Significant Tenants

As of December 31, ~~2018,~~2019, our 15 largest tenants in terms of annualized base rental revenues represented approximately ~~45.7%~~49.6%of our total annualized base rental revenues, defined as annualized monthly contractual rents from existing tenants as of December 31, ~~2018.~~2019. Annualized base rental revenue 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.

For further information on our 15 largest tenants and the composition of our tenant base, see “Item 2. Properties —Significant Tenants.”

Competition

We compete with several developers, owners, operators and acquirers of office, undeveloped land and other commercial real estate, including mixed-use and residential real estate, many of which own properties similar to ours in the same submarkets in which our properties are located. For further discussion of the potential impact of competitive conditions on our business, see “Item 1A. Risk Factors.”

Segment and Geographic Financial Information

During ~~2018~~2019 and ~~2017~~2018, we had one reportable segment, our office properties segment. For information about our office property revenues and long-lived assets and other financial information, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations.”

As of December 31, ~~2018,~~2019, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of eight office properties, ~~and~~ one development project under construction and one recently acquired future development project located in the state of Washington. As of December 31, ~~2018,~~2019, all of our properties and development projects were 100% owned, excluding four office properties owned by three consolidated property partnerships and ~~a property~~two development projects held in ~~a VIE~~VIEs to facilitate apotential future Section 1031 ~~Exchange that closed in January 2019,~~Exchanges, which have been consolidated for financial reporting purposes (see Note 2 “Basis of Presentation and Significant Accounting Policies” to our consolidated financial statements included in this report for further information).

Employees

As of December 31, ~~2018~~2019, we employed ~~276~~267 people through the Operating Partnership, Kilroy Services, LLC, and Kilroy Realty TRS, Inc. We believe that relations with our employees are good.

Environmental Regulations and Potential Liabilities

Government Regulations Relating to the Environment. Many laws and governmental regulations relating to the environment are applicable to our properties, and changes in these laws and regulations, or their interpretation by agencies and the courts, occur frequently and may adversely affect us.

Existing conditions at some of our properties. Independent environmental consultants have conducted Phase I or similar environmental site assessments on all of our properties. We generally obtain these assessments prior to the

acquisition of a property and may later update them as required for subsequent financing of the property, if a property is slated for disposition, or as requested by a tenant. Consultants are required to perform Phase I assessments to American Society for Testing and Materials standards then-existing for Phase I site assessments and typically include a historical review, a public records review, a visual inspection of the surveyed site, and the issuance of a written report. These assessments do not generally include any soil or groundwater sampling or subsurface investigations; however, if a Phase I does recommend that soil or groundwater samples be taken or other subsurface investigations take place, we generally perform such recommended actions. Depending on the age of the property, the Phase I may have included an assessment of asbestos-containing materials or a separate hazardous materials survey may have been conducted.

For properties where asbestos-containing materials were identified or suspected, an operations and maintenance plan was generally prepared and implemented.

Historical operations at or near some of our properties, including the presence of underground or above ground storage tanks, various sites uses that involved hazardous substances, the landfilling of hazardous substances and solid waste, and migration of contamination from other sites, may have caused soil or groundwater contamination. In some instances, the prior owners of the affected properties conducted remediation of known contamination in the soils on our properties, we are required to conduct further environmental clean-up and environmental closure activities at certain properties, and residual contamination could pose environmental, health, and safety risks if not appropriately addressed. We may need to investigate or remediate contaminated soil, soil gas, landfill gas, and groundwater, and we may also need to conduct landfill closure and post-closure activities, including, for example, the implementation of groundwater and methane monitoring systems and impervious cover, and the costs of such work could exceed projected or budgeted amounts. To protect the health and safety of site occupants and others, we may be required to implement and operate safeguards, including, for example, vapor intrusion mitigation systems and building protection systems to address methane. We may need to modify our methods of construction or face increased construction costs as a result of environmental conditions, and we may face obligations under agreements with governmental authorities with respect to the management of such environmental conditions. If releases from our sites migrate offsite, or if our site redevelopment activities cause or contribute to a migration of hazardous substances, neighbors or others could make claims against us, such as for property damage, personal injury, or cost recovery.

As of December 31, ~~2018,~~2019, we had accrued environmental remediation liabilities of approximately ~~$83.2~~$80.7 million recorded on our consolidated balance sheets in connection with certain of our in-process and future development projects. The accrued environmental remediation liabilities represent the remaining costs we estimate we will incur ~~when we perform environmental clean-up~~prior to and ~~closure activities and commence~~during the development process at various development acquisition sites. These estimates, which we developed with the assistance of third party experts, consist primarily of the removal of contaminated soil, performing environmental closure activities, constructing remedial systems and other related costs since we are required to dispose of any existing contaminated soil, and sometimes perform other environmental closure or remedial activities, when we develop new buildings at these sites. It is possible that we could incur additional environmental remediation costs in connection with these development projects. However, potential additional environmental costs cannot be reasonably estimated at this time and certain changes in estimates could occur as the site conditions, final project timing, design elements, actual soil conditions and other aspects of the projects, which may depend upon municipal and other approvals beyond the control of the Company, are determined. See Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report for additional information.

Other than the accrued environmental liabilities recorded in connection with certain of our development projects, we are not aware of any such condition, liability, or concern by any other means that would give rise to material environmental liabilities. However, our assessments may have failed to reveal all environmental conditions, liabilities, or compliance concerns; there may be material environmental conditions, liabilities, or compliance concerns that arose at a property after the review was completed; future laws, ordinances, or regulations may impose material additional environmental liability; and environmental conditions at our properties may be affected in the future by tenants, third parties, or the condition of land or operations near our properties, such as the presence of underground storage tanks or migrating plumes. We cannot be certain that costs of future environmental compliance will not have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.

Use of hazardous materials by some of our tenants. Some of our tenants handle hazardous substances and wastes on our properties as part of their routine operations. Environmental laws and regulations may subject these tenants,

and potentially us, to liability resulting from such activities. We generally require our tenants in their leases to comply with these environmental laws and regulations and to indemnify us for any related liabilities. As of December 31, ~~2018,~~2019, other than routine cleaning materials, approximately ~~4-6%~~2-4% of our tenants handled hazardous substances and/or wastes on approximately 1-3% of the aggregate square footage of our properties as part of their routine operations. These tenants are primarily involved in the life sciences business. The hazardous substances and wastes are primarily comprised of diesel fuel for emergency generators and small quantities of lab and light manufacturing chemicals including, but not limited to, alcohol, ammonia, carbon dioxide, cryogenic gases, dichlorophenol, methane, naturalyte

acid, nitrogen, nitrous oxide, and oxygen which are routinely used by life science companies. We are not aware of any material noncompliance, liability, or claim relating to hazardous or toxic substances or petroleum products in connection with any of our properties, and management does not believe that on-going activities by our tenants will have a material adverse effect on our operations.

Costs related to government regulation and private litigation over environmental matters. Under applicable environmental laws and regulations, we may be liable for the costs of removal, remediation, or disposal of certain hazardous or toxic substances present or released on our properties. These laws could impose liability without regard to whether we are responsible for, or even knew of, the presence or release of the hazardous materials. Government investigations and remediation actions may have substantial costs, and the presence or release of hazardous substances on a property could result in governmental clean-up actions, personal injury actions, or similar claims by private plaintiffs.

Potential environmental liabilities may exceed our environmental insurance coverage limits, transactional indemnities or holdbacks. We carry what we believe to be commercially reasonable environmental insurance. Our environmental insurance policies are subject to various terms, conditions and exclusions. Similarly, in connection with some transactions we obtain environmental indemnities and holdbacks that may not be honored by the indemnitors, may be less than the resulting liabilities or may otherwise fail to address the liabilities adequately. Therefore, we cannot provide any assurance that our insurance coverage or transactional indemnities will be sufficient or that our liability, if any, will not have a material adverse effect on our financial condition, results of operations, cash flows, quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.

Litigation

~~Lawsuits have been~~In 2017, lawsuits were filed in San Francisco County Superior Court ~~in connection with the~~alleging vertical and differential settlement ~~experienced~~ at the Millennium Tower property located at 301 Mission Street in San Francisco, ~~California, a building~~California. The Millennium Tower is not owned by the Company but located in proximity to one of the Company’s ~~property~~properties located at 350 Mission Street. ~~Among the claims asserted in the complex~~The lawsuits ~~are claims~~allege that ~~acts by~~conduct of various entities, including ~~entities~~those affiliated with other neighboring properties, contributed to the settlement ~~that~~of the Millennium ~~Tower has experienced. In October 2017, two~~Tower. Two defendants ~~named in the lawsuits~~ asserted cross-claims for equitable indemnification against certain of the Company’s entities in connection with the development and construction-related activities at ~~our neighboring~~the Company’s 350 Mission Street property. One of those parties has voluntarily dismissed its ~~cross-claims~~cross claims against the Company’s entities. WeIn August 2019, all parties to the lawsuits, including the Company’s entities, reached a settlement in-principle and agreed to stay the litigation pending the negotiation and execution of global settlement documentation. If such settlement documentation is not executed in accordance with the procedural timeline established by the parties to the lawsuit (as the same may be extended), the stay may be lifted. The Company continues to dispute the allegations and ~~intend to vigorously defend against these claims.~~deny responsibility for the claims alleged in the lawsuits.

ITEM 1A. RISK FACTORS

The following section sets forth material factors that may adversely affect our business and operations. The following factors, as well as the factors discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations” and other information contained in this report, should be considered in evaluating us and our business.

Risks Related to our Business and Operations

Global market, economic and geopolitical conditions may adversely affect our business, results of operations, liquidity and financial condition and those of our tenants. Our business may be adversely affected by global market, economic and geopolitical conditions, including general global economic and political uncertainty and dislocations in the credit markets. If these conditions become more volatile or worsen, our and our tenant’s business, results of operations, liquidity and financial condition and those of our tenants may be adversely affected as a result of the following consequences, among others:

the financial condition of our tenants, many of which are technology; life science and healthcare; finance, insurance and real estate; media and professional business and other service firms, may be adversely affected, which may result in tenant defaults under leases due to bankruptcy, lack of liquidity, operational failures or for other reasons;

significant job losses in the financial and professional services industries may occur, which may decrease demand for our office space, causing market rental rates and property values to be negatively impacted;

our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to pursue acquisition and development opportunities and refinance existing debt, reduce our returns from our acquisition and development activities and increase our future interest expense;

reduced values of our properties may limit our ability to dispose of assets at attractive prices or to obtain debt financing secured by our properties and may reduce the availability of unsecured loans; and

one or more lenders under the Operating Partnership’s unsecured revolving credit facility could refuse to fund their financing commitment to us or could fail and we may not be able to replace the financing commitment of any such lenders on favorable terms, or at all.

All of our properties are located in California and greater Seattle, Washington and we may therefore be susceptible to adverse economic conditions and regulations, as well as natural disasters, in those areas. Because all of our properties are concentrated in California and greater Seattle, we may be exposed to greater economic risks than if we owned a more geographically dispersed portfolio. Further, within California, our properties are concentrated in Greater Los Angeles, ~~Orange County,~~ San Diego County and the San Francisco Bay Area, exposing us to risks associated with those specific areas. We are susceptible to adverse developments in the economic and regulatory environments of California and greater Seattle (such as periods of economic slowdown or recession, business layoffs or downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, costs of complying with governmental regulations or increased regulation and other factors), as well as adverse weather conditions and natural disasters that occur in those areas (such as earthquakes, wind, landslides, droughts, fires and other events). For example, many of our assets are in zones that have been impacted by drought and, as such, face the risk of increased water costs and potential fines and/or penalties for high consumption. In addition, California is also regarded as more litigious and more highly regulated and taxed than many other states, which may reduce demand for office space in California.

Any adverse developments in the economy or real estate market in California and the surrounding region, or in greater Seattle or any decrease in demand for office space resulting from the California or greater Seattle regulatory or business environment could impact our ability to generate revenues sufficient to meet our operating expenses or other obligations, which would adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Our performance and the market value of our securities are subject to risks associated with our investments in real estate assets and with trends in the real estate industry. Our economic performance and the value of our real estate assets and, consequently the market value of the Company’s securities, are subject to the risk that our properties may not generate revenues sufficient to meet our operating expenses or other obligations. A deficiency of this nature would adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Events and conditions applicable to owners and operators of real estate that are beyond our control and could impact our economic performance and the value of our real estate assets may include:

local oversupply or reduction in demand for office, mixed-use or other commercial space, which may result in decreasing rental rates and greater concessions to tenants;

inability to collect rent from tenants;

vacancies or inability to rent space on favorable terms or at all;

inability to finance property development and acquisitions on favorable terms or at all;

increased operating costs, including insurance premiums, utilities and real estate taxes;

costs of complying with changes in governmental regulations;

the relative illiquidity of real estate investments;

declines in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing;

changing submarket demographics;

changes in space utilization by our tenants due to technology, economic conditions and business culture;

the development of harmful mold or other airborne toxins or contaminants that could damage our properties or expose us to third-party liabilities; and

property damage resulting from seismic activity or other natural disasters.

We depend upon significant tenants, and the loss of a significant tenant could adversely affect our financial condition, results of operations, ability to borrow funds and cash flows. As of December 31, ~~2018~~2019, our 15 largest tenants represented approximately ~~45.7%~~49.6% of total annualized base rental revenues. See further discussion on the composition of our tenants by industry and our largest tenants under “Item 2. Properties —Significant Tenants.”

Our financial condition, results of operations, ability to borrow funds and cash flows would be adversely affected if any of our significant tenants fails to renew its lease(s), renew its lease(s) on terms less favorable to us, or becomes bankrupt or insolvent or otherwise unable to satisfy its lease obligations.

Downturn in tenants’ businesses may reduce our revenues and cash flows. For the year ended December 31, ~~2018~~2019, we derived approximately 98.7% of our revenues from rental ~~income and tenant reimbursements.~~income. A tenant may experience a downturn in its business, which may weaken its financial condition and result in its failure to make timely rental payments or result in defaults under our leases. In the event of default by a tenant, we may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment.

The bankruptcy or insolvency of a major tenant also may adversely affect the income produced by our properties. If any tenant becomes a debtor in a case under federal bankruptcy law, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might permit the tenant to reject and terminate its lease with us. Our

claim against the tenant for unpaid and future rent could be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. Therefore, our claim for unpaid rent would likely not be paid in full. Any losses resulting from the bankruptcy of any of our existing tenants could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

A large percentage of our tenants operate in a concentrated group of industries and downturns in these industries could adversely affect our financial condition, results of operations and cash flows. As of December 31, ~~2018,~~2019, as a percentage of our annualized base rental revenue ~~48%~~for the stabilized portfolio, 51% of our tenants operated in the technology industry, ~~14%~~15% in the life science and health care industries, ~~14%~~13% in the media industry, 9%8% in the finance, insurance and real estate industries, 7%5% in the professional, business and other services industries and 8% in other industries. As we continue our development and potential acquisition activities in markets populated by knowledge and creative based tenants in the technology and media industries, our tenant mix could become more concentrated, further exposing us to risks associated with those industries. For a further discussion of the composition of our tenants by industry, see “Item 2. Properties —Significant Tenants.” An economic downturn in any of these industries, or in any industry in which a significant number of our tenants currently or may in the future operate, could negatively impact the financial condition of such tenants and cause them to fail to make timely rental payments or default on lease obligations, fail to renew their leases or renew their leases on terms less favorable to us, become bankrupt or insolvent, or otherwise become unable to satisfy their obligations to us. As a result, a downturn in an industry in which a significant number of our tenants operate could adversely affect our financial conditions, result of operations and cash flows.

We may be unable to renew leases or re-lease available space. Most of our income is derived from the rent earned from our tenants. We had office space representing approximately ~~5.6%~~5.4% of the total square footage of our stabilized office properties that was not occupied as of December 31, ~~2018.~~2019. In addition, leases representing approximately ~~11.5%~~7.7% and ~~11.8%~~6.8% of the leased rentable square footage of our properties are scheduled to expire in ~~2019~~2020 and ~~2020~~,2021, respectively. Of the leases scheduled to expire in ~~2019, 66%~~2020 and 2021, 28% and 21% of the rentable square footage scheduled to expire was re-leased, respectively, as of December 31, ~~2018.~~2019. Above market rental rates on some of our properties may force us to renew or re-lease expiring leases at rates below current lease rates. We cannot provide any assurance that leases will be renewed, available space will be re-leased or that our rental rates will be equal to or above the current rental rates. If the average rental rates for our properties decrease, existing tenants do not renew their leases, or available space is not re-leased, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected. For additional information on our scheduled lease expirations, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations.”

We are subject to governmental regulations that may affect the development, redevelopment and use of our properties. Our properties are subject to regulation under federal laws, such as the Americans with Disabilities Act of 1990 (the “ADA”), pursuant to which all public accommodations must meet federal requirements related to access and use by disabled persons, and state and local laws addressing earthquake, fire and life safety requirements. Although we believe that our properties substantially comply with requirements under applicable governmental regulations, none of our properties have been audited or investigated for compliance by any regulatory agency. If we were not in compliance with material provisions of the ADA or other regulations affecting our properties, we might be required to take remedial action, which could include making modifications or renovations to our properties. Federal, state, or local governments may also enact future laws and regulations that could require us to make significant modifications or renovations to our properties. If we were to incur substantial costs to comply with the ADA or any other regulations, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected.

Our properties are subject to land use rules and regulations that govern our development, redevelopment and use of our properties, such as Title 24 of the California Code of Regulations (“Title 24”), which prescribes building energy efficiency standards for residential and nonresidential buildings in the State of California. If we were not in compliance with material provisions of Title 24 or other regulations affecting our properties, we might be required to take remedial action, which could include making modifications or renovations to our properties. Changes in the existing land use rules and regulations and approval process that restrict or delay our ability to develop, redevelop or use our properties ~~(such~~

(such as potential restrictions on the use and/or density of new developments, water use and other uses and activities)

or that prescribe additional standards could have an adverse effect on our financial position, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We may not be able to meet our debt service obligations. As of December 31, ~~2018,~~2019, we had approximately ~~$3.0~~$3.6 billion aggregate principal amount of indebtedness, of which ~~$76.3~~$5.1 million in principal payments will be paid during the year ended December 31, ~~2019~~2020. ~~Of this amount, $74.3 million was paid in February 2019 upon repayment of a mortgage note at par.~~ Our total debt at December 31, ~~2018~~2019 represented ~~31.4%~~28.3% of our total market capitalization (which we define as the aggregate of our long-term debt and the market value of the Company’s common stock and the Operating Partnership’s common units of limited partnership interest, or common units, based on the closing price per share of the Company’s common stock as of that date). For the calculation of our market capitalization and additional information on debt maturities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Company —Capitalization” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Operating Partnership —Liquidity Uses.”

Our ability to make payments on and to refinance our indebtedness and to fund our operations, working capital, and capital expenditures, depends on our ability to generate cash flow in the future. Our cash flow is subject to general economic, industry, financial, competitive, operating, legislative, regulatory, environmental and other factors, many of which are beyond our control.

The instruments and agreements governing some of our outstanding indebtedness (including borrowings under the Operating Partnership’s unsecured revolving credit facility, unsecured term loan facility and note purchase agreements) contain provisions that require us to repurchase for cash or repay that indebtedness under specified circumstances or upon the occurrence of specified events (including upon the acquisition by any person or group of more than a specified percentage of the aggregate voting power of all the Company’s issued and outstanding voting stock, upon certain changes in the composition of a majority of the members of the Company’s ~~Board,~~board of directors, if the Company or one of its wholly-owned subsidiaries ceases to be the sole general partner of the Operating Partnership or if the Company ceases to own, directly or indirectly, at least 60% of the voting equity interests in the Operating Partnership), and our future debt agreements and debt securities may contain similar provisions or may require that we repay or repurchase or offer to repurchase for cash the applicable indebtedness under specified circumstances or upon the occurrence of specified changes of control of the Company or the Operating Partnership or other events. We may not have sufficient funds to pay our indebtedness when due (including upon any such required repurchase, repayment or offer to repurchase), and we may not be able to arrange for the financing necessary to make those payments or repurchases on favorable terms or at all. In addition, our ability to make required payments on our indebtedness when due (including upon any such required repurchase, repayment or offer to repurchase) may be limited by the terms of other debt instruments or agreements. Our failure to pay amounts due in respect of any of our indebtedness when due would generally constitute an event of default under the instrument governing that indebtedness, which could permit the holders of that indebtedness to require the immediate repayment of that indebtedness in full and, in the case of secured indebtedness, could allow them to sell the collateral securing that indebtedness and use the proceeds to repay that indebtedness. Moreover, any acceleration of or default in respect of any of our indebtedness could, in turn, constitute an event of default under other debt instruments or agreements, thereby resulting in the acceleration and required repayment of that other indebtedness. Any of these events could materially adversely affect our ability to make payments of principal and interest on our indebtedness when due and could prevent us from making those payments altogether.

We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of cash will be available to us in an amount sufficient to enable us to pay amounts due on our indebtedness or to fund our other liquidity needs, including cash distributions to stockholders necessary to maintain the Company’s REIT qualification. Additionally, if we incur additional indebtedness in connection with future acquisitions or for any other purpose, our debt service obligations could increase.

We may need to refinance all or a portion of our indebtedness on or before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:

•our financial condition, results of operations and market conditions at the time; and

•restrictions in the agreements governing our indebtedness.

As a result, we may not be able to refinance our indebtedness on commercially reasonable terms or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or proceeds of asset sales or other sources of cash are not available to us, we may not have sufficient cash to enable us to meet all of our obligations. Accordingly, if we cannot service our indebtedness, we may have to take actions such as seeking additional equity financing, delaying capital expenditures, or entering into strategic acquisitions and alliances. Any of these events or circumstances could have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders. In addition, foreclosures could create taxable income without accompanying cash proceeds, which could require us to borrow or sell assets to raise the funds necessary to pay amounts due on our indebtedness and to meet the REIT distribution requirements discussed below, even if such actions are not on favorable terms.

The covenants in the agreements governing the Operating Partnership’s unsecured revolving credit facility, unsecured term loan facility and note purchase agreements may limit our ability to make distributions to the holders of our common stock. The Operating Partnership’s $750.0 million unsecured revolving credit facility, $150.0 million unsecured term loan facility and note purchase agreements contain financial covenants that could limit the amount of distributions payable by us on our common stock and any preferred stock we may issue in the future. We rely on cash distributions we receive from the Operating Partnership to pay distributions on our common stock and any preferred stock we may issue in the future and to satisfy our other cash needs. The agreements governing the unsecured revolving credit facility, the unsecured term loan facility and the note purchase agreements provide that, if the Operating Partnership fails to pay any principal of, or interest on, any borrowings or other amounts payable under such agreement when due or during any other event of default under such revolving credit facility, loan facility and the unsecured private placement notes, the Operating Partnership may make only those partnership distributions that result in distributions to us in an amount sufficient to permit us to make distributions to our stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and (b) avoid the payment of federal or state income or excise tax. Any limitation on our ability to make distributions to our stockholders, whether as a result of these provisions in the unsecured revolving credit facility, the unsecured term loan facility, the note purchase agreements or otherwise, could have a material adverse effect on the market value of our common stock.

A downgrade in our credit ratings could materially adversely affect our business and financial condition. The credit ratings assigned to the Operating Partnership’s debt securities and any preferred stock we may issue in the future could change based upon, among other things, our results of operations and financial condition. These ratings are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any rating will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. Moreover, these credit ratings do not apply to our common stock and are not recommendations to buy, sell or hold our common stock or any other securities. If any of the credit rating agencies that have rated the Operating Partnership’s debt securities or any preferred stock we may issue in the future downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a so-called “watch list” for a possible downgrading or lowering or otherwise indicates that its outlook for that rating is negative, it could have a material adverse effect on our costs and availability of capital, which could in turn have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We face significant competition, which may decrease the occupancy and rental rates of our properties. We compete with several developers, owners and operators of office, undeveloped land and other commercial real estate, including mixed-use and residential real estate, many of which own properties similar to ours in the same submarkets in which our properties are located but which have lower occupancy rates than our properties. Therefore, our competitors have an incentive to decrease rental rates until their available space is leased. If our competitors offer space at rental rates below the rates currently charged by us for comparable space, we may be pressured to reduce our rental rates below those currently charged in order to retain tenants when our tenant leases expire. As a result, our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders may be adversely affected.

In order to maintain the quality of our properties and successfully compete against other properties, we must periodically spend money to maintain, repair and renovate our properties, which reduces our cash flows. If our properties are not as attractive to current and prospective tenants in terms of rent, services, condition or location as properties owned by our competitors, we could lose tenants or suffer lower rental rates. As a result, we may from time to time be required to make significant capital expenditures to maintain the competitiveness of our properties. There can be no assurances that any such expenditure would result in higher occupancy or higher rental rates, or deter existing tenants from relocating to properties owned by our competitors.

Potential casualty losses, such as earthquake losses, may adversely affect our financial condition, results of operations and cash flows. We carry comprehensive liability, fire, extended coverage, rental loss, and terrorism insurance covering all of our properties. Management believes the policy specifications and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for generally uninsurable losses such as loss from riots or acts of God. In addition, all of our properties are located in earthquake-prone areas. We carry earthquake insurance on our properties in an amount and with deductibles that management believes are commercially reasonable. However, the amount of our earthquake insurance coverage may not be sufficient to cover losses from earthquakes. We may also discontinue earthquake insurance on some or all of our properties in the future if the cost of premiums for earthquake insurance exceeds the value of the coverage discounted for the risk of loss. If we experience a loss that is uninsured or which exceeds policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. Further, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if the properties were irreparable.

We may not be able to rebuild our existing properties to their existing specifications if we experience a substantial or comprehensive loss of such properties. In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to rebuild such property to its existing specifications. Further, reconstruction or improvement of such property could potentially require significant upgrades to meet zoning and building code requirements or be subject to environmental and other legal restrictions.

Our business is subject to risks associated with climate change and our sustainability strategies. Climate change could trigger extreme weather and changes in precipitation, temperature, and air quality, all of which may result in physical damage to, or a decrease in demand for, our properties located in the areas affected by these conditions. Should the impact of climate change be severe or occur for lengthy periods of time, our financial condition or results of operations would be adversely affected.

Recognizing the importance of climate change and reducing our greenhouse gas impact on the environment, our sustainability strategies include a commitment to achieving carbon neutral operations by December 31, 2020. This means that the entirety of our scope 1 and scope 2 emissions will be offset by this date through a combination of energy efficiency measures and both onsite and offsite renewables. Scope 1 emissions represent those produced by onsite natural gas consumption procured by us, and Scope 2 emissions represent those produced by onsite electricity consumption procured by us.Our own efforts to reduce our greenhouse gas impact on the environment and/or comply with changes in federal and state laws and regulations on climate change could result in significant capital expenditures to improve the energy efficiency of our existing properties or properties we may acquire. Changes to such law and regulations could also result in increased operating costs at our properties (for example, through increased utility costs). Moreover, if we are unable to achieve carbon neutral operations by our targeted date or comply with laws and regulations on climate change, our reputation among our tenants and investors may be damaged and we may incur fines and/or penalties.

~~In addition,~~Our properties are located in West Coast markets of the United States. To the extent that climate change impacts changes in weather patterns, our markets could experience increases in extreme weather and rising sea levels. For example, many of our assets are in zones that have been impacted by drought and, as such, face the risk of increased water costs and potential fines and/or penalties for high consumption. We endeavor to mitigate these risks through comprehensive, proactive water reduction efforts throughout our portfolio, including domestic fixture upgrades, cooling tower optimizations, a comprehensive leak detection program and irrigation systems retrofits. We also incorporate green lease language into 100% of our new leases, including a cost recover clause for resource-efficiency related capital expenditures in full-service gross leases, which aim to align our and our tenant’s interests on energy, water and waste efficiency. In addition, we are building our current development projects to LEED specifications, and all of our office

development projects are now designed to achieve LEED certification, either LEED Platinum or Gold. However, there can be no assurances that we will successfully mitigate the risk of increased water costs and potential

fines and/or penalties for high consumption or that we will be able to fully recoup any capital expenditures we incur in connection with our green leases. Moreover, there can be no assurance that our development projects will be able to achieve the anticipated LEED certifications or that any of our sustainability strategies will result in reduced operating costs, higher occupancy or higher rental rates or deter our existing tenants from relocating to properties owned by our competitors. Over time, these conditions could result in declining demand for space at our properties or in our inability to operate the buildings as currently intended or at all. Climate change may also have indirect effects on our business by increasing the cost of, or decreasing the availability of, property insurance on terms we find acceptable or at all, or by increasing the cost of energy or water. There can be no assurance that climate change will not have a material adverse effect on our properties, operations or business.

We are subject to environmental and health and safety laws and regulations, and any costs to comply with, or liabilities arising under, such laws and regulations could be material. As an owner, operator, manager, acquirer and developer of real properties, we are subject to environmental and health and safety laws and regulations. Certain of these laws and regulations impose joint and several liability, without regard to fault, for investigation and clean-up costs on current and former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment. At some of our properties, there are asbestos-containing materials, or tenants routinely handle hazardous substances as part of their operations. In addition, historical operations and conditions, including the presence of underground storage tanks, various site uses that involved hazardous substances, the landfilling of hazardous substances and solid waste, and migration of contamination from other sites, have caused soil or groundwater contamination at or near some of our properties. Although we believe that the prior owners of the affected properties or other persons may have conducted remediation of known contamination at many of these properties, not all such contamination has been remediated, further clean-up or environmental closure activities at certain of these properties is or may be required, and residual contamination could pose environmental, health, and safety risks if not appropriately addressed. We may need to investigate or remediate contaminated soil, soil gas, landfill gas, and groundwater, and we may also need to conduct landfill closure and post-closure activities, including, for example, the implementation of groundwater and methane monitoring systems and impervious cover, and the costs of such work could exceed projected or budgeted amounts. To protect the health and safety of site occupants and others, we may be required to implement and operate safeguards, including, for example, vapor intrusion mitigation systems and building protection systems to address methane. We may need to modify our methods of construction or face increased construction costs as a result of environmental conditions, and we may face obligations under agreements with governmental authorities with respect to the management of such environmental conditions. If releases from our sites migrate offsite, or if our site redevelopment activities cause or contribute to a migration of hazardous substances, neighbors or others could make claims against us, such as for property damage, personal injury, cost recovery, or natural resources damage. As of December 31, ~~2018,~~2019, we had accrued environmental remediation liabilities of approximately ~~$83.2~~$80.7 million recorded on our consolidated balance sheets in connection with certain of our in-process and future development projects. The accrued environmental remediation liabilities represent the costs we estimate we will incur when we commence development at various development acquisition sites. These estimates, which we developed with the assistance of third party experts, consist primarily of the removal of contaminated soil, performing environmental closure activities, construction remedial systems, and other related costs since we are required to dispose of any existing contaminated soil, and sometimes perform other environmental closure or remedial activities, when we develop new office properties as these sites. It is possible that we could incur additional environmental remediation costs in connection with future development projects. However, potential additional environmental costs cannot be reasonably estimated at this time and certain changes in estimates could occur as the site conditions, final project timing, design elements, actual soil conditions and other aspects of the projects, which may depend upon municipal and other approvals beyond the control of the Company, are determined. Unknown or unremediated contamination or compliance with existing or new environmental or health and safety laws and regulations could require us to incur costs or liabilities that could be material. See “Item 1. Business —Environmental Regulations and Potential Liabilities” and Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report.

We may be unable to complete acquisitions and successfully operate acquired properties. We continually evaluate the market of available properties and may continue to acquire office or mixed-use properties and undeveloped land when strategic opportunities exist. Our ability to acquire properties on favorable terms and successfully operate them is subject to various risks, including the following:

we may potentially be unable to acquire a desired property because of competition from other real estate investors with significant capital, including both publicly traded and private REITs, institutional investment funds and other real estate investors;

even if we are able to acquire a desired property, competition from other real estate investors may significantly increase the purchase price;

even if we enter into agreements for the acquisition of a desired property, we may be unable to complete such acquisitions because they remain subject to customary conditions to closing, including the completion of due diligence investigations to management’s satisfaction;

we may be unable to finance acquisitions on favorable terms or at all;

we may spend more than budgeted amounts in operating costs or to make necessary improvements or renovations to acquired properties;

we may lease acquired properties at economic lease terms different than projected;

we may acquire properties that are subject to liabilities for which we may have limited or no recourse; and

we may be unable to complete an acquisition after making a nonrefundable deposit and incurring certain other acquisition-related costs.

If we cannot finance property acquisitions on favorable terms or operate acquired properties to meet financial expectations, our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders could be adversely affected.

There are significant risks associated with property acquisition, development and redevelopment. We may be unable to successfully complete and operate acquired, developed and redeveloped properties, and it is possible that:

we may be unable to lease acquired, developed or redeveloped properties on lease terms projected at the time of acquisition, development or redevelopment or within budgeted timeframes;

the operating expenses at acquired, developed or redeveloped properties may be greater than projected at the time of acquisition, development or redevelopment, resulting in our investment being less profitable than we expected;

we may not commence or complete development or redevelopment properties on schedule or within budgeted amounts or at all;

we may not be able to develop or redevelop the estimated square footage and other features of our development and redevelopment properties;

we may suspend development or redevelopment projects after construction has begun due to changes in economic conditions or other factors, and this may result in the write-off of costs, payment of additional costs or increases in overall costs when the development or redevelopment project is restarted;

we may expend funds on and devote management’s time to acquisition, development or redevelopment properties that we may not complete and as a result we may lose deposits or fail to recover expenses already incurred;

we may encounter delays or refusals in obtaining all necessary zoning, land use, and other required entitlements, and building, occupancy, and other required governmental permits and authorizations;

we may encounter delays or unforeseen cost increases associated with building materials or construction services resulting from trade tensions, disruptions, tariffs, duties or restrictions or an outbreak of an epidemic or pandemic;

we may encounter delays, refusals, unforeseen cost increases and other impairments resulting from third-party litigation; and

we may fail to obtain the financial results expected from properties we acquire, develop or redevelop.

If one or more of these events were to occur in connection with our acquired properties, undeveloped land, or development or redevelopment properties under construction, we could be required to recognize an impairment loss.

These events could also have an adverse impact on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

While we historically have acquired, developed and redeveloped office properties in California markets, over the past few years we have acquired properties in greater Seattle, where we currently have eight properties, ~~and~~ one development project under construction and one recently acquired future development project, and may in the future acquire, develop or redevelop properties for other uses and expand our business to other geographic regions where we expect the development or acquisition of property to result in favorable risk-adjusted returns on our investment. Presently, we do not possess the same level of familiarity with other outside markets, which could adversely affect our ability to acquire, develop or redevelop properties or to achieve expected performance.

