions . Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.


A-5

EXHIBIT A
CONSENT OF SPOUSE
I, ________________________________, spouse of _______________________________, have read and approve the foregoing Agreement. In consideration of issuing to my spouse the Restricted Stock Units and Dividend Equivalent rights set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights in said Agreement and any Restricted Stock Units, Dividend Equivalent rights, shares of Kilroy Realty Corporation or cash issued pursuant thereto under the community property laws or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement.
Dated: _______________, _____            ________________________________
Signature of Spouse






Exhibit 31.1

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John B. Kilroy, Jr., certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Kilroy Realty Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/ John B. Kilroy, Jr.
John B. Kilroy, Jr.
President and Chief Executive Officer
Date: May 1, 2014



Exhibit 31.2

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Tyler H. Rose, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Kilroy Realty Corporation;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Tyler H. Rose
Tyler H. Rose
Executive Vice President and
Chief Financial Officer
Date: May 1, 2014



Exhibit 31.3

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John B. Kilroy, Jr., certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Kilroy Realty, L.P. ;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
/s/ John B. Kilroy, Jr.
John B. Kilroy, Jr.
President and Chief Executive Officer
Kilroy Realty Corporation, sole general partner of
  Kilroy Realty, L.P.
Date: May 1, 2014



Exhibit 31.4

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Tyler H. Rose, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Kilroy Realty, L.P. ;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions):

a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Tyler H. Rose
Tyler H. Rose
Executive Vice President and
Chief Financial Officer


Kilroy Realty Corporation, sole general partner of
Kilroy Realty, L.P.
Date: May 1, 2014



Exhibit 32.1

Certification of Chief Executive Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation (the “Company”) hereby certifies, to his knowledge, that:

(i)
the accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ John B. Kilroy, Jr.
John B. Kilroy, Jr.
President and Chief Executive Officer
 
 
Date:
May 1, 2014

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, is not being filed as part of the Report or as a separate disclosure document, and is not being incorporated by reference into any filing of the Company or Kilroy Realty, L.P. under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such filing. The signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



Exhibit 32.2


Certification of Chief Financial Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation (the “Company”) hereby certifies, to his knowledge, that:

(i)
the accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended March 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Tyler H. Rose
Tyler H. Rose
Executive Vice President and
Chief Financial Officer


 
 
Date:
May 1, 2014

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, is not being filed as part of the Report or as a separate disclosure document, and is not being incorporated by reference into any filing of the Company or Kilroy Realty, L.P. under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such filing. The signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.



Exhibit 32.3


Certification of Chief Executive Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation, the sole general partner of Kilroy Realty, L.P. (the “Operating Partnership”), hereby certifies, to his knowledge, that:

(i)
the accompanying Quarterly Report on Form 10-Q of the Operating Partnership for the quarter ended March 31, 2014 (the "Report") fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership.

/s/ John B. Kilroy, Jr.
John B. Kilroy, Jr.
President and Chief Executive Officer
Kilroy Realty Corporation, sole general partner of
Kilroy Realty, L.P.
 
 
Date:
May 1, 2014

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, is not being filed as part of the Report or as a separate disclosure document, and is not being incorporated by reference into any filing of Kilroy Realty Corporation or the Operating Partnership under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such filing. The signed original of this written statement required by Section 906 has been provided to the Operating Partnership and will be retained by the Operating Partnership and furnished to the Securities and Exchange Commission or its staff upon request.



Exhibit 32.4


Certification of Chief Financial Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Kilroy Realty Corporation, the sole general partner of Kilroy Realty, L.P. (the "Operating Partnership"), hereby certifies, to his knowledge, that:

(i)
the accompanying Quarterly Report on Form 10-Q of the Operating Partnership for the quarter ended March 31, 2014 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Operating Partnership.

/s/ Tyler H. Rose
Tyler H. Rose
Executive Vice President and
Chief Financial Officer


Kilroy Realty Corporation, sole general partner of
Kilroy Realty, L.P.
 
 
Date:
May 1, 2014

The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350, is not being filed as part of the Report or as a separate disclosure document, and is not being incorporated by reference into any filing of Kilroy Realty Corporation or the Operating Partnership under the Securities Act of 1933, as amended, or the Securities Act of 1934, as amended, (whether made before or after the date of the Report) irrespective of any general incorporation language contained in such filing. The signed original of this written statement required by Section 906 has been provided to the Operating Partnership and will be retained by the Operating Partnership and furnished to the Securities and Exchange Commission or its staff upon request.