We face risks associated with the development of mixed-use commercial properties. We are currently developing, and in the future may develop, properties either alone or through joint ventures that are known as “mixed-use” developments. This means that in addition to the development of office space, the project may also include space for residential, retail or other commercial purposes. Generally, we have less experience developing and managing non-office real estate. As a result, if a development project includes non-office space, we may develop that space ourselves or seek to partner with a third-party developer with more experience. If we do not partner with such a developer, or if we choose to develop the space ourselves, we would be exposed to specific risks associated with the development and ownership of non-office real estate. In addition, if we elect to participate in the development through a joint venture, we may be exposed to the risks associated with the failure of the other party to complete the development as expected, which could require that we identify another joint venture partner and/or complete the project ourselves (including providing any necessary financing). In the case of residential properties, these risks include competition for prospective tenants from other operators whose properties may be perceived to offer a better location or better amenities or whose rent may be perceived as a better value given the quality, location and amenities that the tenant seeks. With residential properties, we will also compete against apartments, condominiums and single-family homes that are for sale or rent. Because we have less experience with residential properties, we may retain third parties to manage these properties. If we decide to wholly own a non-office project and hire a third-party manager, we could be dependent on that party and its key personnel to provide services to us, and we may not find a suitable replacement if the management agreement is terminated, or if key personnel leave or otherwise become unavailable to us.

Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers' financial condition, and disputes between us and our co-venturers and could expose us to potential liabilities and losses. In addition to the 100 First LLC and 303 Second LLC strategic ventures and the Redwood City Partners, LLC venture, we may continue to co-invest in the future with third parties through partnerships, joint ventures or other entities, or through acquiring non-controlling interests in, or sharing responsibility for, managing the affairs of a property, partnership, joint venture or other entity, which may subject us to risks that may not be present with other methods of ownership, including the following:

we would not be able to exercise sole decision-making authority regarding the property, partnership, joint venture or other entity, which would allow for impasses on decisions that could restrict our ability to sell or transfer our interests in such entity or such entity’s ability to transfer or sell its assets;

partners or co-venturers might become bankrupt or fail to fund their share of required capital contributions, which could delay construction or development of a property or increase our financial commitment to the

partnership or joint venture;

partners or co-venturers may pursue economic or other business interests, policies or objectives that are competitive or inconsistent with ours;

if we become a limited partner or non-managing member in any partnership or limited liability company, and such entity takes or expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our interest in such entity;

disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business; and

we may, in certain circumstances, be liable for the actions of our third-party partners or co-venturers.

We own certain properties subject to ground leases and other restrictive agreements that limit our uses of the properties, restrict our ability to sell or otherwise transfer the properties and expose us to the loss of the properties if such agreements are breached by us, terminated or not renewed. As of December 31, ~~2018,~~2019, we owned ~~thirteen~~fourteen office buildings, located on various land parcels and in various regions, which we lease individually on a long-term basis. As of December 31, ~~2018,~~2019, we had approximately2.0 million aggregate rentable square feet, or ~~15.3%~~15.2% of our total stabilized portfolio, of rental space located on these leased parcels and we may in the future invest in additional properties that are subject to ground leases or other similar restrictive arrangements. Many of these ground leases and other restrictive agreements impose significant limitations on our uses of the subject property, restrict our ability to sell or otherwise transfer our interests in the property or restrict our leasing of the property. These restrictions may limit our ability to timely sell or exchange the properties, impair the properties’ value or negatively impact our ability to find suitable tenants for the properties. In addition, if we default under the terms of any particular lease, we may lose the ownership rights to the property subject to the lease. Upon expiration of a lease, we may not be able to renegotiate a new lease on favorable terms, if at all. The loss of the ownership rights to these properties or an increase of rental expense could have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Real estate assets are illiquid, and we may not be able to sell our properties when we desire. Our investments in our properties are relatively illiquid, limiting our ability to sell our properties quickly in response to changes in economic or other conditions. In addition, the Code generally imposes a 100% prohibited transaction tax on the Company on profits derived from sales of properties held primarily for sale to customers in the ordinary course of business, which effectively limits our ability to sell properties other than on a selected basis. These restrictions on our ability to sell our properties could have an adverse effect on our financial condition, results of operations, cash flow, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We may invest in securities related to real estate, which could adversely affect our ability to pay dividends and distributions to our security holders. We may purchase securities issued by entities that own real estate and may, in the future, also invest in mortgages. In general, investments in mortgages are subject to several risks, including:

borrowers may fail to make debt service payments or pay the principal when due;

the value of the mortgaged property may be less than the principal amount of the mortgage note securing the property; and

interest rates payable on the mortgages may be lower than our cost for the funds used to acquire these mortgages.

Owning these securities may not entitle us to control the ownership, operation and management of the underlying real estate. In addition, we may have no control over the distributions with respect to these securities, which could adversely affect our ability to pay dividends and distributions to our security holders.

We face risks associated with short-term liquid investments. From time to time, we have significant cash balances that we invest in a variety of short-term investments that are intended to preserve principal value and maintain a high degree of liquidity while providing current income. These investments may include (either directly or indirectly):

direct obligations issued by the U.S. Treasury;

obligations issued or guaranteed by the U.S. government or its agencies;

taxable municipal securities;

obligations (including certificates of deposits) of banks and thrifts;

commercial paper and other instruments consisting of short-term U.S. dollar denominated obligations issued by corporations and banks;

repurchase agreements collateralized by corporate and asset-backed obligations;

both registered and unregistered money market funds; and

other highly rated short-term securities.

Investments in these securities and funds are not insured against loss of principal. Under certain circumstances we may be required to redeem all or part of our investment, and our right to redeem some or all of our investment may be delayed or suspended. In addition, there is no guarantee that our investments in these securities or funds will be redeemable at par value. A decline in the value of our investment or a delay or suspension of our right to redeem may have a material adverse effect on our results of operations or financial condition.

Future terrorist activity or engagement in war by the United States may have an adverse effect on our financial condition and operating results. Terrorist attacks in the United States and other acts of terrorism or war, may result in declining economic activity, which could harm the demand for and the value of our properties. In addition, the public perception that certain locations are at greater risk for attack, such as major airports, ports and rail facilities, may decrease the demand for and the value of our properties near these sites. A decrease in demand could make it difficult for us to renew or re-lease our properties at these sites at lease rates equal to or above historical rates. Terrorist activities also could directly impact the value of our properties through damage, destruction, or loss, and the availability of insurance for these acts may be less, and cost more, which could adversely affect our financial condition. To the extent that our tenants are impacted by future attacks, their businesses similarly could be adversely affected, including their ability to continue to honor their existing leases.

Terrorist acts and engagement in war by the United States also may adversely affect the markets in which our securities trade and may cause further erosion of business and consumer confidence and spending, and may result in increased volatility in national and international financial markets and economies. Any one of these events may cause a decline in the demand for our office leased space, delay the time in which our new or renovated properties reach stabilized occupancy, increase our operating expenses, such as those attributable to increased physical security for our properties, and limit our access to capital or increase our cost of raising capital.

The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) will subject us to substantial additional federal regulation. There are significant corporate governance and executive compensation-related requirements that have been, and will in the future be, imposed on publicly-traded companies under the Dodd-Frank Act. Several of these provisions require the SEC to adopt additional rules and regulations in these areas. For example, the Dodd-Frank Act requires publicly-traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. Our efforts to comply with these requirements have resulted in, and are likely to continue to result in, an increase in expenses and a diversion of management’s time from other business activities. In addition, if stockholders do not vote to approve our executive compensation practices and/or our equity plan amendments, these actions may interfere with our ability to attract and retain key personnel who are essential to our future success. Provisions of the Dodd-Frank Act that directly affect other participants in the real estate and capital markets, such as banks, investment funds and interest rate hedge providers,

could also have indirect, but material, impacts on our business that cannot now be predicted. In addition, in February 2017, the U.S. President ordered the Secretary of the U.S. Treasury to review certain existing rules and regulations, such as those promulgated under the Dodd-Frank Act; however, the implications of that review are not yet known and none of the rules and regulations promulgated under the Dodd-Frank Act have been modified or rescinded as of the date of this report. Given the uncertainty associated with both the results of the existing Dodd-Frank Act requirements and the manner in which additional provisions of the Dodd-Frank Act will be implemented by various regulatory agencies and through regulations, the full extent of the impact of such requirements on our operations is unclear. Accordingly, the changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, or otherwise adversely affect our financial condition, results of operations, cash flows, the quoted trading price of our securities and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Our property taxes could increase due to reassessment or property tax rate changes. We are required to pay state and local taxes on our properties. In addition, the real property taxes on our properties may increase as our properties are reassessed by taxing authorities or as property tax rates change. For example, under a current California law commonly referred to as “Proposition 13,” property tax reassessment generally occurs as a result of a “change in ownership” of a property, as specifically defined for purposes of those rules. Because the property taxing authorities may not determine whether there has been a “change in ownership” or the actual reassessed value of a property for a period of time after a transaction has occurred, we may not know the impact of a potential reassessment for a considerable amount of time following a particular transaction or construction of a new property. Therefore, the amount of property taxes we are required to pay could increase substantially from the property taxes we currently pay or have paid in the past, including on a retroactive basis. In addition, from time to time voters and lawmakers have announced initiatives to repeal or amend Proposition 13 to eliminate its application to commercial property and/or introduce split tax roll legislation. Such initiatives, if successful, would increase the assessed value and/or tax rates applicable to commercial property in California, including our properties. An increase in the assessed value of our properties or our property tax rates could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

Unfavorable resolution of litigation matters and disputes could have a material adverse effect on our financial condition. From time to time, we are involved in legal proceedings, lawsuits and other claims. We may also be named as defendants in lawsuits allegedly arising out of our actions or the actions of our operators, vendors, contractors, tenants or other contractual parties in which such parties have agreed to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their respective businesses and/or added as an additional insured under certain insurance policies. An unfavorable resolution of any legal proceeding, lawsuit or other claim could have a negative effect on our financial condition, results of operations, cash flow and the quoted trading price of our securities. Regardless of its outcome, legal proceedings, lawsuits and other claims may result in substantial costs and expenses and significantly divert the attention of our management. There can be no assurance that we will be able to prevail or achieve a favorable settlement or outcome. There can also be no assurance that our insurance or the insurance and/or any contractual indemnities of our operators, vendors, contractors, tenants or other contractual parties will be enough to cover all of our defense costs or any resulting liabilities. In addition, litigation, government proceedings or environmental matters could lead to increased costs or interruption of our normal business operations.

Our business could be adversely impacted if there are deficiencies in our disclosure controls and procedures or internal control over financial reporting. The design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations. While management will continue to review the effectiveness of our disclosure controls and procedures and internal control over financial reporting, there can be no guarantee that our internal control over financial reporting will be effective in accomplishing all control objectives all of the time. Deficiencies, including any material weakness, in our internal control over financial reporting that may occur in the future could result in misstatements of our results of operations, restatements of our financial statements, or otherwise adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant disruptions of our information technology (IT) networks and related systems. We face risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems inside our organization, and other significant disruptions of our IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are essential to the operation of our business and our ability to perform day-to-day operations (including managing our building systems), and, in some cases, may be critical to the operations of certain of our tenants. There can be no assurance that our efforts to maintain the security and integrity of these types of IT networks and related systems will be effective or that attempted security breaches or disruptions would not be successful or damaging. Like other businesses, we have been and expect to continue to be subject to unauthorized access, mishandling or misuse, computer viruses or malware, cyber attacks and other events

of varying degrees. Historically, these events have not adversely affected our operations or business and were not individually or in the aggregate material.

However, in the future, events such as these or other significant disruptions involving our IT networks and related systems could, among other things:

result in unauthorized access to, destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or others, including personally identifiable and account information that could be used to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes;

result in unauthorized access to or changes to our financial accounting and reporting systems and related data;

result in the theft of funds;

result in our inability to maintain building systems relied on by our tenants;

require significant management attention and resources to remedy any damage that results;

subject us to regulatory penalties or claims for breach of contract, damages, credits, penalties or terminations of leases or other agreements; or

damage our reputation among our tenants and investors.

These events could have an adverse impact on our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

An increase in interest rates could increase our interest costs on variable rate debt and new debt and could adversely affect our ability to refinance existing debt, conduct development, redevelopment and acquisition activity and recycle capital. As of December 31, ~~2018,~~2019, we had an unsecured revolving credit facility and an unsecured term loan facility bearing interest at variable rates on any amounts drawn and outstanding. These facilities comprised approximately ~~6.6%~~11.0% of our total outstanding debt at December 31, ~~2018~~2019 and were subject to variable interest rates and therefore subject to interest rate risk. In addition, we may incur additional variable rate debt in the future. If interest rates increase, so could our interest costs for any variable rate debt and for new debt. This increased cost could make the financing of any development, redevelopment and acquisition activity costlier. Rising interest rates could also limit our ability to refinance existing debt when it matures or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to recycle capital and our portfolio promptly in response to changes in economic or other conditions.

We manage a portion of our exposure to interest rate risk by accessing debt with staggered maturities, and we may in the future mitigate this risk through the use of derivative instruments, including interest rate swap agreements or

other interest rate hedging agreements, including swaps, caps and floors. While these agreements are intended to lessen the impact of rising interest rates on us, they also expose us to the risks that counter parties may fail to honor their obligations, that we could incur significant costs associated with the settlement of these agreements, that the amount of income we earn from hedging transactions may be limited by federal tax provisions governing REITs, that these agreements may cause us to pay higher interest rates on our debt obligations than would otherwise be the case and that underlying transactions could fail to qualify as highly-effective cash flow hedges under the accounting guidance. As a result, failure to hedge effectively against interest rate risk, if we choose to engage in such activities, could adversely affect our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

The trading price of our common stock may fluctuate significantly. The trading price of our common stock may fluctuate significantly. BetweenJanuary 1, ~~2018~~ 2019andFebruary ~~8, 2019,~~7, 2020, the closing sale price of Company’s common

stock on the New York Stock Exchange, or the NYSE, ranged from a low of ~~$59.46~~$61.44 to a high of ~~$77.34~~$85.25 per share. The trading price of our common stock may fluctuate in response to many factors, including:

actual or anticipated variations in our operating results, funds from operations, cash flows, liquidity or distributions;

our ability to successfully execute on our development plans;

our ability to successfully complete acquisitions and operate acquired properties;

earthquakes;

changes in our earnings estimates or those of analysts;

publication of research reports about us, the real estate industry generally or the office and residential sectors in which we operate;

the failure to maintain our current credit ratings or comply with our debt covenants;

increases in market interest rates;

changes in market valuations of similar companies;

adverse market reaction to any debt or equity securities we may issue or additional debt we incur in the future;

additions or departures of key management personnel;

actions by institutional investors;

speculation in the press or investment community;

high levels of volatility in the credit or equity markets;

general market and economic conditions; and

the realization of any of the other risk factors included in this report.

Many of the factors listed above are beyond our control. These factors may cause the trading price of our common stock to decline, regardless of our financial condition, results of operations, business or prospects. We cannot assure you that the trading price of our common stock or the amount of dividends we pay on our common stock will not decline in the future, and it may be difficult for investors to resell shares of our common stock at prices they find attractive, or at all.

Changes in accounting pronouncements could adversely affect our operating results, in addition to the reported financial performance of our tenants. Uncertainties posed by various initiatives of accounting standard-setting by the Financial Accounting Standards Board (“FASB”) and the SEC, which establish and govern accounting standards for U.S. companies, may change the financial accounting and reporting standards or their interpretation and application of these standards that govern the preparation of our financial statements, including the adoption of the lease accounting standard.

Proposed and/or future changes in accounting standards could have a material impact on our reported financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in potentially material restatements of prior period financial statements. Similarly, these changes could have a material impact on our tenants’ reported financial condition or results of operations or could impact our tenants’ business decisions in leasing real estate.

We face risks associated with our tenants and contractual counterparties being designated “Prohibited Persons” by the Office of Foreign Assets Control. Pursuant to Executive Order 13224 and other laws, the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) maintains a list of persons designated as terrorists or who are otherwise blocked or banned (“Prohibited Persons”). OFAC regulations and other laws prohibit conducting business or engaging in transactions with Prohibited Persons (the “OFAC Requirements”). Certain of our loan and other agreements require us to comply with OFAC Requirements. Our leases and other agreements, in general, require the other party to comply with OFAC Requirements. If a tenant or other party with whom we contract is placed on the OFAC list, we may be required by the OFAC Requirements to terminate the lease or other agreement. Any such termination could result in a loss of revenue or a damage claim by the other party that the termination was wrongful.

The actual density of our undeveloped land holdings and/or any particular land parcel may not be consistent with our potential density estimates. As of December 31, ~~2018,~~2019, we estimate that our five future ~~potential~~ development sites, representing approximately 7361 gross acres of undeveloped land, provide more than ~~5.0~~6.0 million square feet of potential density. We caution you not to place undue reliance on the potential density estimates for our undeveloped land holdings and/or any particular land parcel because they are based solely on our estimates, using data currently available to us, and our business plans as of December 31, ~~2018.~~2019. The actual density of our undeveloped land holdings and/or any particular land parcel may differ substantially from our estimates based on numerous factors, including our inability to obtain necessary zoning, land use and other required entitlements, as well as building, occupancy and other required governmental permits and authorizations, and changes in the entitlement, permitting and authorization processes that restrict or delay our ability to develop, redevelop or use undeveloped land holdings at anticipated density levels. Moreover, we may strategically choose not to develop, redevelop or use our undeveloped land holdings to their maximum potential density or may be unable to do so as a result of factors beyond our control, including our ability to obtain capital on terms that are acceptable to us, or at all, to fund our development and redevelopment activities. We can provide no assurance that the actual density of our undeveloped land holdings and/or any particular land parcel will be consistent with our potential density estimates. For additional information on our development program, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Factors That May Influence Future Results of Operations.”

Loss of our key personnel could harm our operations and financial performance and adversely affect the quoted trading price of our securities. The leadership and performance of our executive and senior officers play a key role in the success of the Company. They are integral to the Company’s success for many reasons, including that each has a strong national or regional reputation in our industry and investment community. In addition, they have significant relationships with investors, lenders, tenants and industry personnel, which benefit the Company.

Risks Related to Our Organizational Structure

Our growth depends on external sources of capital that are outside of our control and the inability to obtain capital on terms that are acceptable to us, or at all, could adversely affect our financial condition and results of operations. The Company is required under the Code to distribute at least 90% of its taxable income (subject to certain adjustments and excluding any net capital gain), and the Operating Partnership is required to make distributions to the Company to allow the Company to satisfy these REIT distribution requirements. Because of these distribution requirements, the Operating Partnership is required to make distributions to the Company, and we may not be able to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, management relies on

third-party sources of capital to fund our capital needs. We may not be able to obtain financing on favorable terms or at all. Any additional debt we incur will increase our leverage. Access to third-party sources of capital depends, in part, on general market conditions and the availability of credit, the market’s perception of our growth potential, our current and expected future earnings, our cash flows and cash distributions and the quoted trading price of our securities. If we cannot obtain capital from third-party sources, our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders may be adversely affected.

Ourcommon limited partners have limited approval rights, which may prevent us from completing a change of control transaction that may be in the best interests of all our security holders. The Company may not withdraw as the Operating Partnership’s general partner or transfer its general partnership interest in the Operating Partnership without the approval of the holders of at least 60% of the units representing common limited partnership interests, including the common units held by the Company in its capacity as the Operating Partnership’s general partner. In addition, the Company may not engage in a merger, consolidation or other combination or the sale of substantially all of its assets or such similar transaction, without the approval of the holders of 60% of the common units, including the common units held by the Company in its capacity as the Operating Partnership’s general partner. The right of our common limited partners to vote on these transactions could limit our ability to complete a change of control transaction that might otherwise be in the best interest of all our security holders.

In certain circumstances, our limited partners must approve our dissolution and the disposition of properties contributed by the limited partners. For as long as limited partners own at least 5% of all of the Operating Partnership’s partnership interests, we must obtain the approval of limited partners holding a majority of the units representing common limited partnership interests before we may dissolve. As of December 31, ~~2018~~2019, limited partners owned approximately ~~2.0%~~1.9% of the Operating Partnership’s partnership interests, of which ~~0.8%~~0.7% was owned by John Kilroy. In addition, we agreed to use commercially reasonable efforts to minimize the tax consequences to certain common limited partners resulting from the repayment, refinancing, replacement, or restructuring of debt, or any sale, exchange, or other disposition of any of our other assets. The exercise of one or more of these approval rights by the limited partners could delay or prevent us from completing a transaction that may be in the best interest of all our security holders.

The Chairman of our board of directors and our President and Chief Executive Officer has substantial influence over our affairs.John Kilroy is the Chairman of our board of directors and our President and Chief Executive Officer. John Kilroy beneficially owned, as of December 31, ~~2018~~2019, approximately 1.5% of the total outstanding shares of our common stock. The percentage of outstanding shares of common stock beneficially owned includes ~~234,664~~274,256 shares of common stock, ~~501,512~~499,245 restricted stock units (“RSUs”) that were vested and held by John Kilroy at December 31, ~~2018,~~2019, and assumes the exchange into shares of our common stock of the 783,192 common units of the Operating Partnership held by John Kilroy (which may be exchanged for an equal number of shares of our common stock).

Pursuant to the Company’s charter, no stockholder may own, actually or constructively, more than 7.0% (by value or by number of shares, whichever is more restrictive) of our outstanding common stock without obtaining a waiver from the board of directors. The board of directors has waived the ownership limits with respect to John Kilroy, members of his family and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 19.6% of our common stock, excluding Operating Partnership units that are exchangeable into shares of our common stock. Consequently, John Kilroy has substantial influence over the Company, and because the Company is the manager of the Operating Partnership, over the Operating Partnership, and could exercise his influence in a manner that is not in the best interest of our stockholders, noteholders or unitholders. Also, John Kilroy may, in the future, have a substantial influence over the outcome of any matters submitted to our stockholders or unitholders for approval.

There are restrictions on the ownership of the Company’s capital stock that limit the opportunities for a change of control at a premium to existing security holders. Provisions of the Maryland General Corporation Law, the Company’s charter and bylaws and the Operating Partnership’s partnership agreement may delay, deter, or prevent a change of control of the Company, or the removal of existing management. Any of these actions might prevent our security holders from receiving a premium for their shares of common stock or common units over the then-prevailing market price of the shares of our common stock.

In order for the Company to qualify as a REIT under the Code, its stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year. Also, not more than 50% of the value of the outstanding shares of the Company’s stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). The Company’s charter contains restrictions on the ownership and transfer of its capital stock that are intended to assist the Company in complying with these requirements and continuing to qualify as a REIT. No single stockholder may own, either actually or constructively, absent a waiver

from the board of directors, more than 7.0% (by value or by number of shares, whichever is more restrictive) of the Company’s outstanding common stock.

The constructive ownership rules under the Code are complex and may cause stock owned actually or constructively by a group of related individuals and/or entities to be owned constructively by one individual or entity. As a result, the acquisition of less than the applicable ownership limit of a particular class of the Company’s capital stock could, nevertheless, cause that individual or entity, or another individual or entity, to constructively own stock in excess of, and thereby subject such stock to, the applicable ownership limit.

The board of directors may waive the ownership limits if it is satisfied that the excess ownership would not jeopardize the Company’s REIT status and if it believes that the waiver would be in our best interest. The board of directors has waived the ownership limits with respect to John Kilroy, members of his family and some of their affiliated entities. These named individuals and entities may own either actually or constructively, in the aggregate, up to 19.6% of our outstanding common stock, excluding common units that are exchangeable into shares of common stock.

If anyone acquires shares in excess of any ownership limits without a waiver, the transfer to the transferee will be void with respect to the excess shares, the excess shares will be automatically transferred to a trust for the benefit of a qualified charitable organization, and the purported transferee or owner will have no rights with respect to those excess shares.

The Company’s charter contains provisions that may delay, deter or prevent a change of control transaction. The following provisions of the Company’s charter may delay or prevent a change of control over us, even if a change of control might be beneficial to our security holders, deter tender offers that may be beneficial to our security holders, or limit security holders’ opportunity to receive a potential premium for their shares and/or units if an investor attempted to gain shares beyond the Company’s ownership limits or otherwise to effect a change of control:

the Company’s charter authorizes the board of directors to issue up to 30,000,000 shares of the Company’s preferred stock, including convertible preferred stock, without stockholder approval. The board of directors may establish the preferences, rights and other terms, including the right to vote and the right to convert into common stock any shares issued. The issuance of preferred stock could delay or prevent a tender offer or a change of control even if a tender offer or a change of control was in our security holders’ interest; and

the Company’s charter states that any director, or the entire board of directors, may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of at least two thirds of the votes of the Company’s capital stock entitled to be cast in the election of directors.

The board of directors may change investment and financing policies without stockholder or unitholder approval. Our board of directors determines our major policies, including policies and guidelines relating to our acquisition, development and redevelopment activities, leverage, financing, growth, operations, indebtedness, capitalization and distributions to our security holders. Our board of directors may amend or revise these and other policies and guidelines from time to time without stockholder or unitholder approval. Accordingly, our stockholders and unitholders will have limited control over changes in our policies and those changes could adversely impact our financial condition, results of operations, cash flows, the quoted trading price of our securities, and our ability to satisfy our debt service obligations and to pay dividends and distributions to our security holders.

We are not limited in our ability to incur debt. Our financing policies and objectives are determined by the board of directors. Our goal is to limit our dependence on leverage and maintain a conservative ratio of debt to total market capitalization. However, our organizational documents do not limit the amount or percentage of indebtedness, funded

or otherwise, that we may incur. As of December 31, ~~2018,~~2019, we had approximately ~~$3.0~~$3.6 billion aggregate principal amount of indebtedness outstanding, which represented ~~31.4%~~28.3% of our total market capitalization. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Company —Capitalization” for a calculation of our market capitalization. These ratios may be increased or decreased without the consent of our unitholders or stockholders. Increases in the amount of debt outstanding would result in an increase in our debt service costs, which could adversely affect cash flow and our ability to pay dividends and distributions to our security holders. Higher leverage also increases the risk of default on our obligations and limits our ability to obtain additional financing in the future.

We may issue additional common units and shares of capital stock without unitholder or stockholder approval, as applicable, which may dilute unitholder or stockholder investment. The Company may issue shares of our common stock, preferred stock or other equity or debt securities without stockholder approval, including the issuance of shares to satisfy REIT dividend distribution requirements. Similarly, the Operating Partnership may offer its common or preferred units for contributions of cash or property without approval by our stockholders or the Operating Partnership’s unitholders. Existing security holders have no preemptive rights to acquire any of these securities, and any issuance of equity securities under these circumstances may dilute a unitholder's or stockholder's investment.

The market price of our common stock may be adversely affected by future offerings of debt and equity securities by us or the Operating Partnership. In the future, we may increase our capital resources by offering our debt securities and preferred stock, the Operating Partnership’s debt securities and equity securities and our or the Operating Partnership’s other borrowings. Upon our liquidation, dissolution or winding-up, holders of such debt securities, our preferred stock and Operating Partnership’s equity securities, and lenders with respect to other borrowings by us and the Operating Partnership, will be entitled to receive distributions of our available assets prior to the holders of our common stock and it is possible that, after making distributions on these other securities and borrowings, no assets would be available for distribution to holders of our common stock. In addition, the Operating Partnership’s debt and equity securities and borrowings are structurally senior to our common stock, our debt securities and borrowings are senior in right of payment to our common stock, and any preferred stock we may issue in the future may have a preference over our common stock, and all payments (including dividends, principal and interest) and liquidating distributions on such securities and borrowings could limit our ability to pay dividends or make other distributions to the holders of our common stock. Because any decision to issue securities and make borrowings in the future will depend on market conditions and other factors, some of which may be beyond our control, we cannot predict or estimate the amount, timing or nature of our or the Operating Partnership’s future offerings or borrowings. Such future offerings or borrowings may reduce the market price of our common stock.

Sales of a substantial number of shares of the Company’s securities, or the perception that this could occur, could result in decreasing the quoted trading price per share of the Company’s common stock and of the Operating Partnership’s publicly-traded notes. Management cannot predict whether future issuances of shares of the Company’s common stock, or the availability of shares for resale in the open market will result in decreasing the market price per share of the Company’s common stock. As of December 31, ~~2018, 100,746,988~~2019, 106,016,287shares of the Company’s common stock were issued and outstanding.

As of December 31, ~~2018,~~2019, the Company had reserved for future issuance the following shares of common stock: ~~2,025,287~~2,023,287 shares issuable upon the exchange, at the Company’s option, of the Operating Partnership’s common units; approximately ~~0.6~~0.4 million shares remained available for grant under our 2006 Incentive Award Plan (see Note 15 “Share-Based Compensation” to our consolidated financial statements included in this report); approximately ~~1.7~~1.6 million shares issuable upon settlement of time-based RSUs; a maximum of 1.6 million shares contingently issuable upon settlement of RSUs subject to the achievement of market and/or performance conditions; and ~~25,500~~9,000 shares issuable upon exercise of outstanding options. The Company has a currently effective registration statement registering 9.2 million shares of our common stock for possible issuance under our 2006 Incentive Award Plan. The Company has a currently effective registration statement registering 1,649,760 shares of our common stock for possible issuance to and resale by certain holders of the Operating Partnership’s common units. That registration statement also registers 94,441 shares of common stock held by John Kilroy for possible resale. In addition, as of December 31, 2019, various forward equity sale agreements remain to be settled for 3,147,110 shares of common stock sold by financial institutions acting as forward purchasers. Consequently, if and when the shares are issued, they may be freely traded in the public markets.

Risks Related to Taxes and the Company’s Status as a REIT

Loss of the Company’s REIT status would have significant adverse consequences to us and the value of the Company’s common stock. The Company currently operates in a manner that is intended to allow it to qualify as a REIT for federal income tax purposes under the Code. If the Company were to lose its REIT status, the Company would face adverse tax consequences that would substantially reduce the funds available for distribution to its stockholders for each of the years involved because:

the Company would not be allowed a deduction for dividends paid to its stockholders in computing the Company’s taxable income and would be subject to federal income tax at regular corporate rates;

the Company could be subject to increased state and local taxes; and

unless entitled to relief under statutory provisions, the Company could not elect to be taxed as a REIT for four taxable years following the year during which the Company was disqualified.

In addition, if the Company failed to qualify as a REIT, it would not be required to make distributions to its stockholders. As a result of all these factors, the Company’s failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could adversely affect the value and quoted trading price of the Company’s common stock.

Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The complexity of these provisions and of the applicable Treasury regulations that have been promulgated under the Code is greater in the case of a REIT that, like the Company, holds its assets through a partnership. The determination of various factual matters and circumstances not entirely within our control may affect the Company’s ability to continue to qualify as a REIT. For example, to qualify as a REIT, at least 95% of the Company’s gross income in any year must be derived from qualifying sources. Also, the Company must make distributions to its stockholders aggregating annually at least 90% of the Company’s net taxable income (subject to certain adjustments and excluding any net capital gains). In addition, legislation, new regulations, administrative interpretations or court decisions may adversely affect the Company’s security holders or the Company’s ability to qualify as a REIT for federal income tax purposes or the desirability of an investment in a REIT relative to other investments. Although management believes that we are organized and operate in a manner to permit the Company to continue to qualify as a REIT, we cannot provide assurances that the Company has qualified or will continue to qualify as a REIT for tax purposes. We have not requested and do not plan to request a ruling from the Internal Revenue Service (“IRS”) regarding the Company’s qualification as a REIT.

To maintain the Company’s REIT status, we may be forced to borrow funds during unfavorable market conditions. To qualify as a REIT, the Company generally must distribute to its stockholders at least 90% of the Company’s net taxable income each year (subject to certain adjustments and excluding any net capital gains), and the Company will be subject to regular corporate income taxes to the extent that it distributes less than 100% of its net capital gains or distributes at least 90%, but less than 100%, of its net taxable income each year. In addition, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which distributions it pays in any calendar year are less than the sum of 85% of its ordinary income, 95% of its net capital gains, and 100% of its undistributed income from prior years. To maintain the Company’s REIT status and avoid the payment of federal income and excise taxes, the Operating Partnership may need to borrow funds and distribute or loan the proceeds to the Company so it can meet the REIT distribution requirements even if the then-prevailing market conditions are not favorable for these borrowings. These borrowing needs could result from differences in timing between the actual receipt of income and inclusion of income for federal income tax purposes, or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments.

If a transaction intended to qualify as a Section 1031 Exchange is later determined to be taxable or if we are unable to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax deferred basis. When possible, we dispose of properties in transactions that are intended to qualify as Section 1031 Exchanges. It is possible that the qualification of a transaction as a Section 1031 Exchange could be successfully challenged and determined to be currently taxable or that we may be unable to identify

and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange. In such case, our taxable income and earnings and profits would increase. This could increase the dividend income to our stockholders by reducing any return of capital they received. In some circumstances, we may be required to pay additional dividends or, in lieu of that, corporate income tax, possibly including interest and penalties. As a result, we may be required to borrow funds in order to pay additional dividends or taxes and the payment of such taxes could cause us to have less cash available to distribute to our stockholders. In addition, if a Section 1031 Exchange were later to be determined to be taxable, we may be required to amend our tax returns for the applicable year in question, including any information

reports we sent our stockholders. Moreover, under the Tax Cuts and Jobs Act (the “2017 Tax Legislation”), for exchanges completed after December 31, 2017, unless the property was disposed of or received in the exchange on or before such date, Section 1031 of the Code permits exchanges of real property only.It is possible that additional legislation could be enacted that could further modify or repeal the laws with respect to Section 1031 Exchanges, which could make it more difficult or not possible for us to dispose of properties on a tax deferred basis.

Dividends payable by REITs, including us, generally do not qualify for the reduced tax rates available for some dividends. “Qualified dividends” payable to U.S. stockholders that are individuals, trusts and estates generally are subject to tax at preferential rates. Subject to limited exceptions, dividends payable by REITs are not eligible for these reduced rates and are taxable at ordinary income tax rates. The more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including the shares of our capital stock. However, non-corporate stockholders, including individuals, generally may deduct up to 20% of dividends from a REIT, other than capital gain dividends and dividends treated as qualified dividend income, for taxable years beginning after December 31, 2017 and before January 1, 2026.

The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions which would be treated as sales for federal income tax purposes. A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, held primarily for sale to customers in the ordinary course of business. Although we do not intend to hold any properties that would be characterized as held for sale to customers in the ordinary course of our business, unless a sale or disposition qualifies under certain statutory safe harbors, such characterization is a factual determination and no guarantee can be given that the IRS would agree with our characterization of our properties or that we will always be able to make use of the available safe harbors.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments. To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. If we fail to comply with one or more of the asset tests at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. In order to meet these tests, we may be required to forego investments we might otherwise make or to liquidate otherwise attractive investments. Thus, compliance with the REIT requirements may hinder our performance and reduce amounts available for distribution to our stockholders.

Legislative or regulatory action could adversely affect our stockholders or us. In recent years, numerous legislative, judicial and administrative changes have been made to the federal income tax laws applicable to investments in REITs and similar entities. Additional changes to tax laws are likely to continue to occur in the future, and any such changes may adversely impact our ability to qualify as a REIT, our tax treatment as a REIT, our ability to comply with contractual obligations or the tax treatment of our stockholders and limited partners. Also, the law relating to the tax treatment of other entities, or an investment in other entities, could change, making an investment in such other entities more attractive relative to an investment in a REIT.

The 2017 Tax Legislation has significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and their stockholders. Changes made by the 2017 Tax Legislation that could affect us and our stockholders include:

temporarily reducing individual U.S. federal income tax rates on ordinary income; the highest individual U.S. federal income tax rate has been reduced from 39.6% to 37% for taxable years beginning after December 31, 2017 and before January 1, 2026;

permanently eliminating the progressive corporate tax rate structure, which previously imposed a maximum corporate tax rate of 35%, and replacing it with a flat corporate tax rate of 21%;

permitting a deduction for certain pass-through business income, including dividends received by our stockholders from us that are not designated by us as capital gain dividends or qualified dividend income, which will allow individuals, trusts, and estates to deduct up to 20% of such amounts for taxable years beginning after December 31, 2017 and before January 1, 2026;

reducing the highest rate of withholding with respect to our distributions to non-U.S. stockholders that are treated as attributable to gains from the sale or exchange of U.S. real property interests from 35% to 21%;

limiting our deduction for net operating losses arising in taxable years beginning after December 31, 2017 to 80% of REIT taxable income determined without regard to the dividends paid deduction;

generally limiting the deduction for net business interest expense in excess of 30% of a business’ “adjusted taxable income,” except for taxpayers (including most equity REITs) that engage in certain real estate businesses and elect out of this rule (provided that such electing taxpayers must use an alternative depreciation system with longer depreciation periods);

eliminating the corporate alternative minimum tax, for taxable years after December 31, 2017;

requiring us to take into account certain income no later than when we take it into account on applicable financial statements, even if the financial statements take such income into account before it accrues under otherwise applicable Code rules; and

repealing the performance-based compensation exception to the $1 million deduction limit on executive compensation and expanding the scope of employees to whom the limit applies.

~~Many of these changes that are applicable to us are effective with our 2018 taxable year, without any transition periods or grandfathering for existing transactions.~~ The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the U.S. Treasury Department and IRS, any of which could lessen or increase the impact of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities. While some of the changes made by the tax legislation may adversely affect us in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. ~~We continue to work with our tax advisors and auditors to determine the full impact that the recent tax legislation as a whole will have on us.~~


ITEM 1B.	UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

General

Our stabilized portfolio of operating properties was comprised of the following properties at December 31, ~~2018:~~2019:

Number of
Buildings

Rentable
Square Feet

Number of
Tenants

Percentage
Occupied
Percentage Leased
Stabilized Office Properties 94
13,232,580
482
94.4 % 96.6 %



	Number of Buildings	Rentable Square Feet	Number of Tenants	Percentage Occupied		Percentage Leased
Stabilized Office Properties	112	13,475,795	451	94.6	%	97.0	%

Number of
Buildings Number of Units 2018 Average Occupancy
Stabilized Residential Property 1
200
79.7 %



	Number of Buildings	Number of Units	2018 Average Occupancy
Stabilized Residential Property	1	200	82.4	%

Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently committed for construction, under construction or in the tenant improvement phase, undeveloped land, recently completed residential properties not yet stabilized and real estate assets held for sale. 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 properties in the tenant improvement phase as office and retail properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets at the historical cost of the property as the projects are placed in service.

During the year ended December 31, 2019, we added one completed development project to our stabilized office portfolio consisting of 394,340 square feet in San Francisco, California. As of December 31, ~~2018,~~2019, the following properties were excluded from our stabilized portfolio. We did not have any redevelopment properties or properties held for sale at December 31, ~~2018.~~2019.


	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾ (unaudited)	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾ / Units
In-process development projects - tenant improvement⁽²⁾	2	1,150,000	2	846,000
In-process development projects - under construction ⁽³⁾	3	1,290,000	6	2,291,000
Completed residential development project ⁽⁴⁾			1	237 units

________________________


(1)	Estimated rentable square feet upon completion.


(2)	Includes ~~88,000~~96,000 square feet of ~~Production, Distribution, and Repair (“PDR”)~~retail space.


(3)	In addition to the estimated office and ~~PDR~~life science rentable square feet noted above, development projects under construction also include ~~96,000 square feet of retail space and 801~~564 residential units.


(4)	Represents recently completed residential units not yet stabilized.

Our stabilized portfolio also excludes our future development pipeline, which as of December 31, ~~2018,~~2019, was comprised of five ~~potential~~future development sites, representing approximately 7361 gross acres of undeveloped land.

As of December 31, ~~2018,~~2019, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of eight office properties, ~~and~~ one development project under construction and one recently acquired future development project located in the state of Washington. All of our properties and development projects are 100% owned, excluding four office properties owned by three consolidated property partnerships and ~~one office property~~two development projects held in a Variable Interest ~~Entity~~Entities (“~~VIE”~~VIEs”) which we consolidated for financial reporting purposes that ~~was~~were established to facilitate apotential Section 1031 ~~Exchange that closed in January 2019.~~transactions.

We own our interests in all of our real estate assets through the Operating Partnership and the Finance Partnership. All our properties are held in fee, except for the ~~thirteen~~fourteen office buildings that are held subject to ~~four~~five long-term ground

leases for the land (see Note 18 “Commitments and Contingencies” to our consolidated financial statements included in this report for additional information regarding our ground lease obligations).

In general, the office properties are leased to tenants on a full service gross, modified gross or triple net basis. Under a full service gross lease, we are obligated to pay the tenant’s proportionate share of real estate taxes, insurance

and operating expenses up to the amount incurred during the tenant’s first year of occupancy (“Base Year”) or a negotiated amount approximating the tenant’s pro-rata share of real estate taxes, insurance and operating expenses (“Expense Stop”). The tenant pays its pro-rata share of increases in expenses above the Base Year or Expense Stop. A modified gross lease is similar to a full service gross lease, except tenants are obligated to pay their proportionate share of certain operating expenses, usually electricity, directly to the service provider. In addition, some office properties, primarily in the greater Seattle region and certain properties in certain submarkets in San Francisco, are leased to tenants on a triple net basis, pursuant to which the tenants pay their proportionate share of real estate taxes, operating costs and utility costs.

We believe that all of our properties are well maintained and do not require significant capital improvements. As of December 31, ~~2018~~2019, we managed all of our office properties through internal property managers.

Office Properties

The following table sets forth certain information relating to each of the stabilized office properties owned as of December 31, ~~2018.~~2019.


Property Location		No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2018 ⁽¹⁾		Annualized Base Rent (in $000’s) ⁽²⁾		Annualized Rent Per Square Foot ⁽²⁾			No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2019 ⁽¹⁾		Annualized Base Rent (in $000’s) ⁽²⁾	Annualized Rent Per Square Foot ⁽²⁾
Greater Los Angeles	Greater Los Angeles										Greater Los Angeles
2829 Townsgate Road, Thousand Oaks, California	⁽³⁾	1	1990	84,098	80.5	%	$	1,984	$	29.31
3101-3243 La Cienega Boulevard Culver City, California											⁽³⁾	19	2008-2017	151,908	100.0	%	6,853	45.11
2240 E. Imperial Highway, El Segundo, California	⁽⁴⁾	1	1983/ 2008	122,870	100.0	%	3,950		32.15		⁽⁴⁾	1	1983/ 2008	122,870	100.0	%	3,950	32.15
2250 E. Imperial Highway, El Segundo, California	⁽⁷⁾	1	1983	298,728	100.0	%	10,206		34.31		⁽⁵⁾	1	1983	298,728	100.0	%	10,206	34.31
2260 E. Imperial Highway, El Segundo, California	⁽⁴⁾	1	1983/ 2012	298,728	100.0	%	10,510		35.18		⁽⁴⁾	1	1983/ 2012	298,728	100.0	%	10,510	35.18
909 N. Pacific Coast Highway, El Segundo, California	⁽⁸⁾	1	1972/ 2005	244,136	99.5	%	7,658		31.90		⁽⁶⁾	1	1972/ 2005	244,136	92.9	%	8,414	37.56
999 N. Pacific Coast Highway, El Segundo, California	⁽⁹⁾	1	1962/ 2003	128,588	96.9	%	3,844		32.19		⁽⁷⁾	1	1962/ 2003	128,588	93.4	%	3,967	34.37
6115 W. Sunset Blvd., Los Angeles, California	⁽¹⁰⁾	1	1938/ 2015	26,105	100.0	%	1,615		61.88		⁽⁸⁾	1	1938/ 2015	26,105	100.0	%	1,665	63.78
6121 W. Sunset Blvd., Los Angeles, California	⁽⁵⁾	1	1938/ 2015	91,173	100.0	%	4,612		50.59		⁽³⁾	1	1938/ 2015	91,173	100.0	%	4,612	50.59
1525 N. Gower St., Los Angeles, California	⁽⁴⁾	1	2016	9,610	100.0	%	652		67.88		⁽⁴⁾	1	2016	9,610	100.0	%	652	67.88
1575 N. Gower St., Los Angeles, California	⁽¹¹⁾	1	2016	251,245	100.0	%	16,169		64.36		⁽⁹⁾	1	2016	251,245	100.0	%	16,170	64.36
1500 N. El Centro Ave., Los Angeles, California	⁽³⁾	1	2016	104,504	100.0	%	7,104		67.98		⁽¹⁰⁾	1	2016	104,504	100.0	%	7,104	67.98
6255 Sunset Blvd, Los Angeles, California	⁽¹²⁾	1	1971/ 1999	323,920	97.6	%	13,750		44.82		⁽¹¹⁾	1	1971/ 1999	323,920	96.8	%	14,078	46.27
3750 Kilroy Airport Way, Long Beach, California	⁽¹³⁾	1	1989	10,457	100.0	%	158		47.28		⁽¹²⁾	1	1989	10,457	100.0	%	92	30.42
3760 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1989	165,278	94.0	%	4,827		31.57		⁽¹⁰⁾	1	1989	165,278	92.5	%	4,876	31.89
3780 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1989	219,777	78.9	%	4,909		29.67		⁽¹⁰⁾	1	1989	221,452	81.5	%	5,708	32.35
3800 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	2000	192,476	96.1	%	5,917		31.99		⁽¹⁰⁾	1	2000	192,476	100.0	%	6,202	32.22
3840 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1999	136,026	100.0	%	4,882		35.89		⁽¹⁰⁾	1	1999	136,026	100.0	%	4,882	35.89
3880 Kilroy Airport Way, Long Beach, California	⁽¹⁴⁾	1	1987/ 2013	96,035	100.0	%	2,839		29.56
3900 Kilroy Airport Way, Long Beach, California	⁽³⁾	1	1987	129,893	91.4	%	3,092		26.08
8560 West Sunset Blvd, West Hollywood, California	⁽³⁾	1	1963/ 2007	71,875	100.0	%	5,187		72.79


Property Location		No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2018 ⁽¹⁾		Annualized Base Rent (in $000’s) ⁽²⁾		Annualized Rent Per Square Foot ⁽²⁾			No. of Buildings	Year Built/ Renovated	Rentable Square Feet	Percentage Occupied at 12/31/2019 ⁽¹⁾		Annualized Base Rent (in $000’s) ⁽²⁾		Annualized Rent Per Square Foot ⁽²⁾
3880 Kilroy Airport Way, Long Beach, California											⁽¹³⁾	1	1987/ 2013	96,035	100.0	%	2,839		29.56
3900 Kilroy Airport Way, Long Beach, California											⁽¹⁰⁾	1	1987	129,893	91.4	%	3,159		26.65
8560 West Sunset Blvd, West Hollywood, California											⁽¹⁰⁾	1	1963/ 2007	71,875	100.0	%	5,187		72.79
8570 West Sunset Blvd, West Hollywood, California	⁽¹⁵⁾	1	2002/ 2007	43,603	99.2	%	2,607		68.53		⁽¹⁴⁾	1	2002/ 2007	43,603	98.1	%	3,610		84.39
8580 West Sunset Blvd, West Hollywood, California	⁽⁵⁾	1	2002/ 2007	7,126	100.0	%	—		—		⁽³⁾	1	2002/ 2007	7,126	100.0	%	—		—
8590 West Sunset Blvd, West Hollywood, California	⁽⁵⁾	1	2002/ 2007	56,095	87.6	%	1,437		30.95		⁽³⁾	1	2002/ 2007	56,095	86.8	%	1,492		32.46
12100 W. Olympic Blvd., Los Angeles, California	⁽³⁾	1	2003	152,048	100.0	%	8,502		55.92		⁽¹⁰⁾	1	2003	152,048	87.8	%	8,115		60.78
12200 W. Olympic Blvd., Los Angeles, California	⁽³⁾	1	2000	150,832	91.9	%	7,026		67.46		⁽¹⁰⁾	1	2000	150,832	89.5	%	6,843		68.14
12233 W. Olympic Blvd., Los Angeles, California	⁽¹⁶⁾	1	1980/ 2011	151,029	94.3	%	5,357		56.73		⁽¹⁵⁾	1	1980/ 2011	151,029	86.9	%	4,541		60.40
12312 W. Olympic Blvd., Los Angeles, California	⁽⁶⁾	1	1950/ 1997	76,644	100.0	%	4,096		53.44		⁽¹⁶⁾	1	1950/ 1997	76,644	100.0	%	4,096		53.44
1633 26th Street, Santa Monica, California	⁽¹⁷⁾	1	1972/ 1997	43,857	—	%	—		—		⁽¹⁰⁾	1	1972/ 1997	43,857	34.9	%	819		53.47
2100/2110 Colorado Avenue, Santa Monica, California	⁽³⁾	3	1992/ 2009	102,864	100.0	%	4,357		42.36		⁽¹⁰⁾	3	1992/ 2009	102,864	100.0	%	4,357		42.36
3130 Wilshire Blvd., Santa Monica, California	⁽³⁾	1	1969/ 1998	90,074	96.0	%	3,682		42.58		⁽¹⁰⁾	1	1969/ 1998	90,074	100.0	%	4,091		45.42
501 Santa Monica Blvd., Santa Monica, California	⁽¹⁸⁾	1	1974	76,803	82.7	%	4,242		66.80		⁽¹⁷⁾	1	1974	76,803	97.8	%	4,956		65.95
Subtotal/Weighted Average – Los Angeles and Ventura Counties		33		3,956,497	95.1	%	$	155,171	$	42.68		51		4,025,982	95.2	%	$	164,046	$	44.23
Orange County
2211 Michelson, Irvine, California	⁽¹⁹⁾	1	2007	271,556	89.6	%	$	8,993	$	37.67
Subtotal/Weighted Average – Orange County		1		271,556	89.6	%	$	8,993	$	37.67
San Diego County
12225 El Camino Real, Del Mar, California	⁽⁴⁾	1	1998	58,401	100.0	%	$	2,041	$	34.95	⁽⁴⁾	1	1998	58,401	100.0	%	$	2,483	$	42.52
12235 El Camino Real, Del Mar, California	⁽⁴⁾	1	1998	53,751	88.9	%	2,225		46.57		⁽⁴⁾	1	1998	53,751	88.9	%	2,225		46.57
12340 El Camino Real, Del Mar, California	⁽²⁰⁾	1	2002	89,272	45.8	%	1,780		43.52		⁽¹⁸⁾	1	2002	89,272	50.1	%	1,615		36.11
12348 High Bluff Drive, Del Mar, California	⁽²¹⁾	1	1999	38,806	100.0	%	1,314		33.86		⁽¹⁹⁾	1	1999	38,806	80.8	%	1,298		41.36
12390 El Camino Real, Del Mar, California	⁽⁴⁾	1	2000	70,140	44.9	%	1,296		41.15		⁽⁴⁾	1	2000	70,140	100.0	%	3,318		47.31
12400 High Bluff Drive, Del Mar, California	⁽⁴⁾	1	2004	209,220	100.0	%	10,671		51.00		⁽⁴⁾	1	2004	209,220	100.0	%	10,671		51.00
12770 El Camino Real, Del Mar, California	⁽³⁾	1	2016	73,032	100.0	%	3,392		53.16		⁽²⁰⁾	1	2016	73,032	66.1	%	2,222		56.96
12780 El Camino Real, Del Mar, California	⁽⁶⁾	1	2013	140,591	100.0	%	6,883		48.96		⁽¹⁶⁾	1	2013	140,591	100.0	%	7,138		50.77
12790 El Camino Real, Del Mar, California	⁽²²⁾	1	2013	78,836	100.0	%	3,263		41.39		⁽²¹⁾	1	2013	78,836	71.2	%	2,446		43.58
3579 Valley Centre Drive, Del Mar, California	⁽⁴⁾	1	1999	52,418	100.0	%	2,058		39.26		⁽⁴⁾	1	1999	54,960	100.0	%	2,182		39.70
3611 Valley Centre Drive, Del Mar, California	⁽²³⁾	1	2000	129,656	100.0	%	5,518		42.56		⁽²²⁾	1	2000	129,656	100.0	%	5,078		39.17
3661 Valley Centre Drive, Del Mar, California	⁽²⁴⁾	1	2001	128,364	100.0	%	6,025		49.60		⁽²³⁾	1	2001	128,364	100.0	%	6,025		49.60
3721 Valley Centre Drive, Del Mar, California	⁽²⁵⁾	1	2003	115,193	100.0	%	5,310		46.09		⁽²⁴⁾	1	2003	115,193	100.0	%	5,310		46.09
3811 Valley Centre Drive, Del Mar, California	⁽⁶⁾	1	2000	112,067	100.0	%	5,199		46.39		⁽¹⁶⁾	1	2000	112,067	100.0	%	5,199		46.39
13280 Evening Creek Drive South, I-15 Corridor, California	⁽²⁶⁾	1	2008	41,196	100.0	%	1,132		27.47		⁽²⁵⁾	1	2008	41,196	100.0	%	1,196		29.04
13290 Evening Creek Drive South, I-15 Corridor, California	⁽⁴⁾	1	2008	61,180	100.0	%	1,453		23.75		⁽⁴⁾	1	2008	61,180	100.0	%	1,453		23.75


ITEM 7.	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.

Forward-Looking Statements

Statements contained in this “Item 7. 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 our plans, objectives, capital resources, portfolio performance, results of operations, projected future occupancy and rental rates, lease expirations, debt maturities, potential investments, strategies such as capital recycling, development and redevelopment activity, projected construction costs, projected construction commencement and completion dates, projected square footage of space that could be constructed on undeveloped land that we own, projected rentable square footage of or number of units in properties under construction or in the development pipeline, anticipated proceeds from capital recycling activity or other dispositions and anticipated dates of those activities or dispositions, projected increases in the value of properties, dispositions, future executive incentive compensation, pending, potential or proposed acquisitions,plans to grow our Net Operating Income and FFO, our ability to re-lease properties at or above current market rates, anticipated market conditions and demographics and other forward-looking financial data, as well as the discussion in “—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 or implied 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 the forward-looking statements, including, among others:

global market and general economic conditions and their effect on our liquidity and financial conditions and those of our tenants;

adverse economic or real estate conditions generally, and specifically, in the States of California and Washington;

risks associated with our investment in real estate assets, which are illiquid, and with trends in the real estate industry;

defaults on or non-renewal of leases by tenants;

any significant downturn in tenants’ businesses;

our ability to re-lease property at or above current market rates;

costs to comply with government regulations, including environmental remediations;

the availability of cash for distribution and debt service and exposure to risk of default under debt obligations;

increases in interest rates and our ability to manage interest rate exposure;

the availability of financing on attractive terms or at all, which may adversely impact our future interest expense and our ability to pursue development, redevelopment and acquisition opportunities and refinance existing debt;

a decline in real estate asset valuations, which may limit our ability to dispose of assets at attractive prices or obtain or maintain debt financing, and which may result in write-offs or impairment charges;

significant competition, which may decrease the occupancy and rental rates of properties;

potential losses that may not be covered by insurance;

the ability to successfully complete acquisitions and dispositions on announced terms;

the ability to successfully operate acquired, developed and redeveloped properties;

the ability to successfully complete development and redevelopment projects on schedule and within budgeted amounts;

delays or refusals in obtaining all necessary zoning, land use and other required entitlements, governmental permits and authorizations for our development and redevelopment properties;

increases in anticipated capital expenditures, tenant improvement and/or leasing costs;

defaults on leases for land on which some of our properties are located;

adverse changes to, or enactment or implementations of, tax laws or other applicable laws, regulations or legislation, as well as business and consumer reactions to such changes;

risks associated with joint venture investments, including our lack of sole decision-making authority, our reliance on co-venturers’ financial condition and disputes between us and our co-venturers;

environmental uncertainties and risks related to natural disasters; and

our ability to maintain our status as a REIT.

The factors included in this report are not exhaustive and additional factors could adversely affect our business and financial performance. For a discussion of additional factors that could materially adversely affect the Company’s and the Operating Partnership’s business and financial performance, see the discussion below as well as “Item 1A. Risk Factors,” and in our other filings with the SEC. All forward-looking statements are based on information that was available and speak only as of the dates on which they were 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.

Company Overview

We are a self-administered REIT active in premier office and mixed-use 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 Greater 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. We own our interests in all of our real properties through the Operating Partnership and the Finance Partnership and generally conduct substantially all of our operations through the Operating Partnership. We owned an approximate ~~98.0%~~98.1% and ~~97.9%~~98.0% general partnership interest in the Operating Partnership as of December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. All of our properties are held in fee except for the ~~thirteen~~fourteen office buildings that are held subject to long-term ground leases for the land (see Note 18 “Commitments and Contingencies”

~~and Contingencies”~~ to our consolidated financial statements included in this report for additional information regarding our ground lease obligations).

~~2018~~2019 Operating and Development Highlights

~~2018~~2019 was ~~an excellent~~a terrific year across the Company. We achieved aanother Company record in annual leasing and continued to create value in our operating and development platforms that we believe will drive future earnings and dividend growth.

Leasing. During ~~2018,~~2019, we executed new and renewal leases totaling ~~2.8~~1.8 millionsquare feet within our stabilized portfolio with an increase in GAAP rents of ~~36.0%~~52.3% and an increase in cash rents of ~~14.8%~~29.6%. ~~The occupancy of our~~Our stabilized office portfolio was ~~94.4%~~94.6% occupied and 97.0% leased as of December 31, ~~2018.~~2019. We also signed approximately ~~0.6~~1.7 million square feet of leases in our development portfolio.

Development. We continued to execute on our development program during ~~2018, with~~2019. We added one completed development project to our stabilized portfolio, completed construction on 237 residential units, commenced revenue recognition on the first two phases of a development ~~projects progressing~~project in the tenant improvement phase, had one development project progress from the under construction phase to the tenant improvement phase, ~~commencing~~commenced construction on ~~two~~three projects and ~~acquiring a 39-acre waterfront~~acquiredtwo development ~~site~~sites in ~~South San Francisco~~two transactions for approximately ~~$308.2~~$173.0 million. ~~The site is fully entitled for 2.5 million square feet of office and laboratory space.~~ See “—Factors that May Influence Future Operations” for additional ~~information.~~information regarding our development program.

Capital Recycling Program. We have continued to utilize our capital recycling program to provide additional capital to finance development expenditures, fund potential acquisitions, repay long-term debt and for other general corporate purposes. Our general strategy is to target the disposition of non-core properties or those that have limited upside for us and redeploy the capital into acquisitions and/or development projects where we can create additional value to generate higher returns (see “—Factors that May Influence Future Operations” for additional information).

In connection with this strategy, during ~~2018,~~2019, we generated gross sales proceeds totaling approximately ~~$373.0~~$133.8 million through the sale of 11two office buildings.

Operating Property Acquisitions. We remain a disciplined and opportunistic buyer of office properties and development opportunities 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, health care, life sciences, entertainment and professional ~~services.~~services companies. During ~~2018,~~2019, we acquired ~~three~~a 19-building creative office ~~buildings~~campus in ~~South San Francisco and an office building~~Culver City, California in ~~San Francisco~~one transaction totaling ~~255,560 rentable~~151,908 square feet of ~~office and laboratory~~ space ~~in two separate transactions~~ for a total cash purchase price of approximately ~~$257.0~~$186.0 million.

~~2018~~2019 Financing Highlights

In ~~2018,~~2019, we raised approximately ~~$783.8~~$500.0 million in new debt and settled the 2018 forward equity ~~and debt, entered into~~sale agreements by issuing 5,000,000 shares of common stock for net proceeds of $354.3 million. In addition, we executed forward equity sale agreements to sell ~~5,000,000~~3,147,110 shares of common stock ~~commenced a new $500.0 million~~under our at-the-market stock offering program, ~~and redeemed approximately $250.0 million~~which we expect to fully settle in ~~more expensive debt.~~the first quarter of 2020 through the first quarter of 2021 at this time. Refer to our ~~2018~~2019 Financing Highlights in “—Liquidity and Capital Resources of the Operating Partnership” for a list of financing transactions completed in ~~2018~~2019 and Notes 9 and 13, “Secured and Unsecured Debt of the Operating Partnership” and “Stockholders’ Equity of the Company,” respectively, to our consolidated financial statements included in this report for additional information regarding our debt and capital market activity.

Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods.

Certain accounting policies are considered to be critical accounting policies. Critical accounting policies are those policies that require our management team to make significant estimates and/or assumptions about matters that are

uncertain at the time the estimates and/or assumptions are made or where we are required to make significant judgments

and assumptions with respect to the practical application of accounting principles in our business operations. Critical accounting policies are by definition those policies that are material to our financial statements and for which the impact of changes in estimates, assumptions, and judgments could have a material impact to our financial statements.

The following critical accounting policies discussion reflects what we believe are the most significant estimates, assumptions, and judgments used in the preparation of our consolidated financial statements. This discussion of our critical accounting policies is intended to supplement the description of our accounting policies in the footnotes to our consolidated financial statements and to provide additional insight into the information used by management when evaluating significant estimates, assumptions, and judgments. For further discussion of our significant accounting policies, see Note 2 “Basis of Presentation &and Significant Accounting Policies” to our consolidated financial statements included in this report.

~~Rental~~ Revenue Recognition

Rental revenue for office and retail operating properties is our principal source of revenue. We recognize revenue from base rent, additional rent (which consists of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs), parking and other lease-related revenue once all of the following criteria are met: (i) the agreement has been fully executed and delivered, (ii) services have been rendered, (iii) the amount is fixed or determinable and (iv) payment has been received or the collectability of the amount due is probable. Lease termination fees are amortized over the remaining lease term, if applicable. If there is no remaining lease term, they are recognized when received and realized. Minimum annual rental revenues are recognized in rental revenues on a straight-line basis over the non-cancellable term of the related lease.

Base Rent

The timing of when we commence rental revenue recognition for office and ~~life science~~retail properties depends largely on our conclusion as to whether we are or the tenant is the owner for accounting purposes of tenant improvements at the leased property. When we conclude that we are the owner of tenant improvements for accounting purposes, we record the cost to construct the tenant improvements as an asset and we commence rental revenue recognition when the tenant takes possession of or controls the finished space, which is ~~typically~~generally when ~~the~~tenant improvements being recorded as our ~~asset~~assets are substantially complete. In certain instances, when we conclude that the tenant is the owner of certain tenant improvements for accounting purposes, rental revenue recognition begins when the tenant takes possession or controls the physical use of the leased space, which may occur in phases or for an entire building or project. The determination of who owns the tenant improvements is made on a lease-by-lease basis and has a significant effect on the timing of commencement of revenue recognition.

The determination of whether we are or the tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment. In making that determination, we consider numerous factors and perform a detailed evaluation of each individual lease. No one factor is determinative in reaching a conclusion. The factors we evaluate include but are not limited to the following:

whether the lease agreement requires landlord approval of how the tenant improvement allowance is spent prior to installation of the tenant improvements;

whether the lease agreement requires the tenant to provide evidence to the landlord supporting the cost and what the tenant improvement allowance was spent on prior to payment by the landlord for such tenant improvements;

whether the tenant improvements are unique to the tenant or reusable by other tenants;

whether the tenant is permitted to alter or remove the tenant improvements without the consent of the landlord or without compensating the landlord for any lost utility or diminution in fair value; and

whether the ownership of the tenant improvements remains with the landlord or remains with the tenant at the end of the lease term.

~~In addition, we also record the cost of certain tenant improvements paid for or reimbursed by tenants when~~When we conclude that we are the owner of ~~such~~ tenant improvements for accounting purposes using the factors discussed ~~above. For these tenant-funded tenant improvements,~~above, we record the ~~amount funded~~cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants, as ~~deferred revenue, which is amortized and recognized as rental revenue over the term of the related lease beginning upon substantial completion of the leased premises.~~a capital asset. During the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016,~~2017, we capitalized $12.0 million, $22.5 million ~~$22.0 million~~ and ~~$22.3~~$22.0 million, respectively, of tenant-funded tenant improvements. The amount of tenant-funded tenant improvements recorded in any given year varies based upon the mix of specific leases executed and/or commenced during the reporting period. For these tenant-funded tenant improvements, we record the amount funded by or reimbursed by tenants as deferred revenue, which is amortized and recognized as rental income on a straight-line basis over the term of the related lease beginning upon substantial completion of the leased premises. The determination of who owns the tenant improvements has a significant impact on the amount of non-cash rental revenue that we record related to the amortization of deferred revenue for tenant-funded tenant improvements. For the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016,~~2017, we recognized $19.2 million, $18.4 million ~~$16.8 million~~ and ~~$13.2~~$16.8 million, respectively, of non-cash rental revenue related to the amortization of deferred revenue recorded in connection with tenant-funded tenant improvements.

When we conclude that ~~we are not the owner and~~ the tenant is the owner of certain tenant improvements for accounting purposes, we record our contribution towards those tenant-owned improvements as a lease incentive, which

is included in deferred leasing costs and acquisition-related intangible assets, net on our consolidated balance sheets and amortized as a reduction to rental revenue on a straight-line basis over the term of the related ~~lease, and rental revenue recognition begins when the tenant takes possession of or controls the space.~~lease.

Our determination as to whether we are or the tenant is the owner of tenant improvements for accounting purposes is made on a lease-by-lease basis and has a significant impact on the amount of non-cash rental revenue that we record related to the amortization of deferred revenue for tenant-funded tenant improvements, and also has a significant effect on the timing of commencement of revenue recognition.

For residential properties, we commence revenue recognition upon ~~occupancy of the premises by the tenant.~~lease commencement. Residential rental revenue is recognized on a straight-line basis over the term of the related lease, net of any concessions.

~~Tenant Reimbursement Revenue~~

Additional Rent - Reimbursements from ~~tenants consist~~Tenants

Additional rent, consisting of amounts due from tenants for common area maintenance, real estate taxes, and other recoverable costs, ~~including capital expenditures.~~ are recognized in rental income in the period the recoverable costs are incurred. Prior to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842)” (“Topic 842”) on January 1, 2019, such amounts were recognized in revenue as tenant reimbursements. Additional rent where we pay the associated costs directly to third-party vendors and are reimbursed by our tenants are recognized and recorded on a gross basis, with the corresponding expense recognized in property expenses or real estate taxes. Prior to the adoption of Topic 842, recoverable costs were generally recognized and recorded on a gross basis when we were the primary obligor with respect to purchasing goods and services from third-party suppliers, had discretion in selecting the supplier, and had credit risk.

Calculating ~~tenant reimbursement revenue~~additional rent requires an in-depth analysis of the complex terms of each underlying lease. Examples of judgments and estimates used when determining the amounts recoverable include:

estimating the final expenses, net of accruals, that are recoverable;

estimating the fixed and variable components of operating expenses for each building;

conforming recoverable expense pools to those used in establishing the base year or base allowance for the applicable underlying lease; and

concluding whether an expense or capital expenditure is recoverable pursuant to the terms of the underlying lease.

During the year, we accrue estimated ~~tenant reimbursement revenue~~additional rent in the period in which the ~~tenant reimbursable~~recoverable costs are incurred based on our best estimate of the amounts to be recovered. Throughout the year, we perform analyses to properly match ~~tenant reimbursement revenue~~additional rent with reimbursable costs incurred to date. Additionally, during the fourth quarter of each year, we perform preliminary reconciliations and accrue additional ~~tenant reimbursement revenue~~rent or refunds. Subsequent to year end, we perform final detailed reconciliations and analyses on a lease-by-lease basis and bill or refund each tenant for any cumulative annual

adjustments in the first and second quarters of each year for the previous year’s activity. Our historical experience for the years ended December 31, ~~2017~~2018 and ~~2016~~2017 has been that our final reconciliation and billing process resulted in final amounts that approximated the total annual ~~tenant reimbursement revenues~~additional rent recognized.

Uncollectible Lease Receivables and Allowances for ~~Uncollectible Current~~ Tenant ~~Receivables~~ and Deferred Rent Receivables

~~Tenant receivables~~We carry our current and deferred rent receivables ~~are carried~~ net of allowances for amounts that may not be collected. Prior to the adoption of Topic 842 on January 1, 2019, the allowances were increased or decreased through provision for ~~uncollectible current tenant receivables~~bad debts on our consolidated statements of operations. Upon the adoption of Topic 842 on January 1, 2019, the allowances are increased or decreased through rental income, and deferred rent receivables. Current tenant receivables consist primarily of amounts due for contractual lease payments and reimbursements of common area maintenance expenses, property taxes, and other costs recoverable from tenants. Deferred rent receivables represent the amount by which the cumulative straight-line rental revenue recorded to date exceeds cash rents billed to date under the lease agreement. As of December 31, 2018 and 2017, current receivables were carried net of an allowance for uncollectible tenant receivables of $4.6 million and $2.3 million, respectively, for each period and deferred rent receivables were carried net of an allowance for deferred rent of $3.3 million~~and $3.2 million, respectively.~~

~~Management’s~~our determination of the adequacy of the ~~allowance~~Company’s allowances for ~~uncollectible~~ tenant receivables ~~and~~includes a binary assessment of whether or not substantially all of the ~~allowance for deferred rent receivables is performed~~amounts due under a tenant’s lease agreement are probable of collection. Such assessment involves using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of specific tenants, specific industry trends and conditions, and general economic trends and

conditions. Since these factors are beyond our control, actual results can differ from our estimates, and such differences could be material. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.

For tenant and deferred rent receivables associated with leases whose rents are deemed probable of collection, we may record an allowance under other authoritative GAAP using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of specific tenants, specific industry trends and conditions, and general economic trends and conditions. Since these factors are beyond our control, actual results can differ from our estimates, and such differences could be material. Tenant and deferred rent receivables deemed probable of collection are carried net of allowances for uncollectible accounts, with increases or decreases in the allowances recorded through rental income on our consolidated statements of operations. Prior to the adoption of Topic 842 on January 1, 2019, the allowances were increased or decreased through provision for bad debts on our consolidated statements of operations.

Current tenant receivables consist primarily of amounts due for contractual lease payments and reimbursements of common area maintenance expenses, property taxes, and other costs recoverable from tenants. With respect to the allowance for uncollectible tenant receivables, the specific identification methodology analysis relies on factors such as the age and nature of the receivables, the payment history and financial condition of the tenant, our assessment of the tenant’s ability to meet its lease obligations, and the status of negotiations of any disputes with the tenant.

Deferred rent receivables represent the amount by which the cumulative straight-line rental revenue recorded to date exceeds cash rents billed to date under the lease agreement. With respect to the allowance for deferred rent receivables, given the longer-term nature of these receivables, the specific identification methodology analysis evaluates each of our significant tenants and any tenants on our internal watchlist and relies on factors such as each tenant’s financial condition and its ability to meet its lease obligations. We evaluate our reserve levels quarterly based on changes in the financial condition of tenants and our assessment of the tenant’s ability to meet its lease obligations, overall economic conditions, and the current business environment.

For the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016,~~2017, we recorded a total ~~provision~~allowance for ~~bad debts~~uncollectible accounts for both current tenant receivables and deferred rent receivables of approximately 0.3%,0.4%,~~0.5%~~ and ~~0.0%~~0.5%, respectively, of ~~rental revenue.~~total revenues. In addition, for the ~~year~~years ended December 31, 2019 and 2018, we recorded an additional provision for ~~bad debts~~uncollectible accounts of approximately 0.1% and 0.4%, respectively, of total revenues related to a note receivable. In the event our estimates were not accurate and we had to change our allowances by 1% of revenue from continuing operations, the potential impact to our net income available to common stockholders would be approximately $8.4 million, $7.5 million ~~$7.2 million~~ and ~~$6.4~~$7.2 million for the years ended December 31, 2019, 2018 and 2017, ~~and 2016,~~ respectively.

Acquisitions

~~Subsequent to our adoption of~~ ~~Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2017-01 (“ASU 2017-01”) on January 1, 2017, which was adopted on a prospective basis, a~~Acquisitions of operating properties and development and redevelopment opportunities generally ~~no longer~~do not meet the definition of a business and are accounted for as asset ~~acquisitions.~~acquisitions, as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. For these asset acquisitions, we record the acquired tangible and intangible assets and assumed liabilities based on each asset’s and liability’s relative fair value at the acquisition date of the total purchase price plus any capitalized acquisition costs. We record the acquired tangible and intangible assets and assumed liabilities of acquisitions of operating properties and development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date.

We assess and consider fair value based on estimated cash flow projections that utilize available market information and discount and/or capitalization rates that we deem appropriate. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The acquired assets and assumed liabilities for an operating property acquisition generally include but are not limited to: land and improvements, buildings and improvements, construction in progress and identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any.

The fair value of land and improvements is derived from comparable sales of land and improvements within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements and leasing costs considers the value of the property as if it was vacant as well as current replacement costs and other relevant market rate information.

The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) management’s estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangible assets, net on the balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related liabilities, net on the balance sheet and are amortized on a straight-line basis

as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. Our below-market operating leases generally do not include fixed rate or below-market renewal options. If a lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related above-market or below-market lease intangible would be accelerated.

The fair value of acquired in-place leases is derived based on management’s assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. This fair value is based on a variety of considerations including, but not necessarily limited to: (1) the value associated with avoiding the cost of originating the acquired in-place leases; (2) the value associated with lost revenue related to tenant reimbursable operating costs estimated to be incurred during the assumed lease-up period; and (3) the value associated with lost rental revenue from existing leases during the assumed lease-up period. Factors we consider in performing these analyses include an estimate of the carrying costs during the expected lease-up periods, current market conditions, and costs to execute similar leases. In estimating carrying costs, we include real estate taxes, insurance and other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on current market demand at market rates. In estimating costs to execute similar leases, we consider leasing commissions, legal and other related expenses. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related intangible assets, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. If a lease were to be terminated or if termination were determined to be likely prior to its contractual expiration (for example resulting from bankruptcy), amortization of the related unamortized in-place lease intangible would be accelerated.

The determination of the fair value of any debt assumed in connection with a property acquisition is estimated by discounting the future cash flows using interest rates available for the issuance of debt with similar terms and remaining maturities.

The determination of the fair value of the acquired tangible and intangible assets and assumed liabilities of acquisitions requires us to make significant judgments and assumptions about the numerous inputs discussed above. The use of different assumptions in these fair value calculations could significantly affect the reported amounts of the allocation of our acquisition related assets and liabilities and the related depreciation and amortization expense recorded for such assets and liabilities. In addition, because the value of above and below market leases are amortized as either a reduction or increase to rental income, respectively, our judgments for these intangibles could have a significant impact on our reported rental revenues and results of operations.

~~Subsequent to our adoption of ASU 2017-01 on January 1, 2017,~~ ~~transaction~~Transaction costs associated with our acquisitions are capitalized as part of the purchase price of the acquisition. ~~Prior to our adoption of~~ ASU 2017-01, acquisition costs associated with all operating property acquisitions and those development and redevelopment acquisitions that met the criteria to be accounted for as business combinations were expensed as incurred and costs associated with development acquisitions accounted for as asset acquisitions were capitalized as part of the cost of the asset.During the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016,~~2017, we capitalized $1.6 million, $3.8 million, ~~$4.6 million,~~ and ~~$0.5~~$4.6 million, respectively, of acquisition costs. ~~During the year ended December 31, 2016, we expensed $1.9 million of acquisition costs.~~

Evaluation of Asset Impairment

We evaluate our real estate assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of a given asset may not be recoverable. We evaluate our real estate assets for impairment on a property-by-property basis. Indicators we use to determine whether an impairment evaluation is necessary include:

low occupancy levels, forecasted low occupancy levels or near term lease expirations at a specific property;

current period operating or cash flow losses combined with a historical pattern or future projection of potential continued operating or cash flow losses at a specific property;

deterioration in rental rates for a specific property as evidenced by sudden significant rental rate decreases or continuous rental rate decreases over numerous quarters, which could signal a continued decrease in future cash flow for that property;

deterioration of a given rental submarket as evidenced by significant increases in market vacancy and/or negative absorption rates or continuous increases in market vacancy and/or negative absorption rates over numerous quarters, which could signal a decrease in future cash flow for properties within that submarket;

significant increases in property sales yields, continuous increases in property sales yields over several quarters, or recent property sales at a loss within a given submarket, each of which could signal a decrease in the market value of properties;

significant change in strategy or use of a specific property or any other event that could result in a decreased holding period, including classifying a property as held for sale, or significant development delay;

evidence of material physical damage to the property; and

default by a significant tenant when any of the other indicators above are present.

When we evaluate for potential impairment our real estate assets to be held and used, we first evaluate whether there are any indicators of impairment. If any impairment indicators are present for a specific real estate asset, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the real estate asset to the real estate asset’s estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the real estate asset, we perform an impairment loss calculation to determine if the fair value of the real estate asset less estimated costs to sell, is less than the net carrying value of the real estate asset. We also perform an impairment loss calculation for real estate assets held for sale to determine if the fair value of the real estate asset, less estimated costs to sell, is less than the net carrying value of the real estate asset. Our impairment loss calculation compares the net carrying amount of the real estate asset to the real estate asset’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We recognize an impairment loss if the amount of the asset’s net carrying amount exceeds the asset’s

estimated fair ~~value less costs to sell.~~value. If we recognize an impairment loss, the estimated fair value of the asset becomes its new cost basis. For a depreciable long-lived asset, the new cost basis ~~will~~would be depreciated (amortized) over the remaining useful life of that asset. If a real estate asset is designated as real estate held for sale, it is carried at the lower of the net carrying value or estimated fair value less costs to sell, and depreciation ceases.

Our undiscounted cash flow and fair value calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flow and property fair values, including determining our estimated holding period and selecting the discount or capitalization rate that reflects the risk inherent in future cash flow. Estimating projected cash flow is highly subjective as it requires assumptions related to future rental rates, tenant allowances, operating expenditures, property taxes, capital improvements, and occupancy levels. We are also required to make a number of assumptions relating to future economic and market events and prospective operating trends. Determining the appropriate capitalization rate also requires significant judgment and is typically based on many factors including the prevailing rate for the market or submarket, as well as the quality and location of the properties. Further, capitalization rates can fluctuate resulting from a variety of factors in the overall economy or within regional markets. If the actual net cash flow or actual market capitalization rates significantly differ from our estimates, the impairment evaluation for an individual asset could be materially affected.

For each property where such an indicator occurred and/or for properties within a given submarket where such an indicator occurred, we completed an impairment evaluation. After completing this process, we determined that for each of the operating properties evaluated, undiscounted cash flows over the holding period were in excess of carrying value and, therefore, we did not record any impairment losses for these properties.

Cost Capitalization and Depreciation

We capitalize costs associated with development and redevelopment activities, capital improvements, and tenant improvements, including internal compensation costs. For the years ended December 31, 2019, 2018 and 2017, we capitalized $25.6 million, $24.2 million and $23.2 million, respectively, of internal costs to our qualifying development projects. In addition, for development and redevelopment projects, we

also capitalize the following costs during periods in which activities necessary to prepare the project for its intended use are in progress: interest costs based on the weighted average interest rate of our outstanding indebtedness for the period, real estate taxes and insurance. ~~For the years ended December 31, 2018, 2017 and 2016, we capitalized $24.2 million, $23.2 million and $19.0 million, respectively, of internal costs to our qualifying development projects.~~

Amounts capitalized are depreciated or amortized over estimated useful lives determined by management. We depreciate buildings and improvements based on the estimated useful life of the asset, and we amortize tenant improvements over the shorter of the estimated useful life or estimated remaining life of the related lease. All capitalized costs are depreciated or amortized using the straight-line method.

Determining whether expenditures meet the criteria for capitalization and the assignment of depreciable lives requires management to exercise significant judgment. Expenditures that meet one or more of the following criteria generally qualify for capitalization:

provide benefit in future periods;

extend the useful life of the asset beyond our original estimates; and

increase the quality of the asset beyond our original estimates.

Our historical experience has demonstrated that we have not had material write-offs of assets and that our depreciation and amortization estimates have been reasonable and appropriate.

Share-Based Incentive Compensation Accounting

At December 31, ~~2018,~~2019, the Company had one share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan, which is described more fully in Note 15 “Share-Based Compensation” to our consolidated financial statements included in this report. The Executive Compensation Committee determines compensation for ~~Executive Officers.~~executive officers, as defined in Rule 16 under the Exchange Act. Compensation cost for all share-based awards, including options, requires an estimate of fair value on the grant date and compensation cost is recognized on a straight-line basis over the service vesting period, which represents the requisite service period. The grant date fair value for compensation programs that contain market conditions, like modifiers based on total stockholder return (a “market condition”), are performed using complex pricing valuation models that require the input of assumptions, including judgments to estimate expected stock price volatility, expected life, and forfeiture rate. Specifically, the grant date fair value of share-based compensation programs that include market conditions are calculated using a Monte Carlo simulation pricing model and the grant date fair value of stock option grants are calculated using the Black-Scholes valuation model. Additionally, certain of our market condition share-based compensation programs also contain pre-defined financial performance conditions, including FFO per share, FAD per share growth, and debt to EBITDA ratio goals which can impact the number of restricted stock units ultimately earned. This variability relating to the level of the performance condition achieved requires management’s judgment and estimates, which impacts compensation cost recognized for these awards during the performance period. As of December 31, ~~2018,~~2019, the performance condition for certain of our outstanding market condition share-based compensation programs has been met and compensation cost for these awards is no longer variable. For these awards, although the number of restricted stock units ultimately earned remains variable subject to the ultimate achievement level of the market condition, compensation cost is no longer variable for these awards as the market condition was already taken into consideration as part of the grant date fair value calculation. As of December 31, ~~2018,~~2019, there are certain outstanding share-based compensation awards where the performance conditions have not all yet been met. For these awards, compensation cost and the number of restricted stock units ultimately earned remains ~~variable.~~variable and compensation cost for these awards is recorded based the estimated level of achievement of the performance conditions through the requisite service period. Changes to compensation cost resulting from changes in the estimated level of achievement of the performance conditions are recorded as cumulative adjustments in the period the change in the estimated level of achievement of the performance conditions is determined.

For the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016~~2017 we recorded approximately $18.1 million, $23.5 million, ~~$14.5 million,~~ and ~~$16.6~~$14.5 million, respectively, of compensation cost related to programs that were subject to such valuation models. If the valuation of the grant date fair value for such programs changed by 10%, the potential impact to our net income available to common stockholders would be approximately $1.6 million, $2.0 million, ~~$1.1 million,~~ and ~~$1.4~~$1.1 million for the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016,~~2017, respectively.

Factors That May Influence Future Results of Operations

Development Program

We believe that a portion of our long-term future growth will continue to come from the completion of our in-process development projects and, subject to market conditions, executing on our future development pipeline, including expanding entitlements. Over the past several years, we increased our focus on development opportunities and expanded our future development pipeline through targeted acquisitions of development opportunities on the West Coast. This includes the ~~acquisition~~acquisitions of ~~a 39-acre fully-entitled~~two development ~~site~~sites in ~~South San Francisco, California on June 1, 2018~~two separate transactions for a total cash purchase price of approximately ~~$308.2~~$173.0 million in 2019, as discussed in “—Acquisitions” below.

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 submarkets. We expect to execute on our development program with prudence and will be pursuing opportunities with attractive economic returns in strategic locations with proximity to public transportation or transportation access and retail amenities and in markets with strong fundamentals and visible demand. We plan to develop in phases as appropriate and we generally favor starting projects with pre-leasing activity, as appropriate.

~~In-Process~~

Stabilized Development Projects ~~- Tenant Improvement~~

During the year ended December 31, ~~2018,~~2019, we added the following ~~two development projects progressed from the under construction phase~~project to ~~the tenant improvement phase:~~our stabilized portfolio:

100 Hooper, SOMA, San Francisco, California, which we ~~acquired in July 2015 and~~ commenced construction on in November 2016. This project encompasses ~~approximately 312,000~~311,859 square feet of office and ~~approximately 88,000~~82,481 square feet of production, distribution and repair (“PDR”) space ~~configured in~~spanning two buildings with a total estimated investment of approximately ~~$270.0~~$275.0 million. The office portion of the project is 100% leased toand occupied by Adobe Systems Inc. and the PDR space is~~38% leased.~~ 86% leased as of the date of this report. We commenced revenue recognition on the lease with Adobe Systems Inc. on October 1, ~~2018~~2018. Cash rents on Phase I of the lease commenced in March 2019 and cash rents on the remaining phases will commence ~~in the first quarter of 2019~~ through the second quarter of 2020.

Completed Residential Development Projects

During the year ended December 31, 2019, we completed the first phase of the following residential development project:

One Paseo (Residential Phase I) - Del Mar, San Diego, California. We commenced construction on the first phase of the residential component of this mixed-use project in December 2016, which includes 237 residential units. The total estimated investment for this phase of the residential component of the project is ~~currently expected to be stabilized~~approximately $145.0 million. As of the date of this report, 66% of the units have been leased.

In-Process Development Projects - Tenant Improvement

As of December 31, 2019, the following development projects were in the ~~second quarter of 2019.~~

tenant improvement phase:

The Exchange on 16th, Mission Bay, San Francisco, ~~California, which we acquired in May 2014 and~~California. We commenced construction on this project in June 2015. This project ~~will encompass~~totals approximately 750,000 gross rentable square feet consisting of ~~736,000~~738,000 square feet of office space and ~~14,000~~12,000 square feet of retail space at a total estimated investment of $585.0 million. The office space in the project is 100% ~~pre-leased~~leased to Dropbox, Inc. ~~Cash rents will commence~~During the year ended December 31, 2019, we completed construction and commenced revenue recognition on the first phase of the project in the second quarter of 2019 and on the second phase of the project in the fourth quarter of 2019, totaling approximately 82% of the project. The remaining space is currently expected to stabilize in the third quarter of ~~2019~~2020. Cash rents on the project will continue to commence through the first quarter of 2020. ~~The~~

One Paseo (Retail) - Del Mar, San Diego, California. We commenced construction on the retail component of this mixed-use project in December 2016, which is comprised of approximately 96,000 square feet of retail space with a total estimated ~~stabilization dates for Phase I, Phase II,~~investment of $100.0 million. As of the date of this report, the retail space of the project was 100% leased and ~~Phase III are~~89% occupied. This project will be added to our stabilized portfolio in the ~~third~~first quarter of ~~2019, the fourth quarter of 2019, and the third quarter of 2020, respectively.~~2020.

In-Process Development Projects - Under Construction

As of December 31, ~~2018,~~2019, we had ~~three~~six projects in our in-process development pipeline that were under construction.

Kilroy Oyster Point (Phase I), South San Francisco, California. In March 2019, we commenced construction on Phase I of this 39-acre life science campus situated on the waterfront in South San Francisco. This first phase encompasses approximately 656,000 square feet of office space at a total estimated investment of $570.0 million. In 2019, we executed two 12-year leases for 100% of Phase I of the project. We currently expect this project to stabilize in the fourth quarter of 2021.

9455 Towne Centre Drive, University Towne Center, San Diego, California. In March 2019, we commenced construction on this project which totals approximately 160,000 square feet of office space at a total estimated investment of $110.0 million. In December 2019, we executed a long-term lease with a major technology company for 100% of the project. We currently expect this project to stabilize in the first quarter of 2021.

Netflix & Living // On Vine, Hollywood, ~~development, Hollywood, California, which we acquired in 2013.~~California. We commenced construction on the office component of this mixed-use project in January 2018, which includes the project’s overall infrastructure and site work and approximately 355,000 square feet of office space for a total estimated investment of $300.0 million. The office space of this project is 100% ~~pre-leased~~leased to Netflix, Inc. We commenced construction on the residential component of the project in December 2018, which encompasses 193 residential units at a total estimated investment of $195.0 million. ~~The~~We currently expect this project to stabilize in the first quarter of 2021, and the residential component is currently expected to be completed in the fourth quarter of 2020.

333 Dexter, South Lake Union, ~~Washington, which we acquired in February 2015 and~~Seattle, Washington. We commenced construction on this project in June 2017. This project encompasses approximately ~~650,000 square feet of office space at a total~~

~~estimated investment of $380.0 million. Construction is currently in progress and the cold shell is currently estimated to be ready for tenant improvements in the second half of 2019.~~

One Paseo - Del Mar Heights, San Diego, California, which we acquired in November 2007. We commenced construction on the retail and residential components of this mixed-use project in December 2016, which includes site work and related infrastructure for the entire project, as well as 608 residential units and approximately 96,000 square feet of retail space. The total estimated investment for the retail and residential components of the project is approximately $470.0 million. The project is expected to be stabilized in phases beginning in the first quarter of 2019 for the retail space through the third quarter of 2020 for the residential units. As of the date of this report, the retail space of the project was 91% leased. We commenced construction on the office component of the project in December 2018, which encompasses 285,000635,000 square feet of office space at a total estimated investment of ~~$205.0~~$410.0 million. ~~As of~~During the ~~date of this report, the office component~~year ended December 31, 2019, we executed a lease for 100% of the project ~~was 42% pre-leased.~~

with a Fortune 50 publicly traded company. Construction is currently in progress and the project is currently estimated to move into the tenant improvement phase in the first quarter of 2020 and stabilize in the second half of 2022.

•

One Paseo (Residential Phases II and III and Office) - Del Mar, San Diego, California. We commenced construction on the residential component of this mixed-use project in December 2016 of which Phases II and III comprise 371 residential units. The total estimated investment for Phases II and III of the residential component of the project is approximately $230.0 million. Phases II and III are expected to be completed and delivered in phases during the first half of 2020. We commenced construction on the office component of the project in December 2018, which encompasses 285,000square feet of office space at a total estimated investment of $205.0 million. As of the date of this report, the office component of the project was 80% leased. We currently expect the project to stabilize in the second quarter of 2021.

2100 Kettner, Little Italy, San Diego, California. We commenced construction on this project in September 2019. This project is comprised of approximately 200,000 square feet of office space for a total estimated investment of $140.0 million.

Future Development Pipeline

As of December 31, ~~2018,~~2019, our future development pipeline included five future projects located in Greater Seattle, the San Francisco Bay Area and San Diego County with an aggregate cost basis of approximately ~~$773.2~~$985.7 million, at which we believe we could develop more than ~~5.0~~6.0 million rentable square feet for a total estimated investment of approximately ~~$3.5~~$5.0 billion to ~~$5.0~~$7.0 billion, depending on successfully obtaining entitlements and market conditions.

The following table sets forth information about our future development pipeline.


Future Development Pipeline	Location	Approx. Developable Square Feet / Resi Units ⁽¹⁾	Total Costs as of 12/31/2018 ($ in millions)⁽²⁾		Location	Approx. Developable Square Feet ⁽¹⁾	Total Costs as of 12/31/2019 ($ in millions)⁽²⁾

San Diego County
2100 Kettner	Little Italy	175,000	$	26.0
9455 Towne Centre Drive	University Towne Center	150,000	16.4
Santa Fe Summit – Phases II and III	56 Corridor	600,000	79.9		56 Corridor	600,000 - 650,000	$	80.4
1335 Broadway & 901 Park Boulevard					East Village	TBD	45.1
San Francisco Bay Area
Kilroy Oyster Point	South San Francisco	2,500,000	399.7
Kilroy Oyster Point - Phase II - IV					South San Francisco	1,750,000 - 1,900,000	330.5
Flower Mart	SOMA	TBD	251.2		SOMA	2,300,000	392.3
Greater Seattle
Seattle CBD Project					Seattle CBD	TBD	137.4
TOTAL:			$	773.2			$	985.7

________________________


(1)	The developable square feet and scope of projects could change materially from estimated data provided due to one or more of the following: any significant changes in the economy, market conditions, our markets, tenant requirements and demands, construction costs, new supply, regulatory and entitlement processes or project design.


(2)	Represents cash paid and costs incurred, including accrued liabilities in accordance with GAAP, as of December 31, ~~2018.~~2019.

Fluctuations in our development activities could cause fluctuations in the average development asset balances qualifying for interest and other carrying cost and internal cost capitalization in future periods. During the years ended December 31, ~~2018~~2019 and ~~2017,~~2018, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately ~~$1.6~~$2.0 billion and ~~$1.0~~$1.6 billion, respectively, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. For the years ended December 31, ~~2018~~2019 and ~~2017,~~2018, we capitalized ~~$68.1~~$81.2 million and ~~$46.5~~$68.1 million, respectively, of interest to our qualifying development projects. For the years ended December 31, ~~2018~~2019 and ~~2017,~~2018, we capitalized ~~$24.2~~$25.6 million and ~~$23.2~~$24.2 million, respectively, of internal costs to our qualifying redevelopment and development projects.

Capital Recycling Program. We continuously evaluate opportunities for the potential disposition of non-core properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated 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 and other tax deferred transaction structures, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes. See the “Liquidity and

Capital Resources of the Operating Partnership – Liquidity Sources” section for further discussion of our capital recycling activities.

In connection with our capital recycling strategy, during 2019, we completed the sale of two office properties to unaffiliated third parties for total gross sales proceeds of $133.8 million. During 2018, we completed the sale of 11 office properties to unaffiliated third parties for total gross sales proceeds of $373.0 million. ~~During 2017, we completed the sale of 11 office properties and one undeveloped land parcel to unaffiliated third parties for total gross sales proceeds of $186.6 million.~~

The timing of any potential future disposition or strategic venture 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, enter into any additional strategic ventures, or that we will be able to identify and complete the acquisition of a suitable replacement property to effect a Section 1031 Exchange or be able to use other tax deferred structures in connection with our strategy. See the “Liquidity and Capital Resources of the Operating Partnership – Liquidity Sources” section for further information.

Acquisitions. As part of our growth strategy, which is highly dependent on market conditions and business cycles, among other factors, we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add operating properties. We continue to focus on growth opportunities in West Coast markets populated by knowledge and creative based tenants in a variety of industries, including technology, media, healthcare, life sciences, entertainment and professional services. Against the backdrop of market volatility, we expect to manage a strong balance sheet, execute on our development program and selectively evaluate opportunities that either add immediate Net Operating Income to our portfolio or play a strategic role in our future growth.

During the year ended December 31, 2019, we acquired a 19-building creative office campus and two development sites in three transactions for a total cash purchase price of $359.0 million. During the year ended December 31, 2018, we acquired fouroffice buildings in two transactions for a total cash purchase price of $257.0 ~~million. In addition, we acquired~~million and a 39-acre development site for ~~a cash purchase price of~~ approximately $308.2 ~~million from an unrelated seller. During the year ended December 31, 2017, we acquired a 1.2 acre development site for $19.4 million in cash.~~million. We generally finance our acquisitions through proceeds from the issuance of debt and equity securities, borrowings under our unsecured revolving credit facility, proceeds from our capital recycling program, the assumption of existing debt and cash flows from operations.

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 we may enter into in the future will be completed. In addition, acquisitions are subject to various risks and uncertainties and we may be unable to complete an acquisition after making a nonrefundable deposit or incurring acquisition-related costs.

Incentive Compensation. Our Executive Compensation Committee determines compensation, including cash bonuses and equity incentives, for our executive ~~officers.~~officers, as defined in Rule 16 under the Exchange Act. For ~~2018,~~2019, 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 and/or market-measure based vesting requirements and 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, liquidity measures, and other factors. Consequently, we cannot predict the amounts that will be recorded in future periods related to such incentive compensation.

As of December 31, ~~2018,~~2019, there was approximately ~~$60.5~~$50.5 million of total unrecognized compensation cost related to outstanding nonvested shares of restricted common stock and RSUs issued under share-based compensation arrangements. Those costs are expected to be recognized over a weighted-average period of ~~3.0~~2.1 years. The ~~$60.5~~$50.5 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued subsequent to December 31, ~~2018.~~2019. 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.

Information on Leases Commenced and Executed

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 year ended December 31, ~~2018.~~2019.

For Leases Commenced



	1st & 2nd Generation ⁽¹⁾⁽²⁾						2nd Generation ⁽¹⁾⁽²⁾
	Number of Leases ⁽³⁾		Rentable Square Feet ⁽³⁾		Retention Rates ⁽⁴⁾		TI/LC per Sq. Ft. ⁽⁵⁾		TI/LC per Sq. Ft. / Year		Changes in Rents ⁽⁶⁾⁽⁷⁾		Changes in Cash Rents ⁽⁸⁾		Weighted Average Lease Term (in months)
	New	Renewal	New	Renewal	Retention Rates ⁽⁴⁾		TI/LC per Sq. Ft. ⁽⁵⁾		TI/LC per Sq. Ft. / Year		Changes in Rents ⁽⁶⁾⁽⁷⁾		Changes in Cash Rents ⁽⁸⁾		Weighted Average Lease Term (in months)
Year Ended December 31, 2019	70	58	1,440,649	867,514	35.5	%	$	50.49	$	6.45	41.1	%	18.4	%	94

For Leases Executed ⁽⁹⁾

1st & 2nd Generation ⁽¹⁾⁽²⁾

2nd Generation ⁽¹⁾⁽²⁾

Number of
Leases ⁽³⁾

Rentable
Square Feet ⁽³⁾

Retention Rates ⁽⁴⁾

TI/LC per
Sq. Ft. ⁽⁵⁾
TI/LC per
Sq. Ft. / Year
Changes in
Rents ⁽⁶⁾⁽⁷⁾

Changes in
Cash Rents ⁽⁸⁾

Weighted Average Lease Term (in months)
New Renewal New Renewal
Year Ended December 31, 2018 79
58
1,033,085
1,161,596
49.1 % $ 47.09
$ 7.24
25.4 % 10.7 % 78

~~For Leases Executed~~ ⁽⁹⁾

1st & 2nd Generation⁽¹⁾⁽²⁾

2nd Generation ⁽¹⁾⁽²⁾

Number of Leases ⁽³⁾

Rentable Square Feet ⁽³⁾

TI/LC per Sq. Ft. ⁽⁵⁾
TI/LC Per Sq. Ft. / Year
Changes in
Rents ⁽⁶⁾⁽⁷⁾

Changes in
Cash Rents ⁽⁸⁾

Weighted Average Lease Term
(in months)
New Renewal New Renewal
Year Ended December 31, 2018 89
58
1,667,447
1,161,596
$ 56.90
$ 7.11
36.0 % 14.8 % 96



	1st & 2nd Generation⁽¹⁾⁽²⁾				2nd Generation ⁽¹⁾⁽²⁾
	Number of Leases ⁽³⁾		Rentable Square Feet ⁽³⁾		TI/LC per Sq. Ft. ⁽⁵⁾		TI/LC Per Sq. Ft. / Year		Changes in Rents ⁽⁶⁾⁽⁷⁾		Changes in Cash Rents ⁽⁸⁾		Weighted Average Lease Term (in months)
	New	Renewal	New	Renewal	TI/LC per Sq. Ft. ⁽⁵⁾		TI/LC Per Sq. Ft. / Year		Changes in Rents ⁽⁶⁾⁽⁷⁾		Changes in Cash Rents ⁽⁸⁾		Weighted Average Lease Term (in months)
Year Ended December 31, 2019	70	58	964,247	867,514	$	59.01	$	8.64	52.3	%	29.6	%	82

_______________________


(1)	Includes 100% of consolidated property partnerships.


(2)	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.


(3)	Represents leasing activity for leases that commenced or were signed during the period, including first and second generation space, net of month-to-month leases. Excludes leasing on new construction.


(4)	Calculated as the percentage of space either renewed or expanded into by existing tenants or subtenants at lease expiration.


(5)	Tenant improvements and leasing commissions per square foot exclude tenant-funded tenant improvements.


(6)	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.

(7)

Excludes commenced and executed leases of approximately ~~471,880~~355,829 and~~386,587~~215,640 rentable square feet, respectively, for the year ended December 31, ~~2018~~2019, 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 more meaningful market comparison.


(8)	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.


(9)	For the year ended December 31, ~~2018, 38~~2019, 34 new leases totaling ~~1,138,133~~644,176 rentable square feet were signed but not commenced as of December 31, ~~2018.~~2019.

As of December 31, ~~2018,~~2019, we believe that the weighted average cash rental rates for our total stabilized portfolio, are approximately 20% below the current average market rental rates. 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.

Our rental rates and occupancy are impacted by general economic conditions, including the pace of regional economic growth and access to capital. Therefore, we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current market rates. Additionally, decreased demand and other negative trends or unforeseeable events that impair our ability to timely renew or re-lease space could have further negative effects on our future financial condition, results of operations, and cash flows.

Scheduled Lease Expirations. The following tables set forth certain information regarding our lease expirations for our stabilized portfolio for the next five years and by region for the next two years.

Lease Expirations ⁽¹⁾


Year of Lease Expiration	Number of Expiring Leases	Total Square Feet	% of Total Leased Sq. Ft.		Annualized Base Rent ⁽²⁾⁽³⁾		% of Total Annualized Base Rent⁽²⁾		Annualized Base Rent per Sq. Ft. ⁽²⁾		Number of Expiring Leases	Total Square Feet	% of Total Leased Sq. Ft.		Annualized Base Rent ⁽²⁾⁽³⁾		% of Total Annualized Base Rent⁽²⁾		Annualized Base Rent per Sq. Ft. ⁽²⁾
2019	98	1,410,267	11.5	%	$	63,201	11.0	%	$	44.81
2020	96	1,445,161	11.8	%	58,889		10.2	%	40.75
2021	83	862,910	7.0	%	37,914		6.6	%	43.94
2020⁽⁴⁾											82	965,896	7.7	%	$	42,648	6.6	%	$	44.15
2021⁽⁴⁾											80	843,494	6.8	%	36,461		5.6	%	43.23
2022	52	639,915	5.2	%	27,523		4.7	%	43.01		62	749,273	6.0	%	32,488		5.1	%	43.36
2023	71	1,271,112	10.4	%	66,383		11.5	%	52.22		77	1,227,648	9.7	%	64,992		10.1	%	52.94
2024											56	998,249	8.0	%	47,378		7.4	%	47.46
Total	400	5,629,365	45.9	%	$	253,910	44.0	%	$	45.10	357	4,784,560	38.2	%	$	223,967	34.8	%	$	46.81


ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The primary market risk we face is interest rate risk. We seek to mitigate this risk by following established risk management policies and procedures. These policies include maintaining prudent amounts of debt, including a greater amount of fixed-rate debt as compared to variable-rate debt in our portfolio, and may include the periodic use of derivative instruments. As of December 31, ~~2018~~2019 and ~~2017,~~2018, we did not have any interest-rate sensitive derivative assets or liabilities. Information about our changes in interest rate risk exposures from December 31, ~~2017~~2018 to December 31, ~~2018~~2019 is incorporated herein by reference from “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources of the Operating Partnership.”

Interest Rate Risk

As of December 31, ~~2018, 6.6%~~2019, 11.0% of our total outstanding debt of ~~$3.0~~$3.6 billion (before the effects of debt discounts ~~premiums~~ and deferred financing costs) was subject to variable interest rates. The remaining~~93.4%~~89.0% bore interest at fixed rates. All of our interest rate sensitive financial instruments are held for purposes other than trading purposes. In general, interest rate fluctuations applied to our variable-rate debt will impact our future earnings and cash flows. Conversely, interest rate fluctuations applied to our fixed-rate debt will generally not impact our future earnings and cash flows, unless such instruments mature or are otherwise terminated and need to be refinanced. However, interest rate fluctuations will impact the fair value of the fixed-rate debt instruments.

We generally determine the fair value of our secured debt, unsecured debt, and unsecured line of credit by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market rate by obtaining period-end treasury rates for maturities that correspond to the maturities of our fixed-rate debt and then adding an appropriate credit spread based on information obtained from third-party financial institutions. These credit spreads take into account factors, including but not limited to, our credit profile, the tenure of the debt, amortization period, whether the debt is secured or unsecured, and the loan-to-value ratio of the debt to the collateral, amongst other factors. These calculations are significantly affected by the assumptions used, including the discount rate, credit spreads and estimates of future cash flow. We calculate the market rate of our unsecured revolving credit facility and unsecured term loan facility by obtaining the period-end London Interbank Offered Rate (“LIBOR”) and then adding an appropriate credit spread based on our credit ratings, and the amended terms of our unsecured revolving credit facility and unsecured term loan facility agreement. We determine the fair value of each of our publicly traded unsecured senior notes based on their quoted trading price at the end of the reporting period, if such prices are available. See Note 19 “Fair Value Measurements and Disclosures” and Note 2 “Basis of Presentation and Significant Accounting Policies” in the consolidated financial statements included in this report for additional information on the fair value of our financial assets and liabilities as of December 31, ~~2018~~2019 and December 31, ~~2017.~~2018.

At December 31, 2019, the total outstanding balance of our variable-rate debt was comprised of borrowings on our unsecured revolving facility of $245.0 million and unsecured term loan facility of $150.0 million, which were indexed to LIBOR plus a spread of 1.00% (weighted average interest rate of 2.76%) and LIBOR plus a spread of 1.10% (weighted average interest rate of 2.85%), respectively. As of December 31, 2018, the total outstanding balance of our variable-rate debt was comprised of borrowings on our unsecured revolving credit facility of $45.0 million and unsecured term loan facility of $150.0 million, which were indexed to LIBOR plus a spread of 1.00% (weighted average interest rate of 3.48%) and LIBOR plus a spread of 1.10% (weighted average interest rate of 3.49%), respectively. As of December 31, 2017, there were no outstanding balances on both our $750.0 million unsecured revolving credit facility and our $150.0 million unsecured term loan facility, but both were available for borrowing at the following variable rates: LIBOR plus a spread of 1.00% (weighted average interest rate of 2.56%) and LIBOR plus a spread of 1.10% (weighted average interest rate of 2.66%), respectively. Assuming no changes in the outstanding balance of our existing variable-rate debt as of December 31, ~~2018,~~2019, a 100 basis point increase in the LIBOR rate would have increased our projected annual interest expense, before the effect of capitalization, by approximately ~~$2.0~~$4.0 million.

The total carrying value of our fixed-rate debt was approximately ~~$2.7~~$3.2 billion and ~~$2.3~~$2.7 billion as of December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. The total estimated fair value of our fixed-rate debt was approximately ~~$2.7~~$3.4 billionand ~~$2.4~~$2.7 billion as of December 31, ~~2018~~2019 and ~~2017,~~2018, respectively. For sensitivity purposes, a 100 basis point increase in the discount rate equates to a decrease in the total fair value of our fixed-rate debt of approximately $203.3 million, or 6.0%, as of December 31, 2019. Comparatively, a 100 basis point increase in the discount rate equates to a decrease in the total fair value of our fixed-rate debt of approximately $165.3 million, or 6.1%, as of December 31, 2018. Comparatively, a 100 basis point increase in the discount rate equates to a decrease in the total fair value of our fixed-rate debt of approximately $145.0 million, or 6.0%, as of December 31, 2017.

In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. As our variable-rate debt is indexed to LIBOR, we are monitoring this activity and evaluating the related risks.


ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index included at Item 15. “Exhibits and Financial Statement Schedules.”


ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.


ITEM 9A.	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 December 31, ~~2018~~2019, 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, the disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

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

Management’s Report on Internal Control Over Financial Reporting

Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is supported by written policies and procedures and by an appropriate segregation of responsibilities and duties. The Company has used the criteria set forth in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess our internal control over financial reporting. Based upon this assessment, management concluded that internal control over financial reporting operated effectively as of December 31, ~~2018~~2019.

Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has audited the Company’s financial statements and has issued a report on the effectiveness of the Company’s internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors ~~and Stockholders~~ of

Kilroy Realty Corporation

~~Los Angeles, California~~

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Kilroy Realty Corporation and subsidiaries (the “Company”) as of December 31, ~~2018,~~2019, based on criteria established in Internal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2018,~~2019, based on criteria established in Internal Control —- Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, ~~2018,~~2019, of the Company and our report dated February ~~14, 2019,~~13, 2020, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

February ~~14, 2019~~13, 2020

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 of its general partner, 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 its general partner, of the effectiveness of the design and operation of the disclosure controls and procedures as of December 31, ~~2018,~~2019, the end of the period covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of its general partner concluded, as of that time, the disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes that occurred during the fourth quarter of the most recent year covered by this report in the Operating Partnership’s internal control over financial reporting identified in connection with the evaluation referenced above that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and Chief Financial Officer of the Operating Partnership’s general partner and effected by the board of directors, management, and other personnel of its general partner to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is supported by written policies and procedures and by an appropriate segregation of responsibilities and duties. The Operating Partnership has used the criteria set forth in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission to assess our internal control over financial reporting. Based upon this assessment, management concluded that internal control over financial reporting operated effectively as of December 31, ~~2018~~.2019.

Deloitte & Touche LLP, the Operating Partnership’s independent registered public accounting firm, has audited the Operating Partnership’s financial statements and has issued a report on the effectiveness of the Operating Partnership’s internal control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of

Kilroy Realty, L.P.

~~Los Angeles, California~~

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Kilroy Realty, L.P. and subsidiaries (the “Operating Partnership”) as of December 31, ~~2018,~~2019, based on criteria established in Internal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Operating Partnership maintained, in all material respects, effective internal control over financial reporting as of December 31, ~~2018,~~2019, based on criteria established in Internal Control —- Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, ~~2018,~~2019, of the Operating Partnership and our report dated February ~~14, 2019,~~13, 2020, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Operating Partnership’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Operating Partnership’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Definition and Limitations of Internal Control over Financial Reporting

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

February ~~14, 2019~~13, 2020


ITEM 9B.	OTHER INFORMATION

Not applicable.

PART III


ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May ~~2019.~~2020.


ITEM 11.	EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May ~~2019.~~2020.


ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May ~~2019.~~2020.


ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May ~~2019.~~2020.


ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporated by reference from our definitive proxy statement for our annual stockholders’ meeting presently scheduled to be held in May ~~2019.~~2020.

PART IV


ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) and (2) Financial Statements and Schedules

The following consolidated financial information is included as a separate section of this annual report on Form 10-K:



Report of Independent Registered Public Accounting Firm – Kilroy Realty Corporation	F - 2
Consolidated Balance Sheets as of December 31, ~~2018~~2019 and ~~2017~~2018 – Kilroy Realty Corporation	F - 34
Consolidated Statements of Operations for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 – Kilroy Realty Corporation	F - 45
Consolidated Statements of Equity for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 – Kilroy Realty Corporation	F - 56
Consolidated Statements of Cash Flows for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 – Kilroy Realty Corporation	F - 67
Report of Independent Registered Public Accounting Firm – Kilroy Realty, L.P.	~~F - 7~~
~~Consolidated Balance Sheets as of December 31, 2018 and 2017 – Kilroy Realty, L.P.~~	F - 8
Consolidated Balance Sheets as of December 31, 2019 and 2018 – Kilroy Realty, L.P.	F - 9
Consolidated Statements of Operations for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 – Kilroy Realty, L.P.	F - 910
Consolidated Statements of Capital for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 – Kilroy Realty, L.P.	F - 1011
Consolidated Statements of Cash Flows for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017 – Kilroy Realty, L.P.	~~F - 11~~
~~Notes to Consolidated Financial Statements~~	F - 12
Notes to Consolidated Financial Statements	F - 13
Schedule II – Valuation and Qualifying Accounts	F - 6064
Schedule III – Real Estate and Accumulated Depreciation	F - 6165

All other schedules are omitted because the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the financial statements and notes thereto.

(3) 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 reclassifying shares of the Series G Preferred Stock of the Company (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 23, 2017)
3.(i)5		Articles Supplementary reclassifying shares of the Series H Preferred Stock of the Company (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 23, 2017)
3.(ii)1		Fifth 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 February 1, 2017)



3.(ii)2		Seventh Amended and Restated Agreement of Limited Partnership of Kilroy Realty, L.P. dated August 15, 2012, as amended (previously filed by Kilroy Realty Corporation on Form 10-Q for the quarter ended June 30, 2014)
4.(vi)1*		Description of Capital Stock of Kilroy Realty Corporation
4.(vi)2*		Description of Common Units Representing Limited Partnership Interests of Kilroy Realty, L.P.
4.1		Kilroy Realty Corporation Form of Certificate for Common Stock (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
4.2		Registration Rights Agreement, dated January 31, 1997 (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
4.3		Form of Certificate for Partnership Units 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)
4.4		Registration Rights Agreement, dated July 31, 2012 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended June 30, 2012)
4.5		Officers’ Certificate pursuant to Sections 101, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “3.800% Notes due 2023,” including the form of 3.800% Notes due 2023 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on January 14, 2013)
4.6		Indenture, dated March 1, 2011, by and among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit to the Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on October 2, 2013)
4.7		Supplemental Indenture, dated July 5, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit to the Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on October 2, 2013)
4.8		Officers’ Certificate pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “4.25% Senior Notes due 2029,” including the form of 4.25% Senior Notes due 2029 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 6, 2014)
4.9		Officers’ Certificate, dated September 16, 2015, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “4.375% Senior Notes due 2025,” including the form of 4.375% Senior Notes due 2025 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on September 16, 2015)
4.10		Officers’ Certificate, dated December 11, 2017, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “3.450% Senior Notes due 2024,” including the form of 3.450% Senior Notes due 2024 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 11, 2017)
4.11		Officers’ Certificate, dated November 29, 2018, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, as amended and supplemented, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “4.750% Senior Notes due 2028,” including the form of 4.750% Senior Note due 2028 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on November 29, 2018)



4.12		Officers’ Certificate, dated September 17, 2019, pursuant to Sections 102, 201, 301 and 303 of the Indenture dated March 1, 2011, as amended and supplemented, among Kilroy Realty, L.P., as issuer, Kilroy Realty Corporation, as guarantor, and U.S. Bank National Association, as trustee, establishing a series of securities entitled “3.050% Senior Notes due 2030,” including the form of 3.050% Senior Note due 2030 and the form of related guarantee (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P. as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on September 17, 2019)
4.13		The Company is party to agreements in connection with long-term debt obligations, none of which individually exceeds ten percent of the total assets of the Company on a consolidated basis. Pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, the Company agrees to furnish copies of these agreements to the Commission upon request



10.1		Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
10.2†		1997 Stock Option and Incentive Plan of the Registrant and Kilroy Realty, L.P. (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 3 to Form S-11 (No. 333-15553))
10.3		License Agreement by and among the Registrant and the other persons named therein (previously filed by Kilroy Realty Corporation as an exhibit to the Registration Statement on Amendment No. 4 to Form S-11 (No. 333-15553))
10.4†		Form of Restricted Stock Award Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on February 8, 2007)
10.5†		Kilroy Realty Corporation Stock Award Deferral Program (previously filed by Kilroy Realty Corporation as an exhibit to Form 8-K as filed with the Securities and Exchange Commission on January 2, 2008)
10.6†		Form of Indemnification Agreement of Kilroy Realty Corporation with certain officers and directors (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-K for the year ended December 31, 2009)
10.7†		Kilroy Realty Corporation Form of Stock Option Grant Notice and Stock Option Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on February 24, 2012)
10.8†		Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended June 30, 2013)
10.9†		Form of Stock Award Deferral Program Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended June 30, 2013)
10.10†		Form of Performance-Vest Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2014)
10.11†		Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2014)
10.12†		Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2014)
10.13†		Form of Performance-Vest Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2015)
10.14†		Form of Restricted Stock Unit Agreement (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2015)
10.15†		Form of Restricted Stock Unit Agreement for Non-Employee Members of the Board of Directors (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2015)
10.16†		Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Jeffrey C. Hawken effective as of December 31, 2015 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-K for the year ended December 31, 2015)



10.17†		Confidential Separation Agreement and Release of Claims by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Stephen A. Rosetta effective as of August 26, 2019 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended September 30, 2019)
10.18†		Extension of Employment Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Jeffrey C. Hawken effective as of February 28, 2019 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2019)
10.19†*		Extension of Employment Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Jeffrey C. Hawken effective as of January 31, 2020
10.20†		Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and Jeffrey C. Hawken, dated January 9, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2016)
~~10.18†~~10.21†		Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Tyler H. Rose effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2016)
~~10.19†~~10.22†		Amended and Restated Employment Agreement and Non-Competition Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Justin W. Smart effective as of January 28, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2016)



~~10.20†~~10.23†		Kilroy Realty Corporation Director Compensation Policy effective as of April 1, 2018 (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended March 31, 2018.
~~10.21†~~10.24†		Employment Agreement, as amended and restated December 27, 2018, by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and John B. Kilroy, Jr. (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 31, 2018)
~~10.22†~~10.25†		Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and John B. Kilroy, Jr., dated December 27, 2018 (with retirement as to Time-Based RSUs) (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 31, 2018)
~~10.23†~~10.26†		Kilroy Realty Corporation 2006 Incentive Award Plan Restricted Stock Unit Agreement by and between Kilroy Realty Corporation and John B. Kilroy, Jr., dated December 27, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on December 31, 2018)
10.24†*10.27†		Form of Restricted Stock Unit Agreement for 2006 Incentive Award Plan
~~10.25~~10.28		Note Purchase Agreement dated September 14, 2016 (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on September 14, 2016)
~~10.26~~10.29		Amendment to Note Purchase Agreement dated May 11, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 14, 2018)
~~10.27~~10.30		Form of Time Sharing Agreement of Kilroy Realty, L.P. (previously filed by Kilroy Realty Corporation as an exhibit on Form 10-Q for the quarter ended September 30, 2016)
~~10.28~~10.31		Promissory Note, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
~~10.29~~10.32		Loan Agreement, dated November 29, 2016, by and between KR WMC, LLC and Massachusetts Mutual Life Insurance Company (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
~~10.30~~10.33		Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
~~10.31~~10.34		Assignment of Leases and Rents, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)

~~10.32~~

10.35		Recourse Guaranty Agreement, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
~~10.33~~10.36		Environmental Indemnification Agreement, dated November 29, 2016 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2017)
~~10.34†~~10.37†		Kilroy Realty Corporation 2007 Deferred Compensation Plan, as amended and restated effective January 1, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-K for the year ended December 31, 2016)
~~10.35~~10.38		General Partner Guaranty Agreement, dated February 17, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-Q for the quarter ended March 31, 2017)
~~10.36†~~10.39†		Kilroy Realty 2006 Incentive Award Plan (previously filed by Kilroy Realty Corporation as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 23, 2017)
~~10.37~~10.40		Second Amended and Restated Credit Agreement dated as of July 24, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-Q for the quarter ended June 30, 2017)
~~10.38~~10.41		Second Amended and Restated Guaranty dated as of July 24, 2017 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 10-Q for the quarter ended on June 30, 2017)



~~10.39~~10.42		Note Purchase Agreement dated May 11, 2018 (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on May 14, 2018)
~~10.40~~10.43		Sales Agreement, dated June 5, 2018, between and among Kilroy Realty Corporation, Kilroy Realty, L.P. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Jefferies LLC, J.P. Morgan Securities LLC, Raymond James & Associates, Inc., RBC Capital Markets, LLC, Scotia Capital (USA) Inc. and SMBC Nikko Securities America, Inc. as Agents, and the Forward Purchasers (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on June 5, 2018)
~~10.41~~		Forward Sale Agreement dated August 8, 2018, among Kilroy Realty Corporation and Barclays Bank PLC, as Forward Purchaser (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 13, 2018)
~~10.42~~		Forward Sale Agreement dated August 8, 2018, among Kilroy Realty Corporation and Citibank, N.A., as Forward Purchaser (previously filed by Kilroy Realty Corporation and Kilroy Realty, L.P., as an exhibit on Form 8-K as filed with the Securities and Exchange Commission on August 13, 2018)
21.1*		List of Subsidiaries of Kilroy Realty Corporation
21.2*		List of Subsidiaries of Kilroy Realty, L.P.
23.1*		Consent of Deloitte & Touche LLP for Kilroy Realty Corporation
23.2*		Consent of Deloitte & Touche LLP for Kilroy Realty, L.P.
24.1*		Power of Attorney (included on the signature page of this Form 10-K)
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 year ended December 31, ~~2018,~~2019, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Changes in Equity, (iv) Consolidated Statements of Capital, (v) Consolidated Statements of Cash Flows and (vi) Notes to the Consolidated Financial ~~Statements.~~Statements⁽¹⁾



*	Filed herewith
†	Management contract or compensatory plan or arrangement.
(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.

104

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Kilroy Realty Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February ~~14, 2019.~~13, 2020.



	KILROY REALTY CORPORATION

	By		/s/ ~~Heidi R. Roth~~Merryl E. Werber
			~~Heidi R. Roth~~Merryl E. Werber ~~Executive~~Senior Vice President, ~~and~~ Chief Accounting Officer and Controller

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that we, the undersigned directors and officers of Kilroy Realty Corporation, do hereby severally constitute and appoint John Kilroy, Jeffrey C. Hawken, Tyler H. Rose and ~~Heidi R. Roth,~~Merryl E. Werber, and each of them, as our true and lawful attorneys-in-fact and agents, each with full powers of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or any of them, may deem necessary or advisable to enable Kilroy Realty Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically, but without limitation, the power and authority to sign for us or any of us, in our names in the capacities indicated below, any and all amendments hereto; and we do each hereby ratify and confirm all that said attorneys-in-fact and agents or their substitutes, or any one of them, shall do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



Name	Title	Date

/s/ John Kilroy	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)	February ~~14, 2019~~13, 2020
John Kilroy
/s/ Tyler H. Rose	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	February ~~14, 2019~~13, 2020
Tyler H. Rose
/s/ ~~Heidi R. Roth~~Merryl E. Werber	~~Executive~~Senior Vice President, ~~and~~ Chief Accounting Officer and Controller (Principal Accounting Officer)	February ~~14, 2019~~13, 2020
~~Heidi R. Roth~~Merryl E. Werber
/s/ Edward F. Brennan, PhD	Director	February 12, ~~2019~~2020
Edward F. Brennan, PhD
/s/ Jolie Hunt	Director	February 12, ~~2019~~2020
Jolie Hunt
/s/ Scott S. Ingraham	Director	February 12, ~~2019~~2020
Scott S. Ingraham
/s/ Gary R. Stevenson	Director	February 12, ~~2019~~2020
Gary R. Stevenson
/s/ Peter B. Stoneberg	Director	February 12, ~~2019~~2020
Peter B. Stoneberg

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Kilroy Realty, L.P. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February ~~14, 2019.~~13, 2020.



	KILROY REALTY, L.P.

	By		/s/ ~~Heidi R. Roth~~Merryl E. Werber
			~~Heidi R. Roth~~ ~~Executive~~Merryl E. Werber Senior Vice President, ~~and~~ Chief Accounting Officer and Controller

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that we, the undersigned directors and officers of Kilroy Realty Corporation, as sole general partner and on behalf of Kilroy Realty, L.P., do hereby severally constitute and appoint John Kilroy, Jeffrey C. Hawken, Tyler H. Rose and ~~Heidi R. Roth,~~Merryl E. Werber, and each of them, as our true and lawful attorneys-in-fact and agents, each with full powers of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or any of them, may deem necessary or advisable to enable Kilroy Realty Corporation, as sole general partner and on behalf of Kilroy Realty, L.P., to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically, but without limitation, the power and authority to sign for us or any of us, in our names in the capacities indicated below, any and all amendments hereto; and we do each hereby ratify and confirm all that said attorneys-in-fact and agents or their substitutes, or any one of them, shall do or cause to be done by virtue hereof.



Name	Title	Date

/s/ John Kilroy	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)	February ~~14, 2019~~13, 2020
John Kilroy
/s/ Tyler H. Rose	Executive Vice President and Chief Financial Officer (Principal Financial Officer)	February ~~14, 2019~~13, 2020
Tyler H. Rose
/s/ ~~Heidi R. Roth~~Merryl E. Werber	~~Executive~~Senior Vice President, ~~and~~ Chief Accounting Officer and Controller (Principal Accounting Officer)	February ~~14, 2019~~13, 2020
~~Heidi R. Roth~~Merryl E. Werber
/s/ Edward F. Brennan, PhD	Director	February 12, ~~2019~~2020
Edward F. Brennan, PhD
/s/ Jolie Hunt	Director	February 12, ~~2019~~2020
Jolie Hunt
/s/ Scott S. Ingraham	Director	February 12, ~~2019~~2020
Scott S. Ingraham
/s/ Gary R. Stevenson	Director	February 12, ~~2019~~2020
Gary R. Stevenson
/s/ Peter B. Stoneberg	Director	February 12, ~~2019~~2020
Peter B. Stoneberg

106

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, ~~2018~~2019 AND ~~2017~~2018

AND FOR THE THREE YEARS ENDED DECEMBER 31, ~~2018~~2019

TABLE OF CONTENTS



	Page
FINANCIAL STATEMENTS OF KILROY REALTY CORPORATION:
Report of Independent Registered Public Accounting Firm	F - 2
Consolidated Balance Sheets as of December 31, ~~2018~~2019 and ~~2017~~2018	F - 34
Consolidated Statements of Operations for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017	F - 45
Consolidated Statements of Equity for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017	F - 56
Consolidated Statements of Cash Flows for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017	F - 67
FINANCIAL STATEMENTS OF KILROY REALTY, L.P.:
Report of Independent Registered Public Accounting Firm	~~F - 7~~
~~Consolidated Balance Sheets as of December 31, 2018 and 2017~~	F - 8
Consolidated Balance Sheets as of December 31, 2019 and 2018	F - 9
Consolidated Statements of Operations for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017	F - 910
Consolidated Statements of Capital for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017	F - 1011
Consolidated Statements of Cash Flows for the Years ended December 31, 2019, 2018 ~~2017~~ and ~~2016~~2017	F - 1112

Notes to Consolidated Financial Statements for Kilroy Realty Corporation and Kilroy Realty, L.P.	F - 1213
Schedule II – Valuation and Qualifying Accounts for Kilroy Realty Corporation and Kilroy Realty, L.P.	F - 6064
Schedule III – Real Estate and Accumulated Depreciation for Kilroy Realty Corporation and Kilroy Realty, L.P.	F - 6165

F - 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors ~~and Stockholders~~ of

Kilroy Realty Corporation

~~Los Angeles, California~~

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Kilroy Realty Corporation and subsidiaries (the “Company”) as of December 31, ~~2018~~2019 and ~~2017,~~2018, the related consolidated statements of operations, equity, and cash flows, for each of the three years in the period ended December 31, ~~2018,~~2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, ~~2018~~2019 and ~~2017,~~2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2018,~~2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, ~~2018,~~2019, based on criteria established in Internal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February ~~14, 2019,~~13, 2020 expressed an unqualified opinion on the ~~Company's~~Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Rental income, deferred revenue and acquisition-related intangible liabilities - Timing of Development Property Revenue Recognition and Ownership of Tenant Improvements - Refer to Notes 2 and 10 to the financial statements

Critical Audit Matter Description

The Company evaluates tenant improvements on a lease-by-lease basis to determine who is the owner of such assets for accounting purposes. When management concludes that the Company is the owner of the tenant improvements, the Company records the cost to construct the tenant improvements as capital assets, and commences rental revenue recognition when the tenant takes possession of or controls the finished space, which is typically when the improvements being recorded as the Company’s asset are substantially complete. When management concludes that the Company is not the owner and the tenant is the owner of certain tenant improvements for accounting purposes, the Company records their contribution towards those tenant-owned improvements as a lease incentive, which is amortized as a reduction to rental revenue on a straight-line basis over the term of the related lease, and rental revenue recognition begins when

the tenant takes possession of or controls the leased space. The determination of whether the Company or tenant is the owner of tenant improvements for accounting purposes is subject to significant judgment, and the commencement of rental revenue recognition depends on the Company’s conclusion as to when the tenant takes possession of or controls the leased space. Control is typically transferred when the Company has completed all of its obligations under the lease agreement in order for the leased space to be used by the tenant as intended. The Company’s determination of whether its obligations have been met and control has been transferred to the tenant can be complex for large development properties.

Given the nature of construction work on large development properties, auditing management’s estimates regarding the commencement of rental revenue recognition, including the determination of the owner of the tenant improvements and when control of the leased space transfers to the tenant, involves especially subjective judgment. Construction for large development properties can include certain tenant improvements that are landlord-owned and others that are tenant-owned improvements, typically dependent upon the judgment of whether the tenant improvements are unique to the tenant or reusable by other tenants at the end of the lease term. Further, large development properties can deliver leased space in phases, resulting in various revenue commencement dates with judgment surrounding when the tenant improvements that are landlord-owned, for a particular phase, are substantially complete.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to determining the ownership of tenant improvements and when control of the leased space transfers to the tenant for development properties, thus the timing of the commencement of rental revenue recognition, included the following, among others:

We tested the effectiveness of controls over revenue recognition, including those over the ownership of tenant improvements and the determination of when the tenant took possession of or controlled the leased space.

We evaluated the reasonableness of management’s conclusions regarding the Company’s ownership of tenant improvements by:


–	Evaluating the Company’s and the tenant’s respective obligations as governed by the lease agreements for selected leases against criteria for establishing ownership.


–	Testing documentation supporting the nature of tenant improvements.


–	Performing on-site inspections of selected development properties to evaluate the nature of tenant improvements, particularly the uniqueness of the improvements.

We evaluated the reasonableness of management’s conclusions regarding the possession of or control of the completed leased space and corresponding commencement of rental revenue recognition for development properties by:


–	Testing documentation from construction contractors, architects, and city building inspection sign offs on temporary certificates of occupancy.


–	Performing on-site inspections of selected development properties near the planned rental revenue recognition commencement date to observe the status of the site and tenant improvements to evaluate whether control of the leased space had been or was ready to be transferred to the tenant.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

February ~~14, 2019~~13, 2020

We have served as the Company’s auditor since 1995.

F - 3

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	December 31, 2018			December 31, 2017			December 31, 2019			December 31, 2018
ASSETS
REAL ESTATE ASSETS (Notes 2, 3 and 4):
Land and improvements	$	1,160,138		$	1,076,172		$	1,466,166		$	1,160,138
Buildings and improvements	5,207,984			4,908,797			5,866,477			5,207,984
Undeveloped land and construction in progress	2,058,510			1,432,808			2,296,130			2,058,510
Total real estate assets held for investment	8,426,632			7,417,777			9,628,773			8,426,632
Accumulated depreciation and amortization	(1,391,368		)	(1,264,162		)	(1,561,361		)	(1,391,368		)
Total real estate assets held for investment, net	7,035,264			6,153,615			8,067,412			7,035,264
CASH AND CASH EQUIVALENTS (Note 23)	51,604			57,649			60,044			51,604
RESTRICTED CASH (Notes 4 and 23)	119,430			9,149
RESTRICTED CASH (Notes 3, 4 and 23)							16,300			119,430
MARKETABLE SECURITIES (Notes 16 and 19)	21,779			20,674			27,098			21,779
CURRENT RECEIVABLES, NET (Note 6)	20,176			16,926
DEFERRED RENT RECEIVABLES, NET (Note 6)	267,007			246,391
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 3 and 5)	197,574			183,728
CURRENT RECEIVABLES, NET (Notes 2, 6 and 20)							26,489			20,176
DEFERRED RENT RECEIVABLES, NET (Notes 2, 6 and 20)							337,937			267,007
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2, 3 and 5)							212,805			197,574
RIGHT OF USE GROUND LEASE ASSETS (Notes 2 and 18)							96,348			—
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 7)	52,873			114,706			55,661			52,873
TOTAL ASSETS	$	7,765,707		$	6,802,838		$	8,900,094		$	7,765,707
LIABILITIES AND EQUITY
LIABILITIES:
Secured debt, net (Notes 8, 9 and 19)	$	335,531		$	340,800		$	258,593		$	335,531
Unsecured debt, net (Notes 8, 9 and 19)	2,552,070			2,006,263			3,049,185			2,552,070
Unsecured line of credit (Notes 8, 9 and 19)	45,000			—			245,000			45,000
Accounts payable, accrued expenses and other liabilities (Note 18)	374,415			249,637			418,848			374,415
Ground lease liabilities (Notes 2 and 18)							98,400			—
Accrued dividends and distributions (Notes 13 and 28)	47,559			43,448			53,219			47,559
Deferred revenue and acquisition-related intangible liabilities, net (Notes 3, 5 and 10)	149,646			145,890			139,488			149,646
Rents received in advance and tenant security deposits	60,225			56,484			66,503			60,225
Total liabilities	3,564,446			2,842,522			4,329,236			3,564,446
COMMITMENTS AND CONTINGENCIES (Note 18)
EQUITY (Notes 11 and 13):
Stockholders’ Equity:
Common stock, $.01 par value, 150,000,000 shares authorized, 100,746,988 and 98,620,333 shares issued and outstanding, respectively	1,007			986
EQUITY:
Stockholders’ Equity (Note 13):
Common stock, $.01 par value, 150,000,000 shares authorized, 106,016,287 and 100,746,988 shares issued and outstanding, respectively							1,060			1,007
Additional paid-in capital	3,976,953			3,822,492			4,350,917			3,976,953
Distributions in excess of earnings	(48,053		)	(122,685		)	(58,467		)	(48,053		)
Total stockholders’ equity	3,929,907			3,700,793			4,293,510			3,929,907
Noncontrolling Interests (Note 11):
Noncontrolling Interests (Notes 2 and 11):
Common units of the Operating Partnership	78,991			77,948			81,917			78,991
Noncontrolling interests in consolidated property partnerships (Note 2)	192,363			181,575
Noncontrolling interests in consolidated property partnerships							195,431			192,363
Total noncontrolling interests	271,354			259,523			277,348			271,354
Total equity	4,201,261			3,960,316			4,570,858			4,201,261
TOTAL LIABILITIES AND EQUITY	$	7,765,707		$	6,802,838		$	8,900,094		$	7,765,707

See accompanying notes to consolidated financial statements.

F - 4

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)


	Year Ended December 31,									Year Ended December 31,
	2018			2017			2016			2019			2018			2017
REVENUES:
REVENUES (Note 2):
Rental income	$	656,631		$	633,896		$	574,413		$	826,472		$	656,631		$	633,896
Tenant reimbursements	80,982			76,559			61,079			—			80,982			76,559
Other property income (Note 18)	9,685			8,546			7,080
Other property income										10,982			9,685			8,546
Total revenues	747,298			719,001			642,572			837,454			747,298			719,001
EXPENSES:
Property expenses	133,787			129,971			113,932
Real estate taxes	70,820			66,449			55,206
Provision for bad debts (Note 20)	5,685			3,269			—
Ground leases (Notes 5 and 18)	6,176			6,337			3,439
Property expenses (Note 2)										160,037			133,787			129,971
Real estate taxes (Note 2)										78,097			70,820			66,449
Provision for bad debts (Notes 2 and 20)										—			5,685			3,269
Ground leases (Notes 2, 5 and 18)										8,113			6,176			6,337
General and administrative expenses (Note 15)	90,471			60,581			57,029			88,139			90,471			60,581
Acquisition-related expenses (Note 2)	—			—			1,902
Leasing costs (Notes 2 and 5)										7,615			—			—
Depreciation and amortization (Notes 2 and 5)	254,281			245,886			217,234			273,130			254,281			245,886
Total expenses	561,220			512,493			448,742			615,131			561,220			512,493
OTHER (EXPENSES) INCOME:
Interest income and other net investment (loss) gain (Note 19)	(559		)	5,503			1,764
Interest income and other net investment gain (loss) (Note 19)										4,641			(559		)	5,503
Interest expense (Note 9)	(49,721		)	(66,040		)	(55,803		)	(48,537		)	(49,721		)	(66,040		)
Loss on early extinguishment of debt (Note 9)	(12,623		)	(5,312		)	—			—			(12,623		)	(5,312		)
Net gain (loss) on sales of land (Note 4)	11,825			449			(295		)
Net gain on sales of land (Note 4)										—			11,825			449
Gains on sales of depreciable operating properties (Note 4)	142,926			39,507			164,302			36,802			142,926			39,507
Total other income (expenses)	91,848			(25,893		)	109,968
Total other (expenses) income										(7,094		)	91,848			(25,893		)
NET INCOME	277,926			180,615			303,798			215,229			277,926			180,615
Net income attributable to noncontrolling common units of the Operating Partnership (Notes 2 and 11)	(5,193		)	(3,223		)	(6,635		)	(3,766		)	(5,193		)	(3,223		)
Net income attributable to noncontrolling interests in consolidated property partnerships (Notes 2 and 11)	(14,318		)	(12,780		)	(3,375		)	(16,020		)	(14,318		)	(12,780		)
Total income attributable to noncontrolling interests	(19,511		)	(16,003		)	(10,010		)	(19,786		)	(19,511		)	(16,003		)
NET INCOME ATTRIBUTABLE TO KILROY REALTY CORPORATION	258,415			164,612			293,788			195,443			258,415			164,612
Preferred dividends (Note 13)	—			(5,774		)	(13,250		)	—			—			(5,774		)
Original issuance costs of redeemed preferred stock and preferred units (Note 13)	—			(7,589		)	—			—			—			(7,589		)
Total preferred dividends	—			(13,363		)	(13,250		)	—			—			(13,363		)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	258,415		$	151,249		$	280,538		$	195,443		$	258,415		$	151,249
Net income available to common stockholders per share – basic (Note 21)	$	2.56		$	1.52		$	3.00		$	1.87		$	2.56		$	1.52
Net income available to common stockholders per share – diluted (Note 21)	$	2.55		$	1.51		$	2.97		$	1.86		$	2.55		$	1.51
Weighted average shares of common stock outstanding – basic (Note 21)	99,972,359			98,113,561			92,342,483			103,200,568			99,972,359			98,113,561
Weighted average shares of common stock outstanding – diluted (Note 21)	100,482,365			98,727,331			93,023,034			103,849,168			100,482,365			98,727,331

See accompanying notes to consolidated financial statements.

F - 5

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except share and per share/unit data)


	Preferred Stock			Common Stock											Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity			Preferred Stock			Common Stock											Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
				Number of Shares		Common Stock			Additional Paid-in Capital			Distributions in Excess of Earnings															Number of Shares		Common Stock			Additional Paid-in Capital			Distributions in Excess of Earnings
BALANCE AS OF DECEMBER 31, 2015	$	192,411		92,258,690		$	923		$	3,047,894		$	(70,262	)	$	3,170,966		$	63,620		$	3,234,586
Net income												293,788			293,788			10,010			303,798
Issuance of common stock				451,398		4			31,113						31,117						31,117
Issuance of share-based compensation awards									1,827						1,827						1,827
Non-cash amortization of share-based compensation									26,624						26,624						26,624
Exercise of stock options				286,500		3			12,205						12,208						12,208
Repurchase of common stock, stock options and restricted stock units				(137,126	)	(1		)	(8,874		)				(8,875		)				(8,875		)
Settlement of restricted stock units for shares of common stock				109,044		1			(1		)				—						—
Issuance of common units in connection with acquisition															—			48,033			48,033
Exchange of common units of the Operating Partnership				250,933		2			8,891						8,893			(8,893		)	—
Initial contributions by noncontrolling interest in consolidated property partnership, net of transaction costs									328,997						328,997			124,452			453,449
Distributions to noncontrolling interests in consolidated property partnerships															—			(3,615		)	(3,615		)
Adjustment for noncontrolling interest in the Operating Partnership									8,973						8,973			(8,973		)	—
Preferred dividends and distributions												(13,250		)	(13,250		)				(13,250		)
Dividends declared per share of common stock and common unit ($3.375 per share/unit)												(318,273		)	(318,273		)	(8,312		)	(326,585		)
BALANCE AS OF DECEMBER 31, 2016	192,411			93,219,439		932			3,457,649			(107,997		)	3,542,995			216,322			3,759,317			$	192,411		93,219,439		$	932		$	3,457,649		$	(107,997	)	$	3,542,995		$	216,322		$	3,759,317
Net income												164,612			164,612			16,003			180,615														164,612			164,612			16,003			180,615
Redemption of Series G & H Preferred stock	(192,411		)									(7,589		)	(200,000		)				(200,000		)	(192,411		)									(7,589		)	(200,000		)				(200,000		)
Issuance of common stock				4,662,577		46			326,012						326,058						326,058						4,662,577		46			326,012						326,058						326,058
Issuance of share-based compensation awards									5,890						5,890						5,890											5,890						5,890						5,890
Non-cash amortization of share-based compensation									26,319						26,319						26,319											26,319						26,319						26,319
Exercise of stock options				285,000		4			12,175						12,179						12,179						285,000		4			12,175						12,179						12,179
Settlement of restricted stock units for shares of common stock				317,848		3			(3		)				—						—						317,848		3			(3		)				—						—
Repurchase of common stock, stock options and restricted stock units				(168,881	)	(2		)	(12,984		)				(12,986		)				(12,986		)				(168,881	)	(2		)	(12,984		)				(12,986		)				(12,986		)
Exchange of common units of the Operating Partnership				304,350		3			10,936						10,939			(10,939		)	—						304,350		3			10,936						10,939			(10,939		)	—
Contributions from noncontrolling interests in consolidated property partnerships									—						—			54,604			54,604											—						—			54,604			54,604
Distributions to noncontrolling interests in consolidated property partnerships															—			(16,542		)	(16,542		)															—			(16,542		)	(16,542		)
Adjustment for noncontrolling interest in the Operating Partnership									(3,502		)				(3,502		)	3,502			—											(3,502		)				(3,502		)	3,502			—
Preferred dividends and distributions												(5,774		)	(5,774		)				(5,774		)												(5,774		)	(5,774		)				(5,774		)
Dividends declared per share of common stock and common unit ($1.65 per share/unit)												(165,937		)	(165,937		)	(3,427		)	(169,364		)												(165,937		)	(165,937		)	(3,427		)	(169,364		)
BALANCE AS OF DECEMBER 31, 2017	—			98,620,333		986			3,822,492			(122,685		)	3,700,793			259,523			3,960,316			—			98,620,333		986			3,822,492			(122,685		)	3,700,793			259,523			3,960,316
Net income												258,415			258,415			19,511			277,926														258,415			258,415			19,511			277,926
Issuance of common stock																											1,817,195		18			130,675						130,693						130,693
Issuance of share-based compensation awards																																3,926						3,926						3,926
Non-cash amortization of share-based compensation																																35,890						35,890						35,890
Exercise of stock options																											1,000		—			41						41						41
Settlement of restricted stock units for shares of common stock																											488,354		4			(4		)				—						—
Repurchase of common stock, stock options and restricted stock units																											(231,800	)	(2		)	(16,551		)				(16,553		)				(16,553		)
Exchange of common units of the Operating Partnership																											51,906		1			1,961						1,962			(1,962		)	—
Contributions from noncontrolling interests in consolidated property partnerships																																						—			8,273			8,273
Distributions to noncontrolling interests in consolidated property partnerships																																						—			(11,803		)	(11,803		)
Adjustment for noncontrolling interest in the Operating Partnership																																(1,477		)				(1,477		)	1,477			—
Dividends declared per share of common stock and common unit ($1.79 per share/unit)																																			(183,783		)	(183,783		)	(3,665		)	(187,448		)
BALANCE AS OF DECEMBER 31, 2018																								—			100,746,988		1,007			3,976,953			(48,053		)	3,929,907			271,354			4,201,261
Net income																																			195,443			195,443			19,786			215,229
Opening adjustment to Distributions in Excess of Earnings upon adoption of ASC 842 (Note 2)																																			(3,146		)	(3,146		)				(3,146		)
Issuance of common stock (Note 13)				1,817,195		18			130,675						130,693						130,693						5,000,000		50			353,672						353,722						353,722
Issuance of share-based compensation awards (Note 15)									3,926						3,926						3,926											4,664						4,664						4,664
Non-cash amortization of share-based compensation (Note 15)									35,890						35,890						35,890											32,813						32,813						32,813
Exercise of stock options				1,000		—			41						41						41						16,500		—			703						703						703
Settlement of restricted stock units for shares of common stock (Note 15)				488,354		4			(4		)				—						—						463,276		5			(5		)				—						—
Repurchase of common stock and restricted stock units (Note 15)				(231,800	)	(2		)	(16,551		)				(16,553		)				(16,553		)
Repurchase and cancellation of common stock, stock options, and restricted stock units (Note 15)																											(212,477	)	(2		)	(14,859		)				(14,861		)				(14,861		)
Exchange of common units of the Operating Partnership				51,906		1			1,961						1,962			(1,962		)	—						2,000		—			78						78			(78		)	—
Contributions from noncontrolling interests in consolidated property partnerships															—			8,273			8,273
Distributions to noncontrolling interests in consolidated property partnerships															—			(11,803		)	(11,803		)															—			(12,952		)	(12,952		)
Adjustment for noncontrolling interest in the Operating Partnership (Note 2)									(1,477		)				(1,477		)	1,477			—											(3,102		)				(3,102		)	3,102			—
Dividends declared per share of common stock and common unit ($1.79 per share/unit) (Notes 13 and 28)												(183,783		)	(183,783		)	(3,665		)	(187,448		)
BALANCE AS OF DECEMBER 31, 2018	$	—		100,746,988		$	1,007		$	3,976,953		$	(48,053	)	$	3,929,907		$	271,354		$	4,201,261
Dividends declared per share of common stock and common unit ($1.91 per share/unit) (Notes 13 and 28)																																			(202,711		)	(202,711		)	(3,864		)	(206,575		)
BALANCE AS OF DECEMBER 31, 2019																								$	—		106,016,287		$	1,060		$	4,350,917		$	(58,467	)	$	4,293,510		$	277,348		$	4,570,858

See accompanying notes to consolidated financial statements.

F - 6

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31,									Year Ended December 31,
	2018			2017			2016			2019			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	277,926		$	180,615		$	303,798		$	215,229		$	277,926		$	180,615
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate assets and leasing costs	249,882			241,862			213,156			268,045			249,882			241,862
Depreciation of non-real estate furniture, fixtures and equipment	4,400			4,024			4,078			5,085			4,400			4,024
Increase in provision for bad debts (Note 20)	5,685			3,269			—
(Recoveries of) provision for bad debts (Notes 2 and 20)										(3,433		)	5,685			3,269
Non-cash amortization of share-based compensation awards (Note 15)	27,932			19,046			21,064			27,007			27,932			19,046
Non-cash amortization of deferred financing costs and net debt discounts	1,084			3,247			2,720			1,427			1,084			3,247
Non-cash amortization of net below market rents (Note 5)	(9,748		)	(8,528		)	(7,166		)	(9,206		)	(9,748		)	(8,528		)
Loss on early extinguishment of debt (Note 9)	12,623			5,312			—
(Gain) loss on sale of land (Note 4)	(11,825		)	(449		)	295
Gains on sales of depreciable operating properties (Note 4)	(142,926		)	(39,507		)	(164,302		)	(36,802		)	(142,926		)	(39,507		)
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements (Note 10)	(18,429		)	(16,767		)	(13,244		)	(19,190		)	(18,429		)	(16,767		)
Straight-line rents	(26,976		)	(33,275		)	(29,629		)	(72,023		)	(26,976		)	(33,275		)
Amortization of the right of use ground lease asset (Note 2)										683			—			—
Loss on early extinguishment of debt (Note 9)										—			12,623			5,312
(Gain) loss on sale of land (Note 4)										—			(11,825		)	(449		)
Net change in other operating assets	(7,930		)	(17,732		)	(5,214		)	(14,476		)	(7,930		)	(17,732		)
Net change in other operating liabilities	48,345			5,895			19,498			24,175			48,345			5,895
Net cash provided by operating activities	410,043			347,012			345,054			386,521			410,043			347,012
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development properties and undeveloped land	(489,236		)	(397,440		)	(351,012		)	(845,464		)	(489,236		)	(397,440		)
Expenditures for acquisitions of development properties and undeveloped land (Note 3)	(311,299		)	(19,829		)	(33,513		)	(173,291		)	(311,299		)	(19,829		)
Expenditures for acquisitions of operating properties (Note 3)	(257,340		)	—			(393,767		)	(186,258		)	(257,340		)	—
Expenditures for operating properties and other capital assets	(166,440		)	(88,425		)	(111,961		)	(147,687		)	(166,440		)	(88,425		)
Net proceeds received from dispositions (Note 4)	364,300			182,492			325,031			124,421			364,300			182,492
Decrease (increase) in acquisition-related deposits	36,000			(35,900		)	1,902			—			36,000			(35,900		)
Proceeds received from repayment of note receivable (Note 7)	15,100			—			—
Issuance of notes receivable	—			—			(16,100		)
Proceeds received from repayment of note receivable										—			15,100			—
Net cash used in investing activities	(808,915		)	(359,102		)	(579,420		)	(1,228,279		)	(808,915		)	(359,102		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock (Note 13)	130,693			326,058			31,117			353,722			130,693			326,058
Redemption of Series G and H Preferred stock (Note 13)	—			(200,000		)	—			—			—			(200,000		)
Net proceeds from the issuance of unsecured debt (Note 9)	648,537			674,447			—			499,390			648,537			674,447
Repayments of unsecured debt (Note 9)	(261,823		)	(519,024		)	—			—			(261,823		)	(519,024		)
Borrowings on unsecured revolving credit facility	765,000			270,000			305,000			1,110,000			765,000			270,000
Repayments on unsecured revolving credit facility	(690,000		)	(270,000		)	(305,000		)	(910,000		)	(690,000		)	(270,000		)
Borrowings on unsecured debt (Note 9)	120,000			—			—			—			120,000			—
Principal payments and repayments of secured debt (Note 9)	(3,584		)	(130,371		)	(74,140		)	(76,309		)	(3,584		)	(130,371		)
Proceeds from the issuance of secured debt (Note 9)	—			—			170,000
Financing costs	(6,262		)	(11,500		)	(2,159		)	(6,678		)	(6,262		)	(11,500		)
Repurchase of common stock and restricted stock units (Note 15)	(16,553		)	(12,986		)	(8,875		)	(14,556		)	(16,553		)	(12,986		)
Proceeds from exercise of stock options	41			12,179			12,208			703			41			12,179
Contributions from noncontrolling interests in consolidated property partnerships (Note 11)	8,273			54,604			453,449			—			8,273			54,604
Distributions to noncontrolling interests in consolidated property partnerships	(11,803		)	(16,542		)	(3,615		)	(12,952		)	(11,803		)	(16,542		)
Dividends and distributions paid to common stockholders and common unitholders	(179,411		)	(340,697		)	(137,444		)	(196,252		)	(179,411		)	(340,697		)
Dividends and distributions paid to preferred stockholders and preferred unitholders	—			(7,409		)	(13,250		)	—			—			(7,409		)
Net cash provided by (used in) financing activities	503,108			(171,241		)	427,291			747,068			503,108			(171,241		)
Net increase (decrease) in cash and cash equivalents and restricted cash	104,236			(183,331		)	192,925
Net (decrease) increase in cash and cash equivalents and restricted cash										(94,690		)	104,236			(183,331		)
Cash and cash equivalents and restricted cash, beginning of year	66,798			250,129			57,204			171,034			66,798			250,129
Cash and cash equivalents and restricted cash, end of year	$	171,034		$	66,798		$	250,129		$	76,344		$	171,034		$	66,798

See accompanying notes to consolidated financial statements.

F - 7

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Partners of

Kilroy Realty, L.P.

~~Los Angeles, California~~

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Kilroy Realty, L.P. and subsidiaries (the “Operating Partnership”) as of December 31, ~~2018~~2019 and ~~2017,~~2018, the related consolidated statements of operations, capital, and cash flows, for each of the three years in the period ended December 31, ~~2018,~~2019, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Operating Partnership as of December 31, ~~2018~~2019 and ~~2017,~~2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, ~~2018,~~2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Operating Partnership’s internal control over financial reporting as of December 31, ~~2018,~~2019, based on criteria established in Internal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February ~~14, 2019,~~13, 2020, expressed an unqualified opinion on the Operating Partnership’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Operating Partnership’s management. Our responsibility is to express an opinion on the Operating Partnership’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Operating Partnership in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California

February ~~14, 2019~~13, 2020

We have served as the Operating Partnership’s auditor since 2010.

F - 8

KILROY REALTY, L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands, except unit data)


	December 31, 2018			December 31, 2017			December 31, 2019			December 31, 2018
ASSETS
REAL ESTATE ASSETS (Notes 2, 3 and 4):
Land and improvements	$	1,160,138		$	1,076,172		$	1,466,166		$	1,160,138
Buildings and improvements	5,207,984			4,908,797			5,866,477			5,207,984
Undeveloped land and construction in progress	2,058,510			1,432,808			2,296,130			2,058,510
Total real estate assets held for investment	8,426,632			7,417,777			9,628,773			8,426,632
Accumulated depreciation and amortization	(1,391,368		)	(1,264,162		)	(1,561,361		)	(1,391,368		)
Total real estate assets held for investment, net	7,035,264			6,153,615			8,067,412			7,035,264
CASH AND CASH EQUIVALENTS (Note 24)	51,604			57,649			60,044			51,604
RESTRICTED CASH (Notes 4 and 24)	119,430			9,149
RESTRICTED CASH (Notes 3, 4 and 24)							16,300			119,430
MARKETABLE SECURITIES (Notes 16 and 19)	21,779			20,674			27,098			21,779
CURRENT RECEIVABLES, NET (Note 6)	20,176			16,926
DEFERRED RENT RECEIVABLES, NET (Note 6)	267,007			246,391
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 3 and 5)	197,574			183,728
CURRENT RECEIVABLES, NET (Notes 2, 6 and 20)							26,489			20,176
DEFERRED RENT RECEIVABLES, NET (Notes 2, 6 and 20)							337,937			267,007
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Notes 2, 3 and 5)							212,805			197,574
RIGHT OF USE GROUND LEASE ASSET (Note 2 and 18)							96,348			—
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 7)	52,873			114,706			55,661			52,873
TOTAL ASSETS	$	7,765,707		$	6,802,838		$	8,900,094		$	7,765,707
LIABILITIES AND CAPITAL
LIABILITIES:
Secured debt, net (Notes 9 and 19)	$	335,531		$	340,800		$	258,593		$	335,531
Unsecured debt, net (Notes 9 and 19)	2,552,070			2,006,263			3,049,185			2,552,070
Unsecured line of credit (Notes 9 and 19)	45,000			—			245,000			45,000
Accounts payable, accrued expenses and other liabilities (Note 18)	374,415			249,637			418,848			374,415
Ground lease liabilities (Note 2 and 18)							98,400			—
Accrued distributions (Notes 14 and 28)	47,559			43,448			53,219			47,559
Deferred revenue and acquisition-related intangible liabilities, net (Notes 3, 5 and 10)	149,646			145,890			139,488			149,646
Rents received in advance and tenant security deposits	60,225			56,484			66,503			60,225
Total liabilities	3,564,446			2,842,522			4,329,236			3,564,446
COMMITMENTS AND CONTINGENCIES (Note 18)
CAPITAL (Notes 12 and 14):
Common units, 100,746,988 and 98,620,333 held by the general partner and 2,025,287 and 2,077,193 held by common limited partners issued and outstanding, respectively	4,003,700			3,773,941
CAPITAL:
Common units, 106,016,287 and 100,746,988 held by the general partner and 2,023,287 and 2,025,287 held by common limited partners issued and outstanding, respectively (Note 14)							4,369,758			4,003,700
Total partners’ capital	4,003,700			3,773,941			4,369,758			4,003,700
Noncontrolling interests in consolidated property partnerships and subsidiaries (Notes 2 and 12)	197,561			186,375			201,100			197,561
Total capital	4,201,261			3,960,316			4,570,858			4,201,261
TOTAL LIABILITIES AND CAPITAL	$	7,765,707		$	6,802,838		$	8,900,094		$	7,765,707

See accompanying notes to consolidated financial statements.

F - 9

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except unit and per unit data)


	Year Ended December 31,									Year Ended December 31,
	2018			2017			2016			2019			2018			2017
REVENUES:
REVENUES (Note 2):
Rental income	$	656,631		$	633,896		$	574,413		$	826,472		$	656,631		$	633,896
Tenant reimbursements	80,982			76,559			61,079			—			80,982			76,559
Other property income (Note 18)	9,685			8,546			7,080
Other property income										10,982			9,685			8,546
Total revenues	747,298			719,001			642,572			837,454			747,298			719,001
EXPENSES:
Property expenses	133,787			129,971			113,932
Real estate taxes	70,820			66,449			55,206
Provision for bad debts (Note 20)	5,685			3,269			—
Ground leases (Notes 5 and 18)	6,176			6,337			3,439
Property expenses (Note 2)										160,037			133,787			129,971
Real estate taxes (Note 2)										78,097			70,820			66,449
Provision for bad debts (Notes 2 and 20)										—			5,685			3,269
Ground leases (Notes 2, 5 and 18)										8,113			6,176			6,337
General and administrative expenses (Note 15)	90,471			60,581			57,029			88,139			90,471			60,581
Acquisition-related expenses (Note 2)	—			—			1,902
Leasing costs (Notes 2 and 5)										7,615			—			—
Depreciation and amortization (Notes 2 and 5)	254,281			245,886			217,234			273,130			254,281			245,886
Total expenses	561,220			512,493			448,742			615,131			561,220			512,493
OTHER (EXPENSES) INCOME:
Interest income and other net investment (loss) gain (Note 19)	(559		)	5,503			1,764
Interest income and other net investment gain (loss) (Note 19)										4,641			(559		)	5,503
Interest expense (Note 9)	(49,721		)	(66,040		)	(55,803		)	(48,537		)	(49,721		)	(66,040		)
Loss on early extinguishment of debt (Note 9)	(12,623		)	(5,312		)	—			—			(12,623		)	(5,312		)
Net gain (loss) on sales of land (Note 4)	11,825			449			(295		)
Net gain on sales of land (Note 4)										—			11,825			449
Gains on sales of depreciable operating properties (Note 4)	142,926			39,507			164,302			36,802			142,926			39,507
Total other income (expenses)	91,848			(25,893		)	109,968
Total other (expenses) income										(7,094		)	91,848			(25,893		)
NET INCOME	277,926			180,615			303,798			215,229			277,926			180,615
Net income attributable to noncontrolling interests in consolidated property partnerships and subsidiaries (Notes 2 and 12)	(14,716		)	(13,175		)	(3,735		)	(16,491		)	(14,716		)	(13,175		)
NET INCOME ATTRIBUTABLE TO KILROY REALTY, L.P.	263,210			167,440			300,063			198,738			263,210			167,440
Preferred distributions (Note 14)	—			(5,774		)	(13,250		)	—			—			(5,774		)
Original issuance costs of redeemed preferred units (Note 14)	—			(7,589		)	—			—			—			(7,589		)
Total preferred distributions	—			(13,363		)	(13,250		)	—			—			(13,363		)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS	$	263,210		$	154,077		$	286,813		$	198,738		$	263,210		$	154,077
Net income available to common unitholders per unit – basic (Note 22)	$	2.56		$	1.52		$	2.99		$	1.87		$	2.56		$	1.52
Net income available to common unitholders per unit – diluted (Note 22)	$	2.55		$	1.51		$	2.96		$1.86			$	2.55		$	1.51
Weighted average common units outstanding – basic (Note 22)	102,025,276			100,246,567			94,771,688			105,223,975			102,025,276			100,246,567
Weighted average common units outstanding – diluted (Note 22)	102,535,282			100,860,337			95,452,239			105,872,575			102,535,282			100,860,337

See accompanying notes to consolidated financial statements.

F - 10

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CAPITAL

(in thousands, except unit and per unit data)


	Partners’ Capital								Total Partners’ Capital				Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries							Partners’ Capital									Total Partners’ Capital			Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
	Preferred Units			Number of Common Units		Common Units						Total Capital				Preferred Units				Number of Common Units			Common Units					Total Capital
BALANCE AS OF DECEMBER 31, 2015	$	192,411		94,023,465		$	3,031,609				$	3,224,020					$	10,566			$	3,234,586
Net income						300,063			300,063				3,735				303,798
Issuance of common units				451,398		31,117			31,117								31,117
Issuance of common units in connection with acquisition				867,701		48,033			48,033								48,033
Issuance of share-based compensation awards						1,827			1,827								1,827
Non-cash amortization of share-based compensation						26,624			26,624								26,624
Exercise of stock options				286,500		12,208			12,208								12,208
Repurchase of common units and restricted stock units				(137,126	)	(8,875		)	(8,875		)						(8,875		)
Settlement of restricted stock units				109,044		—			—								—
Initial contributions from noncontrolling interest in consolidated property partnership, net of transaction costs						328,997			328,997				124,452				453,449
Distributions to noncontrolling interests in consolidated property partnerships													(3,615		)		(3,615		)
Preferred distributions						(13,250		)	(13,250		)						(13,250		)
Distributions declared per common unit ($3.375per unit)						(326,585		)	(326,585		)						(326,585		)
BALANCE AS OF DECEMBER 31, 2016	192,411			95,600,982		3,431,768			3,624,179				135,138				3,759,317			$	192,411			95,600,982		$	3,431,768			$	3,624,179		$	135,138		$	3,759,317
Net income						167,440			167,440				13,175				180,615									167,440			167,440			13,175			180,615
Redemption of Series G & H Preferred stock	(192,411		)			(7,589		)	(200,000		)						(200,000		)	(192,411		)				(7,589		)	(200,000		)				(200,000		)
Issuance of common units				4,662,577		326,058			326,058								326,058							4,662,577		326,058			326,058						326,058
Issuance of share-based compensation awards						5,890			5,890								5,890									5,890			5,890						5,890
Non-cash amortization of share-based compensation						26,319			26,319								26,319									26,319			26,319						26,319
Exercise of stock options				285,000		12,179			12,179								12,179							285,000		12,179			12,179						12,179
Settlement of restricted stock units				317,848		—			—								—							317,848		—			—						—
Repurchase of common units and restricted stock units				(168,881	)	(12,986		)	(12,986		)						(12,986		)					(168,881	)	(12,986		)	(12,986		)				(12,986		)
Contributions from noncontrolling interest in consolidated property partnership									—				54,604				54,604															54,604			54,604
Distributions to noncontrolling interests in consolidated property partnerships													(16,542		)		(16,542		)													(16,542		)	(16,542		)
Preferred distributions						(5,774		)	(5,774		)						(5,774		)							(5,774		)	(5,774		)				(5,774		)
Distributions declared per common unit ($1.65 per unit)						(169,364		)	(169,364		)						(169,364		)							(169,364		)	(169,364		)				(169,364		)
BALANCE AS OF DECEMBER 31, 2017	—			100,697,526		3,773,941			3,773,941				186,375				3,960,316			—				100,697,526		3,773,941			3,773,941			186,375			3,960,316
Net income						263,210			263,210				14,716				277,926									263,210			263,210			14,716			277,926
Issuance of common units																								1,817,195		130,693			130,693						130,693
Issuance of share-based compensation awards																										3,926			3,926						3,926
Non-cash amortization of share-based compensation																										35,890			35,890						35,890
Exercise of stock options																								1,000		41			41						41
Settlement of restricted stock units																								488,354		—			—						—
Repurchase of common units and restricted stock units																								(231,800	)	(16,553		)	(16,553		)				(16,553		)
Contributions from noncontrolling interest in consolidated property partnership																										—			—			8,273			8,273
Distributions to noncontrolling interests in consolidated property partnerships																																(11,803		)	(11,803		)
Distributions declared per common unit ($1.79 per unit)																										(187,448		)	(187,448		)				(187,448		)
BALANCE AS OF DECEMBER 31, 2018																				—				102,772,275		4,003,700			4,003,700			197,561			4,201,261
Net income																										198,738			198,738			16,491			215,229
Opening adjustment to Partners’ Capital upon adoption of ASC 842 (Note 2)																										(3,146		)	(3,146		)				(3,146		)
Issuance of common units (Note 14)				1,817,195		130,693			130,693								130,693							5,000,000		353,722			353,722						353,722
Issuance of share-based compensation awards (Note 15)						3,926			3,926								3,926									4,664			4,664						4,664
Non-cash amortization of share-based compensation (Note 15)						35,890			35,890								35,890									32,813			32,813						32,813
Exercise of stock options				1,000		41			41								41							16,500		703			703						703
Settlement of restricted stock units (Note 15)				488,354		—			—								—							463,276		—			—						—
Repurchase of common units and restricted stock units (Note 15)				(231,800	)	(16,553		)	(16,553		)						(16,553		)
Contributions from noncontrolling interest in consolidated property partnership						—			—				8,273				8,273
Repurchase and cancellation of common units, stock options, and restricted stock units (Note 15)																								(212,477	)	(14,861		)	(14,861		)				(14,861		)
Distributions to noncontrolling interests in consolidated property partnerships													(11,803		)		(11,803		)													(12,952		)	(12,952		)
Distributions declared per common unit ($1.79 per unit) (Notes 14 and 28)						(187,448		)	(187,448		)						(187,448		)
BALANCE AS OF DECEMBER 31, 2018	$	—		102,772,275		$	4,003,700		$	4,003,700			$	197,561			$	4,201,261
Distributions declared per common unit ($1.91 per unit) (Notes 14 and 28)																										(206,575		)	(206,575		)				(206,575		)
BALANCE AS OF DECEMBER 31, 2019																				$	—			108,039,574		$	4,369,758		$	4,369,758		$	201,100		$	4,570,858

See accompanying notes to consolidated financial statements.

F - 11

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Year Ended December 31,									Year Ended December 31,
	2018			2017			2016			2019			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	277,926		$	180,615		$	303,798		$	215,229		$	277,926		$	180,615
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate assets and leasing costs	249,882			241,862			213,156			268,045			249,882			241,862
Depreciation of non-real estate furniture, fixtures and equipment	4,400			4,024			4,078			5,085			4,400			4,024
Increase in provision for bad debts (Note 20)	5,685			3,269			—
(Recoveries of) provision for bad debts (Notes 2 and 20)										(3,433		)	5,685			3,269
Non-cash amortization of share-based compensation awards (Note 15)	27,932			19,046			21,064			27,007			27,932			19,046
Non-cash amortization of deferred financing costs and net debt discounts	1,084			3,247			2,720			1,427			1,084			3,247
Non-cash amortization of net below market rents (Note 5)	(9,748		)	(8,528		)	(7,166		)	(9,206		)	(9,748		)	(8,528		)
Loss on early extinguishment of debt (Note 9)	12,623			5,312			—
(Gain) loss on sale of land (Note 4)	(11,825		)	(449		)	295
Gains on sales of depreciable operating properties (Note 4)	(142,926		)	(39,507		)	(164,302		)	(36,802		)	(142,926		)	(39,507		)
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements (Note 10)	(18,429		)	(16,767		)	(13,244		)	(19,190		)	(18,429		)	(16,767		)
Straight-line rents	(26,976		)	(33,275		)	(29,629		)	(72,023		)	(26,976		)	(33,275		)
Amortization of right of use ground lease assets (Note 2)										683			—			—
Loss on early extinguishment of debt (Note 9)										—			12,623			5,312
(Gain) loss on sale of land (Note 4)										—			(11,825		)	(449		)
Net change in other operating assets	(7,930		)	(17,732		)	(5,214		)	(14,476		)	(7,930		)	(17,732		)
Net change in other operating liabilities	48,345			5,895			19,498			24,175			48,345			5,895
Net cash provided by operating activities	410,043			347,012			345,054			386,521			410,043			347,012
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development properties and undeveloped land	(489,236		)	(397,440		)	(351,012		)	(845,464		)	(489,236		)	(397,440		)
Expenditures for acquisitions of development properties and undeveloped land (Note 3)	(311,299		)	(19,829		)	(33,513		)	(173,291		)	(311,299		)	(19,829		)
Expenditures for acquisitions of operating properties (Note 3)	(257,340		)	—			(393,767		)	(186,258		)	(257,340		)	—
Expenditures for operating properties and other capital assets	(166,440		)	(88,425		)	(111,961		)	(147,687		)	(166,440		)	(88,425		)
Net proceeds received from dispositions (Note 4)	364,300			182,492			325,031			124,421			364,300			182,492
Decrease (increase) in acquisition-related deposits	36,000			(35,900		)	1,902			—			36,000			(35,900		)
Proceeds received from repayment of note receivable (Note 7)	15,100			—			—
Issuance of notes receivable	—			—			(16,100		)
Proceeds received from repayment of note receivable										—			15,100			—
Net cash used in investing activities	(808,915		)	(359,102		)	(579,420		)	(1,228,279		)	(808,915		)	(359,102		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common units (Note 14)	130,693			326,058			31,117			353,722			130,693			326,058
Redemption of Series G and H Preferred units (Note 14)	—			(200,000		)	—			—			—			(200,000		)
Net proceeds from the issuance of unsecured debt (Note 9)	648,537			674,447			—			499,390			648,537			674,447
Repayments of unsecured debt (Note 9)	(261,823		)	(519,024		)	—			—			(261,823		)	(519,024		)
Borrowings on unsecured revolving credit facility	765,000			270,000			305,000			1,110,000			765,000			270,000
Repayments on unsecured revolving credit facility	(690,000		)	(270,000		)	(305,000		)	(910,000		)	(690,000		)	(270,000		)
Borrowings on unsecured debt (Note 9)	120,000			—			—			—			120,000			—
Principal payments and repayments of secured debt (Note 9)	(3,584		)	(130,371		)	(74,140		)	(76,309		)	(3,584		)	(130,371		)
Proceeds from the issuance of secured debt (Note 9)	—			—			170,000
Financing costs	(6,262		)	(11,500		)	(2,159		)	(6,678		)	(6,262		)	(11,500		)
Repurchase of common units and restricted stock units (Note 15)	(16,553		)	(12,986		)	(8,875		)	(14,556		)	(16,553		)	(12,986		)
Proceeds from exercise of stock options	41			12,179			12,208			703			41			12,179
Contributions from noncontrolling interests in consolidated property partnerships (Note 12)	8,273			54,604			453,449			—			8,273			54,604
Distributions to noncontrolling interests in consolidated property partnerships	(11,803		)	(16,542		)	(3,615		)	(12,952		)	(11,803		)	(16,542		)
Distributions paid to common unitholders	(179,411		)	(340,697		)	(137,444		)	(196,252		)	(179,411		)	(340,697		)
Distributions paid to preferred unitholders	—			(7,409		)	(13,250		)	—			—			(7,409		)
Net cash provided by (used in) financing activities	503,108			(171,241		)	427,291			747,068			503,108			(171,241		)
Net increase (decrease) in cash and cash equivalents and restricted cash	104,236			(183,331		)	192,925
Net (decrease) increase in cash and cash equivalents and restricted cash										(94,690		)	104,236			(183,331		)
Cash and cash equivalents and restricted cash, beginning of year	66,798			250,129			57,204			171,034			66,798			250,129
Cash and cash equivalents and restricted cash, end of year	$	171,034		$	66,798		$	250,129		$	76,344		$	171,034		$	66,798

See accompanying notes to consolidated financial statements.

F - 12

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	Organization and Ownership

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

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

Our stabilized portfolio of operating properties was comprised of the following properties at December 31, ~~2018:~~2019:



	Number of Buildings	Rentable Square Feet (unaudited)	Number of Tenants	Percentage Occupied (unaudited)		Percentage Leased (unaudited)
Stabilized Office Properties	112	13,475,795	451	94.6	%	97.0	%

Number of
Buildings

Rentable
Square Feet (unaudited)

Number of
Tenants

Percentage
Occupied
(unaudited)

Percentage Leased
(unaudited)
Stabilized Office Properties 94
13,232,580
482
94.4 % 96.6 %



	Number of Buildings	Number of Units	2019 Average Occupancy (unaudited)
Stabilized Residential Property	1	200	82.4	%

Number of
Buildings Number of Units 2018 Average Occupancy
(unaudited)
Stabilized Residential Property 1
200
79.7 %

Our stabilized portfolio includes all of our properties with the exception of development and redevelopment properties currently committed for construction, under construction, or in the tenant improvement phase, undeveloped land, recently completed residential properties not yet stabilized and real estate assets held for sale. 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 properties in the tenant improvement phase as office and retail properties that we are developing or redeveloping where the project has reached cold shell condition and is ready for tenant improvements, which may require additional major base building construction before being placed in service. Projects in the tenant improvement phase are added to our stabilized portfolio once the project reaches the earlier of 95% occupancy or one year from the date of the cessation of major base building construction activities. Costs capitalized to construction in progress for development and redevelopment properties are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets at the historical cost of the property as the projects are placed in service.

During the year ended December 31, 2019, we added 1 completed development project to our stabilized office portfolio consisting of 394,340 square feet in San Francisco, California. As of December 31, ~~2018,~~2019, the following properties were excluded from our stabilized portfolio. We did not have any redevelopment properties or properties held for sale at December 31, ~~2018.~~2019.

Number of
Properties/Projects

Estimated Rentable
Square Feet ⁽¹⁾
(unaudited)
In-process development projects - tenant improvement⁽²⁾
2 1,150,000
In-process development projects - under construction ⁽³⁾
3 1,290,000
F - 13

~~_______________~~


~~(1)~~	~~Estimated rentable square feet upon completion.~~

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾/ Units (unaudited)
In-process development projects - tenant improvement⁽²⁾	2	846,000
In-process development projects - under construction ⁽³⁾	6	2,291,000
Completed residential development project ⁽⁴⁾	1	237 units

_______________


(1)	Estimated rentable square feet upon completion.


(2)	Includes ~~88,000~~96,000 square feet of ~~Production, Distribution, and Repair (“PDR”)~~retail space.


(3)	In addition to the estimated office and ~~PDR~~life science rentable square feet noted above, development projects under construction also include ~~96,000 square feet of retail space and 801~~564 residential units.


(4)	Represents recently completed residential units not yet stabilized.

Our stabilized portfolio also excludes our future development pipeline, which as of December 31, ~~2018~~2019 was comprised of ~~five potential~~5 future development sites, representing approximately 7361gross acres of undeveloped land.

As of December 31, ~~2018,~~2019, all of our properties and development projects were owned and all of our business was conducted in the state of California with the exception of ~~eight~~8 office properties, ~~and one~~1 development project under construction and 1 recently acquired future development project located in the state of Washington. All of our properties and development projects are 100% owned, excluding ~~four~~4 office properties owned by ~~three~~3 consolidated property partnerships and ~~an office property~~2 development projects held by a consolidated variable interest ~~entity for a transaction~~entities established to facilitate potential transactions intended to qualify as a like-kind ~~exchange~~exchanges pursuant to Section 1031 of the Code (“Section 1031 Exchange”) ~~that closed in January 2019. Two~~. NaN of the ~~three~~3 consolidated property partnerships, 100 First Street Member, LLC (“100 First LLC”) and 303 Second Street Member, LLC (“303 Second LLC”), each owned ~~one~~1 office property in San Francisco, California through subsidiary REITs. As of December 31, ~~2018,~~2019, the Company owned a 56% common equity interest in both 100 First LLC and 303 Second LLC. The third consolidated property partnership, Redwood City Partners, LLC (“Redwood LLC”) owned ~~two~~2 office properties in Redwood City, California. As of December 31, ~~2018,~~2019, the Company owned an approximate 93% common equity interest in Redwood LLC. The remaining interests in all ~~three~~3 property partnerships were owned by unrelated third parties.

As of December 31, ~~2018,~~2019, the Company owned an approximate ~~98.0%~~98.1% common general partnership interest in the Operating Partnership. The remaining approximate ~~2.0%~~1.9% common limited partnership interest in the Operating Partnership as of December 31, ~~2018~~2019 was owned by non-affiliated investors and certain of our executive officers and directors. Both the general and limited common partnership interests in the Operating Partnership are denominated in common units. Generally, the number of common units held by the Company is equivalent to the number of outstanding shares of the Company’s common stock, and the rights of all the common units to quarterly distributions and payments in liquidation mirror those of the Company’s common stockholders. The common limited partners have certain redemption rights as provided in the Operating Partnership’s Seventh Amended and Restated Agreement of Limited Partnership, as amended, the “Partnership Agreement”.

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. With the exception of the Operating Partnership and our consolidated property partnerships, all of our subsidiaries are wholly-owned.


2.	Basis of Presentation and Significant Accounting Policies

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, 303 Second LLC, 100 First LLC, Redwood LLC and all of our wholly-owned and controlled subsidiaries. The consolidated financial statements of the Operating Partnership include the consolidated financial position and results of operations of the Operating Partnership, the Finance Partnership, 303 Second LLC, 100 First LLC, Redwood LLC and all of our wholly-owned and controlled subsidiaries. All intercompany balances and transactions have been eliminated in the consolidated financial statements.

~~Accounting Pronouncements Adopted January 1, 2018~~

Effective January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09 “Revenue From Contracts with Customers (Topic 606)” (“ASU 2014-09”) and the related FASB ASU Nos. 2016-12 and 2016-20, which provide practical expedients, technical corrections, and improvements for certain aspects of ASU 2014-09, on a modified retrospective basis. ASU 2014-09 establishes a single comprehensive model for entities to use in accounting for revenue from contracts with customers and supersedes most of the existing revenue recognition guidance.

F - 14

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

We evaluated each of the Company’s revenue streams to determine the sources of revenue that are impacted by ASU 2014-09 and concluded that two revenue streams, sales of real estate and revenue from our multi-tenant parking arrangements, fall within the scope of Topic 606. We evaluated the impact of the adoption of the guidance on the timing of gain recognition for our historical dispositions and concluded there was not a significant impact to our consolidated financial statements given the straight forward nature of our historical disposition transactions. We also evaluated the impact of the guidance on the timing and pattern of revenue recognition for our multi-tenant parking arrangements and determined there was no significant impact to our consolidated financial statements. We generally provide parking for our multi-tenant properties based on the prevailing market rate per parking space, which adjusts based on prevailing market rates during the tenant’s occupancy, and we recognize parking revenue as parking spaces are utilized by the tenant. Given the structure of these arrangements whereby the amount of parking revenue we recognize corresponds directly to the tenant’s use, we were able to apply the practical expedient provided in Accounting Standards Codification (“ASC”) 606-10-50-14(b) (the “right to invoice” practical expedient). As a result of applying this practical expedient, we are not required to disclose the transaction price allocated to future performance obligations for multi-tenant parking since we cannot predict or estimate the use of such parking spaces. During the years ended December 31, 2018, 2017 and 2016, we recognized~~$26.7 million~~, $26.7 million and $23.3 million, respectively, of parking revenue for arrangements that are within the scope of Topic 606, which is included in rental revenues on our consolidated statements of operations. We concluded that the adoption of Topic 606 did not have a material impact on our consolidated financial statements or a material impact on the notes to our consolidated financial statements.

Effective January 1, 2018, we adopted FASB ASU No. 2017-09 “Compensation - Stock Compensation (Topic 718)” on a prospective basis. Under the guidance, an entity will not apply modification accounting to a share-based payment award if the award’s fair value, vesting conditions, and classification as an equity or liability instrument remain the same immediately before and after the change. The adoption of this guidance did not have an impact on our consolidated financial statements or notes to our consolidated financial statements.

Effective January 1, 2018, we adopted FASB ASU No. 2017-05 “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20)” (“ASU 2017-05”) on a retrospective basis. This standard clarifies the scope of the original guidance within Subtopic 610-20 “Gains and Losses from the Derecognition of Nonfinancial Assets” that was issued in connection with ASU 2014-09 which provided guidance for recognizing gains and losses from the transfer of nonfinancial assets in transactions with noncustomers. Additionally, ASU 2017-05 adds guidance pertaining to the partial sales of real estate and clarifies that nonfinancial assets within the scope of ASC 610-20 may include nonfinancial assets transferred within a legal entity to a counterparty. For example, a parent may transfer control of nonfinancial assets by transferring ownership interests in a consolidated subsidiary. We evaluated the impact of the new amendments on our historical transactions and concluded that there was no impact. As such, the adoption of this guidance did not have an impact on our consolidated financial statements or notes to our consolidated financial statements.

Effective January 1, 2018, we adopted FASB ASU No. 2016-15 (“ASU 2016-15”) which provides guidance where there is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, on a retrospective basis. The adoption of this guidance did not have an impact on our consolidated financial statements or notes to our consolidated financial statements.

Effective January 1, 2018, we adopted FASB ASU No. 2016-01 (“ASU 2016-01”) which amends the accounting guidance on the classification and measurement of financial instruments and FASB ASU No. 2018-03 (“ASU 2018-03”) which provides technical corrections and improvements to ASU 2016-01, on a modified retrospective basis. The amendments require that all investments in equity securities, including other ownership interests, are reported at fair value with changes in fair value reported in net income. This requirement does not apply to investments that qualify for equity method accounting or to those that result in consolidation of the investee or for which the entity has elected the predictability exception to fair value measurement. Additionally, the amendments require that the portion of the total fair value change caused by a change in instrument-specific credit risk for financial liabilities for which the fair value option has been elected would be recognized in other comprehensive income. Any accumulated amount remaining in other comprehensive income is reclassified to earnings when the liability is extinguished. The adoption of this guidance did not have an impact on our consolidated financial statements or notes to our consolidated financial statements since our only financial instruments within the scope of ASU 2016-01 and 2018-03 are the marketable securities related to our deferred compensation plan which are classified as trading securities and marked to market at fair value through earnings each reporting period.

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Partially Owned Entities and Variable Interest Entities

At December 31, 2019 the consolidated financial statements of the Company included 4 VIEs in addition to the Operating Partnership: 2 of the consolidated property partnerships, 100 First LLC, 303 Second LLC, and 2 entities established during the fourth quarter of 2019 to facilitate potential future Section 1031 Exchanges. At December 31, 2019, the Company and the Operating Partnership were determined to be the primary beneficiaries of these 4 VIEs since we had the ability to control the activities that most significantly impact each of the VIEs’ economic performance. As of December 31, 2019, the 4 VIEs’ total assets, liabilities and noncontrolling interests included on our consolidated balance sheet were approximately $676.7 million (of which $598.0 million related to real estate held for investment), approximately $40.1 million and approximately $189.6 million, respectively. Revenues, income and net assets generated by 100 First LLC and 303 Second LLC may only be used to settle their contractual obligations, which primarily consist of operating expenses, capital expenditures and required distributions.

At December 31, 2018, the consolidated financial statements of the Company included ~~three~~3 VIEs in addition to the Operating Partnership: 2 of the consolidated property partnerships, 100 First LLC and 303 Second LLC, and an entity established during the fourth quarter of 2018 to facilitate a Section 1031 Exchange. At December 31, 2018, the Company and the Operating Partnership were determined to be the primary beneficiaries of these ~~three~~3 VIEs since we had the ability to control the activities that most significantly impact each of the VIEs’ economic performance. ~~As of~~At December 31, 2018, the ~~three~~3 VIEs’ total assets, liabilities and noncontrolling interests included on our consolidated balance sheet were approximately $615.4 million (of which $543.9 million related to real estate held for ~~investment)~~investment on our consolidated balance sheet), approximately $45.1 millionand approximately $186.4 million,respectively. In January 2019, the Section 1031 Exchange was successfully completed and the related VIE was terminated. Revenues, income and net assets generated by 100 First LLC and 303 Second LLC may only be used to settle their contractual obligations, which primarily consist of operating expenses, capital expenditures and required distributions.

At December 31, 2017, the consolidated financial statements of the Company included two VIEs in addition to the Operating Partnership: 100 First LLC and 303 Second LLC. At December 31, 2017, the impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests on our consolidated balance sheet by approximately $426.5 million (of which $382.1 million related to real estate held for investment on our consolidated balance sheet), approximately $27.3 million and approximately $175.4 million, respectively. The consolidated financial statements of the Operating Partnership included the same three VIEs at December 31, 2017.

Our accounting policy is to consolidate entities in which we have a controlling financial interest and significant decision making control over the entity's operations. In determining whether we have a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, we consider factors such as ownership interest, board representation, management representation, size of our investment (including loans), authority to control decisions, and contractual and substantive participating rights of the members. In addition to evaluating control rights, we consolidate entities in which the other members have no substantive kick-out rights to remove the Company as the managing member.

Entities in which the equity investors do not have sufficient equity at risk to finance their endeavors without additional financial support or the holders of the equity investment at risk do not have a controlling financial interest are VIEs. We evaluate whether an entity is a VIE and whether we are the primary beneficiary. We are deemed to be the primary beneficiary of a VIE when we have the power to direct the activities of the VIE that most significantly impact the VIEs’ economic performance and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE.

If the requirements for consolidation are not met, the Company would account for investments under the equity method of accounting if we have the ability to exercise significant influence over the entity. Equity method investments would be initially recorded at cost and subsequently adjusted for our share of net income or loss and cash contributions and distributions each period. The Company did not have any equity method investments at December 31, ~~2018~~2019 or ~~2017.~~2018.

Accounting Pronouncements Adopted January 1, 2019

Effective January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2016-02 “Leases (Topic 842)” (“Topic 842”) and the related FASB ASU Nos. 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01 which provide practical expedients, technical corrections and improvements for certain aspects of ASU 2016-02, on a modified retrospective basis. Topic 842 establishes a single comprehensive model for entities to use in accounting for leases and supersedes the existing leasing guidance. We evaluated each of the Company’s contracts to determine if the contract is or contains a lease and concluded that Topic 842 is applicable to the Company as a lessor in its tenant lease agreements and as a lessee in its ground leases.

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Lessor Accounting

As a lessor, the Company’s leases with tenants for its real estate assets generally provide for the lease of space, as well as common area maintenance and parking. Under Topic 842, the lease of space is considered a lease component while the common area maintenance billings and tenant parking are considered nonlease components, which fall under revenue recognition guidance in FASB Accounting Standards Codification Topic 606 “Revenue from Contracts with Customers” (“Topic 606”). However, upon adopting the guidance in Topic 842, the Company determined that its tenant leases met the criteria to apply the practical expedient provided by ASU 2018-11 to recognize the lease and non-lease components together as one single component. This conclusion was based on the consideration that 1) the timing and pattern of transfer of the nonlease components and associated lease component are the same, and 2) the lease component, if accounted for separately, would be classified as an operating lease. As the lease of space is the predominant component of the Company’s leasing arrangements, we accounted for all lease and non-lease components as one single component under Topic 842. As a result, the adoption of Topic 842 did not have any impact on the Company’s timing or pattern of recognition of rental revenues as compared to previous guidance. Transient daily parking revenue is accounted for under the guidance in Topic 606 and included in other property income in our consolidated statements of operations.

To reflect their recognition as one lease component, base rental revenues, additional rental revenues (which consist of amounts due from tenants for common area maintenance, real estate taxes, and other recoverable costs) and other lease related property income related to leases that also meet the requirements of the practical expedient provided by ASU 2018-11 have been combined in one line item subsequent to the adoption of Topic 842 for the year ended December 31, 2019 in rental income on the Company’s consolidated statements of operations. In addition, under Topic 842, lessor costs for certain services directly reimbursed by tenants, which were previously presented on a net basis under previous guidance, are required to be presented on a gross basis in revenues and expenses. During the year ended December 31, 2019, we incurred additional property expenses of $13.9 million for which we were reimbursed, that were not required to be grossed up under the previous guidance. We presented this amount on a gross basis within rental income and property expenses in the Company’s consolidated statements of operations as a result of the adoption, which had no impact on net income.

Our rental income is mostly comprised of fixed contractual payments defined under the lease that, in most cases, escalate annually over the term of the lease at fixed rates. Additionally, rental income includes variable payments for tenant reimbursements of property-related expenses and payments based on a percentage of tenant’s sales. The table below sets forth the allocation of rental income between fixed and variable payments for the year ended December 31, 2019:



	Year Ended
	December 31, 2019
	(in thousands)
Fixed lease payments	$	710,557
Variable lease payments	115,915
Total rental income	$	826,472

Upon the adoption of Topic 842 on January 1, 2019, the method for recognizing revenue includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. For leases that are deemed probable of collection, revenue is recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination. Refer to our Significant Accounting Policies below for further discussion of our revenue recognition and allowance for uncollectible tenant and deferred rent receivables policies.

Leasing Costs

Upon adoption of Topic 842, the Company elected to apply the package of practical expedients provided and did not reassess the following as of January 1, 2019: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Under Topic 842, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, beginning January 1, 2019, the

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Company no longer capitalized internal leasing costs and third-party legal leasing costs and instead expensed these costs as incurred. These expenses are included in leasing costs and general and administrative expenses on our consolidated statements of operations in 2019. During the year ended December 31, 2019, the Company expensed approximately $11.4 million of indirect leasing costs which would have been capitalized prior to the adoption of Topic 842.

The election of the package of practical expedients described above permits us to continue to account for our leases that commenced before January 1, 2019 under the previously existing lease accounting guidance for the remainder of their lease terms, and to apply the new lease accounting guidance to leases commencing or modified after January 1, 2019. On January 1, 2019, we recognized a $3.1 million cumulative-effect adjustment, primarily related to internal leasing costs and legal leasing costs for tenant leases that had not commenced prior to that date, to increase distributions in excess of earnings for the Company and partners’ capital for the Operating Partnership in connection with our adoption of Topic 842.

Lessee Accounting

The Company’s ground leases are the primary contracts in which we are the lessee. Upon adoption of Topic 842 on January 1, 2019, the Company had 4 existing ground leases which were classified as operating leases. As discussed above, the Company elected to apply the package of practical expedients provided by Topic 842 and therefore did not reassess the classification of these ground leases. Existing ground leases that commenced before the January 1, 2019 adoption date continued to be accounted for as operating leases, and the new guidance did not have a material impact on our recognition of ground lease expense or our results of operations. However, for periods beginning after January 1, 2019, we are now required to recognize a lease liability on our consolidated balance sheets equal to the present value of the minimum future lease payments required in accordance with each ground lease, as well as a right of use asset equal to the lease liability adjusted for above and below market intangibles and deferred leasing costs. To determine the discount rates used to calculate the present value of the lease payments, we used a hypothetical curve derived from unsecured corporate borrowing rates over the lease terms. The weighted average discount rate for our 4 existing ground leases was 5.15%. The adoption of Topic 842 resulted in the recognition of right of use ground lease assets totaling $82.9 million and ground lease liabilities totaling $87.4 million on January 1, 2019. There was no material impact to our consolidated statements of operations or consolidated statements of cash flows as a result of adoption of this new guidance. For further information related to our ground leases, refer to Note 18 “Commitments and Contingencies.”

For leases with a term of 12 months or less where we are the lessee, we made an accounting policy election by class of underlying asset not to recognize right of use lease assets and lease liabilities. We recognize lease expense for such leases generally on a straight-line basis over the lease term.

Significant Accounting Policies

~~Acquisitions~~Revenue Recognition

~~Subsequent~~Rental revenue for office and retail operating properties is our principal source of revenue. We recognize revenue from base rent, additional rent (which consists of amounts due from tenants for common area maintenance, real estate taxes, and other recoverable costs), parking and other lease-related revenue once all of the following criteria are met: (i) the agreement has been fully executed and delivered, (ii) services have been rendered, (iii) the amount is fixed or determinable and (iv) payment has been received or the collectability of the amount due is probable. Lease termination fees are amortized over the remaining lease term, if applicable. If there is no remaining lease term, they are recognized when received and realized. Minimum annual rental revenues are recognized in rental revenues on a straight-line basis over the non-cancellable term of the related lease.

Base Rent

The timing of when we commence rental revenue recognition for office and retail properties depends largely on our conclusion as to whether the Company or the tenant is the owner for accounting purposes of tenant improvements at the leased property. When we conclude that we are the owner of tenant improvements for accounting purposes, we record the cost to construct the tenant improvements as an asset and commence rental revenue recognition when the tenant takes possession of or controls the finished space, which is generally when tenant improvements being recorded

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

as our assets are substantially complete. In certain instances, when we conclude that the tenant is the owner of certain tenant improvements for accounting purposes, rental revenue recognition begins when the tenant takes possession or controls the physical use of the leased space, which may occur in phases or for an entire building or project. The determination of who owns the tenant improvements is made on a lease-by-lease basis and has a significant effect on the timing of commencement of revenue recognition.

When we conclude that the Company is the owner of tenant improvements for accounting purposes, we record the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants, as a capital asset. For these tenant-funded tenant improvements, we record the amount funded by or reimbursed by tenants as deferred revenue, which is amortized and recognized as rental income on a straight-line basis over the term of the related lease.

When we conclude that the tenant is the owner of certain tenant improvements for accounting purposes, we record our contribution towards those tenant-owned improvements as a lease incentive, which is included in deferred leasing costs and acquisition-related intangible assets, net on our consolidated balance sheets and amortized as a reduction to rental revenue on a straight-line basis over the term of the related lease.

For residential properties, we commence revenue recognition upon lease commencement. Residential rental revenue is recognized on a straight-line basis over the term of the related lease, net of any concessions.

Additional Rent - Reimbursements from Tenants

Additional rent, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, are recognized in rental income in the period the recoverable costs are incurred. Prior to the adoption of ~~FASB ASU No. 2017-01 (“ASU 2017-01”)~~Topic 842, such amounts were recognized in revenue as tenant reimbursements. Additional rent where we pay the associated costs directly to third-party vendors and are reimbursed by our tenants are recognized and recorded on a gross basis, with the corresponding expense recognized in property expenses or real estate taxes. Prior to the adoption of Topic 842, recoverable costs were generally recognized and recorded on a gross basis when we were the primary obligor with respect to purchasing goods and services from third-party suppliers, had discretion in selecting the supplier, and had credit risk.

Other Property Income

Other property income primarily includes amounts recorded in connection with transient daily parking, tenant bankruptcy settlement payments, broken deal income and property damage settlement related payments. Other property income also includes miscellaneous income from tenants, restoration fees and fees for late rental payments. Amounts recorded within other property income fall within the scope of Topic 606 and are recognized as revenue at the point in time when control of the goods or services transfers to the customer and our performance obligation is satisfied.

Uncollectible Lease Receivables and Allowances for Tenant and Deferred Rent Receivables

We carry our current and deferred rent receivables net of allowances for amounts that may not be collected. Prior to the adoption of Topic 842 on January 1, ~~2017, which was adopted~~2019, the allowances were increased or decreased through provision for bad debts on our consolidated statements of operations. Upon the adoption of Topic 842 on January 1, 2019, the allowances are increased or decreased through rental income, and our determination of the adequacy of the Company’s allowances for tenant receivables includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. Such assessment involves using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of specific tenants, specific industry trends and conditions, and general economic trends and conditions. For leases that are deemed probable of collection, revenue continues to be recorded on a ~~prospective~~straight-line basis ~~acquisitions~~over the lease term. For leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For tenant and deferred rent receivables associated with leases whose rents are deemed probable of collection under Topic 842, we may record an allowance under other authoritative GAAP using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of specific tenants, specific industry trends and conditions, and general economic trends and conditions. Tenant and deferred rent receivables deemed probable of collection are carried net of allowances for uncollectible accounts, with increases or decreases in the allowances recorded through rental income on our consolidated statements of operations. Prior to the adoption of Topic 842 on January 1, 2019, the allowances were increased or decreased through provision for bad debts on our consolidated statements of operations.

Acquisitions

Acquisitions of operating properties and development and redevelopment opportunities generally ~~no longer~~do not meet the definition of a business and are accounted for as asset ~~acquisitions.~~acquisitions, as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. For these asset acquisitions, we record the acquired tangible and intangible assets and assumed liabilities based on each asset’s and liability’s relative fair value at the acquisition date of the total purchase price plus any capitalized acquisition costs. We record the acquired tangible and intangible assets and assumed liabilities of acquisitions of operating properties and development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. Transaction costs associated with asset acquisitions are capitalized as part of the purchase price of the acquisition.

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The acquired assets and assumed liabilities for an acquisition generally include but are not limited to (i) land and improvements, buildings and improvements, undeveloped land and construction in progress and (ii) identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of above-market and below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any. Any debt assumed and equity (including common units of the Operating Partnership) issued in connection with a property acquisition is recorded at fair value on the date of acquisition.

The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) our estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. Our below-market operating leases generally do not include fixed rate or below-market renewal options. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangible assets, net on the

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related intangible liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. The amortization of ~~the~~a below-market ground lease obligation is recorded as an increase to ground lease expense in the consolidated statements of operations for the periods presented. The amortization of ~~the~~an above-market ground lease obligation is recorded as a decrease to ground lease expense in the consolidated statements of operations for the periods presented.

The fair value of acquired in-place leases is derived based on our assessment of lost revenue and costs incurred for the period required to lease the “assumed vacant” property to the occupancy level when purchased. The amount recorded for acquired in-place leases is included in deferred leasing costs and acquisition-related intangible assets, net on the balance sheet and amortized as an increase to depreciation and amortization expense over the remaining term of the applicable leases. Fully amortized intangible assets are written off each quarter.

~~Subsequent to our adoption of ASU 2017-01 on January 1, 2017,~~ ~~transaction costs associated with our acquisitions are capitalized as part of the purchase price of the acquisition. Prior to our adoption of~~ ASU 2017-01, costs associated with all operating property acquisitions and those development and redevelopment acquisitions that met the criteria to be accounted for as business combinations were expensed as incurred and costs associated with development acquisitions accounted for as asset acquisitions were capitalized as part of the cost of the asset.

Operating Properties

Operating properties are generally carried at historical cost less accumulated depreciation. Properties held for sale are reported at the lower of the carrying value or the fair value less estimated cost to sell. The cost of operating properties includes the purchase price or development costs of the properties. Costs incurred for the renovation and betterment of the operating properties are capitalized to our investment in that property. Maintenance and repairs are charged to expense as incurred.

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

impairment loss calculation to determine if the fair value of the property is less than the net carrying value of the property. Our impairment loss calculation compares the net carrying amount of the property to the property’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We would recognize an impairment loss if the ~~asset’s~~property's net carrying amount exceeds the ~~asset’s~~property's estimated fair value. If we were to recognize an impairment loss, the estimated fair value of the ~~asset (less costs to sell for assets held for sale) would become~~property becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset.

~~Cost Capitalization~~Other Property Income

~~All costs clearly associated~~Other property income primarily includes amounts recorded in connection with transient daily parking, tenant bankruptcy settlement payments, broken deal income and property damage settlement related payments. Other property income also includes miscellaneous income from tenants, restoration fees and fees for late rental payments. Amounts recorded within other property income fall within the ~~development, redevelopment~~scope of Topic 606 and ~~construction~~are recognized as revenue at the point in time when control of ~~a property are capitalized as project costs, including internal compensation costs. In addition,~~ the following costs are capitalized as project costs during periods in which activities necessary to prepare development and redevelopment properties for their intended use are in progress: pre-construction costs essentialgoods or services transfers to the ~~development~~customer and our performance obligation is satisfied.

Uncollectible Lease Receivables and Allowances for Tenant and Deferred Rent Receivables

We carry our current and deferred rent receivables net of ~~the property, interest, real estate taxes and insurance.~~

~~For office and retail development and redevelopment properties~~allowances for amounts that ~~are pre-leased, we cease capitalization when revenue recognition commences, which is upon substantial completion of tenant improvements deemed to be the Company’s asset for accounting purposes.~~

~~For office and retail development and redevelopment properties that are not pre-leased, we~~ may not ~~immediately build out~~be collected. Prior to the ~~tenant improvements. Therefore, we cease capitalization when revenue recognition commences upon substantial completion~~adoption of Topic 842 on January 1, 2019, the ~~tenant improvements deemed to be the Company's asset~~allowances were increased or decreased through provision for accounting purposes, but in any event, no later than one year after the cessation of major construction activities. We also cease capitalization on a development or redevelopment property when activities necessary to prepare the property for its intended use have been suspended.

For office and retail development or redevelopment properties with multiple tenants and staged leasing, we cease capitalization and begin depreciation on the portion of the development or redevelopment property for which revenue recognition has commenced.

~~For residential development properties, we cease capitalization when the property is substantially complete and available for occupancy.~~

Once major base building construction activities have ceased and the development or redevelopment property is placed in service, the costs capitalized to construction in progress are transferred to land and improvements, buildings and improvements, and deferred leasing costsbad debts on our consolidated ~~balance sheets~~statements of operations. Upon the adoption of Topic 842 on January 1, 2019, the allowances are increased or decreased through rental income, and our determination of the adequacy of the Company’s allowances for tenant receivables includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. Such assessment involves using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of specific tenants, specific industry trends and conditions, and general economic trends and conditions. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as the ~~historical cost~~lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the ~~property.~~

~~Depreciation and Amortization of Buildings and Improvements~~

~~The costs of buildings and improvements and tenant improvements are depreciated using the straight-line method of accounting over the estimated useful lives set forth~~change in the ~~table below. Depreciation expense for buildings and improvements for the three years ended December 31, 2018, 2017, and 2016 was $198.6 million, $190.5 million, and $172.0 million, respectively.~~collectability determination.



~~Asset Description~~		~~Depreciable Lives~~
~~Buildings and improvements~~		~~25 – 40 years~~
~~Tenant improvements~~		~~1 – 20 years~~ ⁽¹⁾

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~~________________________~~


~~(1)~~	~~Tenant improvements are amortized over the shorter of the lease term or the estimated useful life.~~

~~Real Estate Assets Held for Sale, Dispositions and Discontinued Operations~~

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For tenant and ~~amortization expense. Real estate assets held for sale~~deferred rent receivables associated with leases whose rents are ~~reported~~deemed probable of collection under Topic 842, we may record an allowance under other authoritative GAAP using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This determination requires significant judgment and estimates about matters that are uncertain at the ~~lower~~time the estimates are made, including the creditworthiness of ~~their carrying value~~specific tenants, specific industry trends and conditions, and general economic trends and conditions. Tenant and deferred rent receivables deemed probable of collection are carried net of allowances for uncollectible accounts, with increases or ~~their estimated~~decreases in the allowances recorded through rental income on our consolidated statements of operations. Prior to the adoption of Topic 842 on January 1, 2019, the allowances were increased or decreased through provision for bad debts on our consolidated statements of operations.

Acquisitions

Acquisitions of operating properties and development and redevelopment opportunities generally do not meet the definition of a business and are accounted for as asset acquisitions, as substantially all of the fair value ~~less~~of the ~~estimated~~gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. For these asset acquisitions, we record the acquired tangible and intangible assets and assumed liabilities based on each asset’s and liability’s relative fair value at the acquisition date of the total purchase price plus any capitalized acquisition costs. We record the acquired tangible and intangible assets and assumed liabilities of acquisitions of operating properties and development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. Transaction costs associated with asset acquisitions are capitalized as part of the purchase price of the acquisition.

The acquired assets and assumed liabilities for an acquisition generally include but are not limited to ~~sell. As~~(i) land and improvements, buildings and improvements, undeveloped land and construction in progress and (ii) identified tangible and intangible assets and liabilities associated with in-place leases, including tenant improvements, leasing costs, value of ~~December 31, 2018~~above-market and ~~2017, we did not have any properties classified as held for sale.~~

~~Property disposals representing~~below-market operating leases and ground leases, acquired in-place lease values and tenant relationships, if any. Any debt assumed and equity (including common units of the Operating Partnership) issued in connection with a ~~strategic shift that have (or will have) a major effect~~property acquisition is recorded at fair value on the ~~Company’s operations~~date of acquisition.

The fair value of land and ~~financial results, such as a major line~~improvements is derived from comparable sales of ~~business, a major geographical area~~ land and improvements within the same submarket and/or ~~a major equity investment, are required to be presented as discontinued operations. If we were to determine that a property disposition represents a strategic shift,~~region. The fair value of buildings and improvements, tenant improvements and leasing costs considers the ~~revenues, expenses and net gain (loss) on dispositions~~value of the property as if it was vacant as well as current replacement costs and other relevant market rate information.

The net gains (losses) on dispositions of non-depreciable real estate property, including land, are reported in the consolidated statements of operations as gains (losses) on sale of land within continuing operations in the period the land is sold. The net gains (losses) on dispositions of depreciable real estate property are reported in the consolidated statements of operations as gains on sales of depreciable operating properties within continuing operations in the period the land is sold.

~~Revenue Recognition~~

We recognize revenue from rent, tenant reimbursements, parking and other revenue once all of the following criteria are met: (i) the agreement has been fully executed and delivered, (ii) services have been rendered, (iii) the amount is fixed or determinable and (iv) the collectability of the amount is reasonably assured.

~~Minimum annual rental revenues are recognized in rental revenues on a straight-line basis~~acquisition measured over the remaining non-cancellable term of the ~~related lease. Rental revenue recognition commences when~~lease for above-market operating leases and the tenant takes possession or controls the physical use of the leased space. In order for the tenant to take possession, the leased space must be substantially complete and ready for its intended use. In order to determine whether the leased space is substantially ready for its intended use, we begin by determining whether the Company or the tenant owns the tenant improvements. When we conclude that the Company is the owner of tenant improvements, rental revenue recognition begins when the tenant takes possession of the finished space, which is generally when Company owned tenant improvements are substantially complete. In certain instances, when we conclude that the Company is not the owner (the tenant is the owner) of tenant improvements, rental revenue recognition begins when the tenant takes possession of or controls the space.

When we conclude that the Company is the owner of tenant improvements, we record the cost to construct the tenant improvements, including costs paid for or reimbursed by the tenants, as a capital asset. For these tenant improvements, we record the amount funded by or reimbursed by the tenants as deferred revenue, which is amortized on a straight-line basis as additional rental income overinitial non-cancellable term plus the term of ~~the related lease.~~

~~When we conclude that the tenant is the owner of tenant improvements~~any below-market fixed rate renewal options, if applicable, for ~~accounting purposes, we record our contribution towards those improvements as a lease incentive, which is~~below-market operating leases. Our below-market operating leases generally do not include fixed rate or below-market renewal options. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangible assets, net on ~~our consolidated balance sheets and amortized as a reduction to rental income on a straight-line basis over~~ the ~~term of the lease.~~

~~Tenant Reimbursements~~

Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, are recognized as revenue in the period the recoverable costs are incurred. Tenant reimbursements are generally recognized and recorded on a gross basis, as we are generally the primary obligor with respect to purchasing goods and services from third-party suppliers, have discretion in selecting the supplier, and have credit risk.

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related intangible liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. The amortization of a below-market ground lease obligation is recorded as an increase to ground lease expense in the consolidated statements of operations for the periods presented. The amortization of an above-market ground lease obligation is recorded as a decrease to ground lease expense in the consolidated statements of operations for the periods presented.

Operating Properties

When evaluating properties to be held and used for potential impairment, we first evaluate whether there are any indicators of impairment for any of our properties. If any impairment indicators are present for a specific property, we then evaluate the regional market conditions that could reasonably affect the property. If there are negative changes and trends in that regional market, we then perform an undiscounted cash flow analysis and compare the net carrying amount of the property to the property’s estimated undiscounted future cash flow over the anticipated holding period. If the estimated undiscounted future cash flow is less than the net carrying amount of the property, we perform an impairment loss calculation to determine if the fair value of the property is less than the net carrying value of the property. Our impairment loss calculation compares the net carrying amount of the property to the property’s estimated fair value, which may be based on estimated discounted future cash flow calculations or third-party valuations or appraisals. We would recognize an impairment loss if the property's net carrying amount exceeds the property's estimated fair value. If we were to recognize an impairment loss, the estimated fair value of the property becomes its new cost basis. For a depreciable long-lived asset, the new cost basis would be depreciated (amortized) over the remaining useful life of that asset.

Other Property Income

Other property income primarily includes amounts recorded in connection with ~~lease terminations,~~transient daily parking, tenant bankruptcy settlement payments, broken deal income and property damage settlement related payments. ~~Lease termination fees are amortized over the remaining lease term, if applicable. If there is no remaining lease term, they are recognized when received and realized.~~ Other property income also includes miscellaneous income from tenants, ~~such as~~restoration fees ~~related to the restoration of leased premises to their original condition~~ and fees for late rental payments. Amounts recorded within other property income fall within the scope of Topic 606 and are recognized as revenue at the point in time when control of the goods or services transfers to the customer and our performance obligation is satisfied.

Uncollectible Lease Receivables and Allowances for ~~Uncollectible~~ Tenant and Deferred Rent Receivables

We carry our current and deferred rent receivables net of allowances for ~~uncollectible amounts. Our determination~~amounts that may not be collected. Prior to the adoption of Topic 842 on January 1, 2019, the ~~adequacy of these~~ allowances ~~is based primarily upon evaluations of individual receivables, current economic conditions, and other relevant factors. The allowances are~~were increased or decreased through ~~the~~ provision for bad debts on our consolidated statements of operations. ~~We also evaluate~~Upon the adoption of Topic 842 on January 1, 2019, the allowances are increased or decreased through rental income, and our determination of the adequacy of the Company’s allowances for tenant receivables includes a binary assessment of whether or not substantially all of the amounts due under a tenant’s lease agreement are probable of collection. Such assessment involves using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of specific tenants, specific industry trends and conditions, and general economic trends and conditions. For leases that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For leases that are deemed not probable of collection, revenue is recorded as the lesser of (i) the amount which would be recognized on a straight-line basis or (ii) cash that has been received from the tenant, with any tenant and deferred rent receivable balances charged as a direct write-off against rental income in the period of the change in the collectability determination.

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For tenant and deferred rent receivables associated with leases whose rents are deemed probable of collection under Topic 842, we may record an allowance under other authoritative GAAP using a methodology that incorporates a specific identification analysis and an aging analysis and considers the current economic and business environment. This determination requires significant judgment and estimates about matters that are uncertain at the time the estimates are made, including the creditworthiness of specific tenants, specific industry trends and conditions, and general economic trends and conditions. Tenant and deferred rent receivables ~~which includes note receivables included~~deemed probable of collection are carried net of allowances for uncollectible accounts, with increases or decreases in ~~prepaid expenses and other assets~~the allowances recorded through rental income on our consolidated ~~balances sheets.~~statements of operations. Prior to the adoption of Topic 842 on January 1, 2019, the allowances were increased or decreased through provision for bad debts on our consolidated statements of operations.

Acquisitions

Acquisitions of operating properties and development and redevelopment opportunities generally do not meet the definition of a business and are accounted for as asset acquisitions, as substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. For these asset acquisitions, we record the acquired tangible and intangible assets and assumed liabilities based on each asset’s and liability’s relative fair value at the acquisition date of the total purchase price plus any capitalized acquisition costs. We record the acquired tangible and intangible assets and assumed liabilities of acquisitions of operating properties and development and redevelopment opportunities that meet the accounting criteria to be accounted for as business combinations at fair value at the acquisition date. Transaction costs associated with asset acquisitions are capitalized as part of the purchase price of the acquisition.

The fair value of the above-market or below-market component of an acquired in-place operating lease is based upon the present value (calculated using a market discount rate) of the difference between (i) the contractual rents to be paid pursuant to the lease over its remaining non-cancellable lease term and (ii) our estimate of the rents that would be paid using fair market rental rates and rent escalations at the date of acquisition measured over the remaining non-cancellable term of the lease for above-market operating leases and the initial non-cancellable term plus the term of any below-market fixed rate renewal options, if applicable, for below-market operating leases. Our below-market operating leases generally do not include fixed rate or below-market renewal options. The amounts recorded for above-market operating leases are included in deferred leasing costs and acquisition-related intangible assets, net on the

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

balance sheet and are amortized on a straight-line basis as a reduction of rental income over the remaining term of the applicable leases. The amounts recorded for below-market operating leases are included in deferred revenue and acquisition-related intangible liabilities, net on the balance sheet and are amortized on a straight-line basis as an increase to rental income over the remaining term of the applicable leases plus the term of any below-market fixed rate renewal options, if applicable. The amortization of a below-market ground lease obligation is recorded as an increase to ground lease expense in the consolidated statements of operations for the periods presented. The amortization of an above-market ground lease obligation is recorded as a decrease to ground lease expense in the consolidated statements of operations for the periods presented.

Operating Properties

Cost Capitalization

All costs clearly associated with the development, redevelopment and construction of a property are capitalized as project costs, including internal compensation costs. In addition, the following costs are capitalized as project costs during periods in which activities necessary to prepare development and redevelopment properties for their intended use are in progress: pre-construction costs essential to the development of the property, interest, real estate taxes and insurance.

For office and retail development and redevelopment properties that are pre-leased, we cease capitalization when revenue recognition commences, which is upon substantial completion of tenant improvements deemed to be the Company’s asset for accounting purposes.

For office and retail development and redevelopment properties that are not pre-leased, we may not immediately build out the tenant improvements. Therefore, we cease capitalization when revenue recognition commences upon substantial completion of the tenant improvements deemed to be the Company's asset for accounting purposes, but in any event, no later than one year after the cessation of major construction activities. We also cease capitalization on a development or redevelopment property when activities necessary to prepare the property for its intended use have been suspended.

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

For residential development properties, we cease capitalization when the property is substantially complete and available for occupancy.

Once major base building construction activities have ceased and the development or redevelopment property or phases of the development or redevelopment project is placed in service, which may occur in phases or for an entire building or project, the costs capitalized to construction in progress are transferred to land and improvements, buildings and improvements, and deferred leasing costs on our consolidated balance sheets as the historical cost of the property.

Depreciation and Amortization of Buildings and Improvements

The costs of buildings and improvements and tenant improvements are depreciated using the straight-line method of accounting over the estimated useful lives set forth in the table below. Depreciation expense for buildings and improvements for the three years ended December 31, 2019, 2018, and 2017 was $211.9 million, $198.6 million, and $190.5 million, respectively.



Asset Description		Depreciable Lives
Buildings and improvements		25 – 40 years
Tenant improvements		1 – 20 years ⁽¹⁾

________________________


(1)	Tenant improvements are amortized over the shorter of the lease term or the estimated useful life.

Real Estate Assets Held for Sale, Dispositions and Discontinued Operations

A real estate asset is classified as held for sale when certain criteria are met, including but not limited to the availability of the asset for immediate sale, the existence of an active program to locate a buyer and the probable sale or transfer of the asset within one year. If such criteria are met, we present the applicable assets and liabilities related to the real estate asset, if material, separately on the balance sheet as held for sale and we would cease to record depreciation and amortization expense. Real estate assets held for sale are reported at the lower of their carrying value or their estimated fair value less the estimated costs to sell. As of December 31, 2019 and 2018, we did not have any properties classified as held for sale.

Property disposals representing a strategic shift that have (or will have) a major effect on the Company’s operations and financial results, such as a major line of business, a major geographical area or a major equity investment, are required to be presented as discontinued operations. If we were to determine that a property disposition represents a strategic shift, the revenues, expenses and net gain (loss) on dispositions of the property would be recorded in discontinued operations for all periods presented through the date of the applicable disposition. The operations of the properties sold during the years ended December 31, 2019, 2018 and 2017 are presented in continuing operations as they did not represent a strategic shift in the Company’s operations and financial results.

Cash and Cash Equivalents

We consider all highly-liquid investments with original maturities of three months or less to be cash equivalents.

Restricted Cash

Restricted cash consists of cash proceeds from dispositions that are temporarily held at qualified intermediaries for purposes of facilitating potential Section 1031 Exchanges and cash held in escrow related to acquisition and

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

disposition holdbacks. Restricted cash also includes cash held as collateral to provide credit enhancement for the Operating Partnership’s mortgage debt, including cash reserves for capital expenditures, tenant improvements and property taxes. As of December 31, 2019, we did not have any restricted cash held at qualified intermediaries for the purpose of facilitating Section 1031 Exchanges. As of December 31, 2018, we had $113.1 million of restricted cash held at qualified intermediaries for the purpose of facilitating Section 1031 Exchanges. In January 2019, the Section 1031 Exchange was completed and the cash proceeds were released from the qualified intermediary. ~~We did not have any restricted cash held at qualified intermediaries for the purpose of facilitating Section 1031 Exchanges at December 31, 2017.~~

Marketable Securities / Deferred Compensation Plan

Marketable securities reported in our consolidated balance sheets represent the assets held in connection with the Kilroy Realty Corporation 2007 Deferred Compensation Plan (the “Deferred Compensation Plan”) (see Note 16 “Employee Benefit Plans” for additional information). The Deferred Compensation Plan assets are held in a limited rabbi trust and invested in various mutual and money market funds. As a result, the marketable securities are treated as trading securities for financial reporting purposes and are adjusted to fair value at the end of each accounting period, with the corresponding gains and losses recorded in interest income and other net investment gains (losses).

At the time eligible management employees (“Participants”) defer compensation or earn mandatory Company contributions, or if we were to make a discretionary contribution, we record compensation cost and a corresponding deferred compensation plan liability, which is included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheets. This liability is adjusted to fair value at the end of each accounting period based on the performance of the benchmark funds selected by each Participant, and the impact of adjusting the liability to fair value is recorded as an increase or decrease to compensation cost. The impact of adjusting the deferred compensation plan liability to fair value and the changes in the value of the marketable securities held in connection with the Deferred Compensation Plan generally offset and therefore do not significantly impact net income.

Deferred Leasing Costs

Costs incurred in connection with successful property leasing are capitalized as deferred leasing costs and classified as investing activities in the statement of cash flows. ~~Deferred~~Under Topic 842, initial direct costs include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. As a result, subsequent to the adoption of Topic 842 on January 1, 2019, deferred leasing costs consist of leasing commissions paid to external third party brokers and lease incentives, and the Company no longer capitalizes internal leasing costs and third-party legal leasing costs. Prior to the adoption of Topic 842, deferred leasing costs consisted primarily of leasing commissions, lease incentives, legal costs and ~~also include~~ certain internal payroll costs. Deferred leasing costs ~~and lease incentives, which~~ are amortized using the straight-line method of accounting over the lives of the leases which generally range from one to 20 years. We reevaluate the remaining useful lives of leasing costs as the creditworthiness of our tenants and economic and market conditions change. If we

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

determine that the estimated remaining life of a lease has changed, we adjust the amortization period accordingly. Fully amortized deferred leasing costs are written off each quarter.

~~As discussed below under “Accounting Standards Issued But Not Yet Effective at December 31, 2018~~,” upon the adoption of FASB ASU No. 2016-02 “Leases (Topic 842),” most deferred leasing costs (with the exception of leasing commissions paid to external third party brokers) will no longer meet the criteria for capitalization. For leases commenced prior to December 31, 2018, these costs will continue to be amortized over the remaining life of the associated lease. For leases executed prior to December 31, 2018 that have not yet commenced as of December 31, 2018, such costs will be charged to distributions in excess of earnings as of January 1, 2019.

Deferred Financing Costs

Financing costs related to the origination or assumption of long-term debt are deferred and generally amortized using the straight-line method of accounting, which approximates the effective interest method, over the contractual terms of the applicable financings. Fully amortized deferred financing costs are written off when the corresponding financing is repaid.

Debt Discounts and Premiums

Original issuance debt discounts and discounts/premiums related to recording debt acquired in connection with operating property acquisitions at fair value are generally amortized and accreted on a straight-line basis, which approximates the effective interest method. Discounts are recorded as additional interest expense from date of issuance or acquisition through the contractual maturity date of the related debt. Premiums are recorded as a reduction to interest expense from the date of issuance or acquisition through the contractual maturity date of the related debt.

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Noncontrolling Interests - Common Units of the Operating Partnership in the Company's Consolidated Financial Statements

Common units of the Operating Partnership within noncontrolling interests in the Company’s consolidated financial statements represent the common limited partnership interests in the Operating Partnership not held by the Company (“noncontrolling common units”). Noncontrolling common units are presented in the equity section of the Company’s consolidated balance sheets and are reported at their proportionate share of the net assets of the Operating Partnership. Noncontrolling interests with redemption provisions that permit the issuer to settle in either cash or shares of common stock must be further evaluated to determine whether equity or temporary equity classification on the balance sheet is appropriate. Since the common units contain such a provision, we evaluated the accounting guidance and determined that the common units qualify for equity presentation in the Company’s consolidated financial statements. Net income attributable to noncontrolling common units is allocated based on their relative ownership percentage of the Operating Partnership during the reported period. The noncontrolling interest ownership percentage is determined by dividing the number of noncontrolling common units by the total number of common units outstanding. The issuance or redemption of additional shares of common stock or common units results in changes to the noncontrolling interest percentage as well as the total net assets of the Company. As a result, all equity transactions result in an allocation between equity and the noncontrolling interest in the Company’s consolidated balance sheets and statements of equity to account for the changes in the noncontrolling interest ownership percentage as well as the change in total net assets of the Company.

Noncontrolling Interests in Consolidated Property Partnerships

Noncontrolling interests in consolidated property partnerships represent the equity interests held by unrelated third parties in our ~~three~~3 consolidated property partnerships (see Note 11 “Noncontrolling Interests on the Company’s Consolidated Financial Statements” and see Note 12 “Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements”). Noncontrolling interests in consolidated property partnerships are not redeemable and are presented as permanent equity in the Company's consolidated balance sheets. We account for the noncontrolling interests in consolidated property partnerships using the hypothetical liquidation at book value (“HLBV”) method to attribute the earnings or losses of the consolidated property partnerships between the controlling and noncontrolling interests. Under the HLBV method, the amounts reported as noncontrolling interests in consolidated property partnerships in the consolidated balance sheets represent the amounts the noncontrolling interests would hypothetically

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

receive at each balance sheet reporting date under the liquidation provisions of the governing agreements assuming the net assets of the consolidated property partnerships were liquidated at recorded amounts and distributed between the controlling and noncontrolling interests in accordance with the governing documents. The net income attributable to noncontrolling interests in consolidated property partnerships in the consolidated statements of operations is associated with the increase or decrease in the noncontrolling interest holders’ contractual claims on the respective entities’ balance sheets assuming a hypothetical liquidation at the end of that reporting period when compared with their claims on the respective entities’ balance sheets assuming a hypothetical liquidation at the beginning of that reporting period, after removing any contributions or distributions.

Common Partnership Interests on the Operating Partnership’s Consolidated Balance Sheets

The common units held by the Company and the noncontrolling common units held by the common limited partners are both presented in the permanent equity section of the Operating Partnership’s consolidated balance sheets in partners’ capital. The redemption rights of the noncontrolling common units permit us to settle the redemption obligation in either cash or shares of the Company’s common stock at our option (see Note 11 “Noncontrolling Interests on the Company’s Consolidated Financial Statements” for additional information).

Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements

Noncontrolling interests in the Operating Partnership’s consolidated financial statements include the noncontrolling interest in property partnerships (see Note 12 “Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements”) and the Company’s 1.0% general partnership interest in the Finance Partnership. The 1.0% general partnership interest in the Finance Partnership noncontrolling interest is presented in the permanent equity section of the Operating Partnership’s consolidated balance sheets given that these interests are not convertible or redeemable into any other ownership interest of the Company or the Operating Partnership.

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Equity Offerings

Underwriting commissions and offering costs incurred in connection with common equity offerings and our at-the-market stock offering program (see Note 13 “Stockholders’ Equity of the Company”) are reflected as a reduction of additional paid-in capital. Issuance costs incurred in connection with preferred equity offerings are reflected as a reduction of the carrying value of the preferred equity.

Sales of our common stock under forward equity sale agreements (such as those under the forward equity offering executed in August 2018 and those under the 2018 At-The-Market Program, as discussed atin Note ~~13)~~13 “Stockholders’ Equity of the Company”) meet the derivatives and hedging guidance scope exception to be accounted for as equity instruments based on the following assessment: (i) none of the agreements’ exercise contingencies were based on observable markets or indices besides those related to the market for our own stock price and operations; and (ii) none of the settlement provisions precluded the agreements from being indexed to our own stock.

The net proceeds from any equity offering of the Company are generally contributed to the Operating Partnership in exchange for a number of common units equivalent to the number of shares of common stock issued and are reflected in the Operating Partnership’s consolidated financial statements as an increase in partners’ capital.

Share-based Incentive Compensation Accounting

Compensation cost for all share-based awards, including options, requires measurement at estimated fair value on the grant date. Compensation cost is recognized on a straight-line basis over the service vesting period, which represents the requisite service period. The grant date fair value of market measure-based share-based compensation plans are calculated using a Monte Carlo simulation pricing model. The grant date fair value of stock option grants is calculated using the Black-Scholes valuation model. Equity awards settled in cash are valued at the fair value of our common stock on the period end date through the settlement date. Equity awards settled in cash are remeasured at each reporting period and are recognized as a liability in the consolidated balance sheet during the vesting period until settlement. Forfeitures of all share-based awards are recognized when they occur.

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

For share-based awards in which the performance period precedes the grant date, we recognize compensation cost over the requisite service period, which includes both the performance and service vesting periods, using the accelerated attribution expense method. The requisite service period begins on the date the Executive Compensation Committee authorizes the award and adopts any relevant performance measures.

For share-based awards with performance-based measures, the total estimated compensation cost is based on our most recent estimate of the probable achievement of the pre-established specific corporate performance measures. These estimates are based on actual results and our latest internal forecasts for each performance measure. For share-based awards with market measures, the total estimated compensation cost is based on the fair value of the award at the grant date. For share-based awards with performance-based measures and market measures, the total estimated compensation cost is based on the fair value per share at the grant date multiplied by our most recent estimate of the number of shares to be earned based on actual results and the probable achievement of the pre-established corporate performance measures based on our latest internal forecasts.

In accordance with the provisions of our share-based incentive compensation plan, we accept the return of shares of Company common stock, at the current quoted market price, from employees to satisfy minimum statutory tax-withholding requirements related to shares that vested during the period.

For share-based awards granted by the Company, the Operating Partnership issues a number of common units equal to the number of shares of common stock ultimately granted by the Company in respect of such awards.

Basic and Diluted Net Income Available to Common Stockholders per Share

Basic net income available to common stockholders per share is computed by dividing net income available to common stockholders, after preferred distributions and the allocation of income to participating securities, by the weighted-average number of shares of common stock outstanding for the period. Diluted net income available to

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

common stockholders per share is computed by dividing net income available for common stockholders, after preferred distributions and the allocation of income to participating securities, by the sum of the weighted-average number of shares of common stock outstanding for the period plus the assumed exercise of all dilutive securities. The impact of the outstanding common units is considered in the calculation of diluted net income available to common stockholders per share. The common units are not reflected in the diluted net income available to common stockholders per share calculation because the exchange of common units into common stock is on a ~~one~~1 for one basis, and the common units are allocated net income on a per share basis equal to the common stock (see Note 21 “Net Income Available to Common Stockholders Per Share of the Company”). Accordingly, any exchange would not have any effect on diluted net income (loss) available to common stockholders per share.

Nonvested share-based payment awards (including nonvested restricted stock units (“RSUs”), vested market-measure RSUs and vested dividend equivalents issued to holders of RSUs) containing nonforfeitable rights to dividends or dividend equivalents are accounted for as participating securities and included in the computation of basic and diluted net income available to common stockholders per share pursuant to the two-class method. The dilutive effect of shares issuable under executed forward equity sale agreements and stock options are reflected in the weighted average diluted outstanding shares calculation by application of the treasury stock method. The dilutive effect of the outstanding nonvested shares of common stock (“nonvested shares”) and RSUs that have not yet been granted but are contingently issuable under the share-based compensation programs is reflected in the weighted average diluted shares calculation by application of the treasury stock method at the beginning of the quarterly period in which all necessary conditions have been satisfied.

Basic and Diluted Net Income Available to Common Unitholders per Unit

Basic net income available to common unitholders per unit is computed by dividing net income available to common unitholders, after preferred distributions and the allocation of income to participating securities, by the weighted-average number of vested common units outstanding for the period. Diluted net income available to common unitholders per unit is computed by dividing net income available to common unitholders, after preferred distributions and the allocation of income to participating securities, by the sum of the weighted-average number of common units outstanding for the period plus the assumed exercise of all dilutive securities.

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

The dilutive effect of stock options, outstanding nonvested shares, RSUs, awards containing nonforfeitable rights to dividend equivalents and shares issuable under executed forward equity sale agreements are reflected in diluted net income available to common unitholders per unit in the same manner as noted above for net income available to common stockholders per share.

Fair Value Measurements

The fair values of our financial assets and liabilities are disclosed in Note 19, “Fair Value Measurements and Disclosures,” to our consolidated financial statements. The only financial assets recorded at fair value on a recurring basis in our consolidated financial statements are our marketable securities. We elected not to apply the fair value option for any of our eligible financial instruments or other items.

We determine the estimated fair value of financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. This hierarchy requires the use of observable market data when available. The following is the fair value hierarchy:


•	Level 1 – quoted prices for identical instruments in active markets;


•	Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and


•	Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

~~Level 1~~F - 25

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – ~~quoted prices for identical instruments in active markets;~~(Continued)

~~Level 2 –~~ quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

~~Level 3 –~~ ~~fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.~~

We determine the fair value for the marketable securities using quoted prices in active markets for identical assets. Our other financial instruments, which are only disclosed at fair value, are comprised of secured debt, unsecured senior notes, unsecured line of credit and unsecured term loan facility.

We generally determine the fair value of our secured debt, unsecured debt, and unsecured line of credit by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market rate by obtaining period-end treasury rates for maturities that correspond to the maturities of our fixed-rate debt and then adding an appropriate credit spread based on information obtained from third-party financial institutions. These credit spreads take into account factors, including but not limited to, our credit profile, the tenure of the debt, amortization period, whether the debt is secured or unsecured, and the loan-to-value ratio of the debt to the collateral. These calculations are significantly affected by the assumptions used, including the discount rate, credit spreads and estimates of future cash flow. We calculate the market rate of our unsecured line of credit, unsecured term loan facility, and unsecured term loan by obtaining the period-end London Interbank Offered Rate (“LIBOR”) and then adding an appropriate credit spread based on our credit ratings, and the amended terms of our unsecured line of credit, unsecured term loan facility, and unsecured term loan agreement. We determine the fair value of each of our publicly traded unsecured senior notes based on their quoted trading price at the end of the reporting period, if such prices are available.

Carrying amounts of our cash and cash equivalents, restricted cash and accounts payable approximate fair value due to their short-term maturities.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. To qualify as a REIT, we must distribute annually at least 90% of our adjusted taxable income, as defined in the Code, to our stockholders and satisfy certain other organizational and operating requirements. We generally will not be subject to federal income taxes if we distribute 100% of our taxable income for each year to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and we may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

and to federal income taxes and excise taxes on our undistributed taxable income. We believe that we have met all of the REIT distribution and technical requirements for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016,~~2017, and we were not subject to any federal income taxes (see Note 25 “Tax Treatment of Distributions” for additional information). We intend to continue to adhere to these requirements and maintain the Company’s REIT status. Accordingly, no provision for income taxes has been made in the accompanying financial statements.

In addition, any taxable income from our taxable REIT subsidiaries, which were formed in 2002, 2018 and ~~2018,~~2019, are subject to federal, state, and local income taxes. For the years ended December 31, 2019, 2018~~2017~~ and ~~2016~~2017 the taxable REIT subsidiaries had de minimis taxable income.

Uncertain Tax Positions

We include favorable tax positions in the calculation of tax liabilities if it is more likely than not that our adopted tax position will prevail if challenged by tax authorities.

We evaluated the potential impact of identified uncertain tax positions for all tax years still subject to audit under state and federal income tax law and concluded that we did not have any unrecognized tax benefits or any additional tax liabilities as of December 31, ~~2018~~2019 or ~~2017~~2018. As of December 31, ~~2018,~~2019, the years still subject to audit are ~~2014~~2015 through ~~2018~~2019 under the California state income tax law and ~~2015~~2016 through ~~2018~~2019 under the federal income tax law.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported periods. Actual results could differ from those estimates.

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KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Segments

We currently operate in ~~one~~1 operating segment, our office properties segment.

Concentration of Credit Risk

All of our properties and development and redevelopment projects are owned and all of our business is currently conducted in the state of California with the exception of the ownership and operation of ~~eight~~8 office properties, ~~and one~~1 development project under construction and 1 recently acquired future development project located in the state of Washington. The ability of tenants to honor the terms of their leases is dependent upon the economic, regulatory, and social factors affecting the communities in which our tenants operate.

~~As of December 31, 2018, our 15 largest tenants represented approximately 45.7% of total annualized base rental revenues, of which 5.9% was attributable to our largest tenant.~~

We have deposited cash with financial institutions that is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per institution. As of December 31, ~~2018~~2019 and ~~2017~~2018, we had cash accounts in excess of FDIC insured limits.

Accounting Standards Issued But Not Yet Effective at December 31, ~~2018~~2019

Accounting Pronouncements Adopted January 1, ~~2019~~2020

ASU ~~No. 2016-02 “Leases (Topic 842)”~~

On February 25, 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)” (“ASU 2016-02”) to amend the accounting guidance for leases. The accounting applied by a lessor is largely unchanged under ASU 2016-02. However, the standard requires lessees to recognize lease assets and lease liabilities for leases classified as operating leases on the balance sheet. Lessees will recognize in the statement of financial position a liability to make lease payments and

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it will recognize lease expense for such leases generally on a straight-line basis over the lease term. For leases with a term of 12 months or less where we are the lessee, we plan to make this policy election. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018.

In July 2018, the FASB issued ASU No. 2018-11 which (1) simplifies transition requirements for both lessees and lessors by adding an option that permits an organization to apply the transition provisions of the new standard at its adoption date instead of at the earliest comparative period presented in its financial statements and (2) provides a practical expedient for lessors that permits lessors to make an accounting policy election to not separate nonlease components from the associated lease components, if the following two criteria are met: (1) the timing and pattern of transfer of the lease and nonlease components are the same and (2) the lease component would be classified as an operating lease if accounted for separately. For leases where we are the lessor, we plan to elect the optional transition relief and apply the practical expedients provided by ASU 2018-11. As a result, leases where we are the lessor will be accounted for in a similar method to existing standards with the underlying leased asset being reported and recognized as a real estate asset.

In December 2018, the FASB issued ASU 2018-20 which clarifies lessor treatment of sales taxes and other similar taxes collected from lessees, lessor costs paid directly by lessees and recognition of variable payments for contracts with lease and nonlease components. This will result in a gross-up of amounts recorded to tenant reimbursements and property expenses in our consolidated statements of operations related to certain services that, under existing GAAP guidance, were presented on a net basis and such change will not have an impact to net income.

ASU 2016-02 also specifies that upon adoption, lessors will no longer be able to capitalize and amortize certain leasing related costs and instead will only be permitted to capitalize and amortize incremental direct leasing costs. As a result, we have concluded that upon the adoption of the standard, we will be required to expense as incurred certain leasing costs we are currently able to capitalize and amortize as deferred leasing costs under existing guidance. This change had a material impact on the Company’s consolidated financial statements upon adoption of the standard on January 1, 2019.

The election of the package of practical expedients described above permits us to continue to account for our leases that commenced before January 1, 2019 under the existing lease accounting guidance for the remainder of their lease terms, and to apply the new lease accounting guidance to leases commencing or modified after January 1, 2019. On January 1, 2019, we recognized a cumulative adjustment to distributions in excess of earnings, as required by ASU 2016-02, to write-off lease origination costs that were capitalized in connection with leases that had not commenced before January 1, 2019. These costs were capitalized in accordance with the lease accounting standards existing prior to January 1, 2019, and would not qualify for capitalization under the new lease accounting guidance. This adjustment did not have a material impact to our consolidated financial statements.

For leases where we are the lessee, specifically for our four ground leases, the adoption of the standard will significantly change the accounting on our consolidated balance sheets since both existing ground leases and any future ground leases will be required to be recorded on the Company’s consolidated balance sheets as an obligation of the Company. Existing ground leases executed before the January 1, 2019 adoption date will continue to be accounted for as operating leases and the new guidance will not have a material impact on our recognition of ground lease expense or our results of operations. However, we will be required to recognize a right of use asset and a lease liability on our consolidated balance sheets equal to the present value of the minimum lease payments required in accordance with each ground lease. The adoption of this ASU will result in the recognition of operating lease right of use assets and related liabilities of approximately $80 million to $95 million in the aggregate as of January 1, 2019. We do not expect there will be a material impact to our consolidated statements of operations or consolidated cash flows as a result of adoption of this new guidance. In addition, we currently believe that for new ground leases entered into after the adoption date of the new standard, such leases could be required to be accounted for as financing-type leases, resulting in ground lease expense recorded using the effective interest method instead of on a straight-line basis over the term of the lease. This could have a significant impact on our results of operations if we enter into material new ground leases after the date of adoption since ground lease expense calculated using the effective interest method results in an increased amount of ground lease expense in the earlier years of a ground lease as compared to the current straight-line method.

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~Accounting Pronouncements Effective 2020 and Beyond~~

~~ASU~~ No. 2016-13 “Financial Instruments - Credit Losses (Topic 326)”

On June 16, 2016, the FASB issued ASU No. 2016-13 (“ASU 2016-13”) to amend the accounting for credit losses for certain financial instruments. Under the new guidance, an entity recognizes its estimate of expected credit losses as an allowance, which the FASB believes will result in more timely recognition of such losses. In November 2018, the FASB released ASU No. 2018-19“Codification Improvements to Topic 326, Financial Instruments - Credit Losses.” This ASU clarifies that receivables arising from operating leases are not within the scope of Subtopic 326-20 “Financial Instruments – Credit Losses.” Instead, impairment of receivables arising from operating leases should be accounted for under Subtopic 842-30 “Leases – Lessor.” ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The ~~Company does~~adoption did not ~~anticipate that the guidance will~~ have ana material impact on the consolidated financial statements or notes to the consolidated financial statements.

ASU No. 2018-13 “Fair Value Measurement (Topic 820)”

On August 28, 2018, the FASB issued ASU No. 2018-13 (“ASU 2018-13”) to amend the disclosure requirements for fair value measurements. The amendments in ASU 2018-13 include new, modified and eliminated disclosure requirements and are the result of a broader disclosure project called FASB Concepts Statement, Conceptual Framework for Financial Reporting - Chapter 8: Notes to Financial Statements, which the Board finalized on August 28, 2018. The Board used the guidance in the Concepts Statement to improve the effectiveness of ASC 820’s disclosure requirements. ASU 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for any eliminated or modified disclosures. The ~~Company currently anticipates that the guidance will~~adoption did not have a ~~significant~~material impact on the disclosures in the notes to the consolidated financial statements.

ASU No. 2018-15 “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40)”

On August 29, 2018, the FASB issued ASU No. 2018-15 (“ASU 2018-15”) to amend a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The ~~Company is currently evaluating the~~adoption did not have a material impact ~~of ASU 2018-15~~ on the consolidated financial statements ~~and~~or notes to the consolidated financial statements.

F - 27


3.	~~Acquisitions~~

~~Operating Property Acquisitions~~

During the year ended December 31, 2018, we acquired the four operating properties listed below in two transactions from unrelated third parties. We did not acquire any operating properties during the year ended December 31, 2017.

Property Date of Acquisition Number of Buildings Rentable Square Feet (unaudited) Occupancy as of December 31, 2018 (unaudited)
Purchase Price (in millions) ⁽¹⁾
2018 Acquisitions
345, 347 & 349 Oyster Point Boulevard, South San Francisco, CA January 31, 2018 3 145,530
78.5 % $ 111.0
345 Brannan Street, San Francisco, CA ⁽²⁾
December 21, 2018 1 110,030
99.7 % 146.0
Total ⁽³⁾
4 255,560
$ 257.0

~~________________________~~


~~(1)~~	~~Excludes acquisition-related costs.~~

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


3.	Acquisitions

Operating Property Acquisitions

During the year ended December 31, 2019, we acquired the 19-building creative office campus listed below in one transaction from an unrelated third party. During the year ended December 31, 2018, we acquired the 4 operating properties listed below in two transactions from unrelated third parties.



Property	Date of Acquisition	Number of Buildings	Rentable Square Feet (unaudited)	Occupancy as of December 31, 2019 (unaudited)		Purchase Price (in millions) ⁽¹⁾
2019 Acquisitions
3101-3243 La Cienega Boulevard, Culver City, CA⁽²⁾	October 15, 2019	19	151,908	100.0	%	$	186.0

2018 Acquisitions
345, 347 & 349 Oyster Point Boulevard, South San Francisco, CA	January 31, 2018	3	145,530	100.0	%	$	111.0
345 Brannan Street, San Francisco, CA ⁽³⁾	December 21, 2018	1	110,050	99.7	%	146.0
Total ⁽⁴⁾		4	255,580			$	257.0

________________________


(1)	Excludes acquisition-related costs.


(2)	The results of operations for the properties acquired during 2019 contributed $3.7 million to revenue and a net loss of $0.1 million primarily due to a write-off of lease-related intangible assets as a result of an early lease termination.


(3)	At December 31, 2018, this property was temporarily being held in a separate VIE to facilitate potential Section 1031 Exchanges. During January 2019, the Company completed the Section 1031 Exchange related to this VIE. ~~See Note 2 “Basis of Presentation and Significant Accounting Policies.”~~


~~(3)~~(4)	The results of operations for the properties acquired during 2018 contributed $8.0 million and~~$1.7~~ $1.7 millionto revenue and net income, respectively, for the year ended December 31, 2018.

The related assets, liabilities and results of operations of the acquired properties are included in the consolidated financial statements as of the date of acquisition. The following table summarizes the estimated fair values of the assets and liabilities assumed at the respective acquisition dates for our 2019 and 2018 operating property ~~acquisitions:~~acquisitions, respectively:


	Total 2018 Operating Property Acquisitions ⁽¹⁾
			Total 2019 Operating Property Acquisitions ⁽¹⁾		Total 2018 Operating Property Acquisitions ⁽²⁾
Assets
Land and improvements	$	80,269	$	150,561	$	80,269
Buildings and improvements ⁽²⁾	172,059
Deferred leasing costs and acquisition-related intangible assets ⁽³⁾	13,593
Buildings and improvements ⁽³⁾			30,932		172,059
Deferred leasing costs and acquisition-related intangible assets ⁽⁴⁾			12,063		13,593
Right of use ground lease asset ⁽⁵⁾			13,334		—
Total assets acquired	$	265,921	$	206,890	$	265,921
Liabilities
Acquisition-related intangible liabilities ⁽⁴⁾⁽⁶⁾	$	8,921	$	9,950	$	8,921
Ground lease liability ⁽⁵⁾			10,940		—
Total liabilities assumed	8,921		$	20,890	$	8,921
Net assets and liabilities acquired	$	257,000	$	186,000	$	257,000

________________________


(1)	The purchase price of the ~~two~~acquisition completed during the year ended December 31, 2019 was less than 10% of the Company’s total assets as of December 31, 2018.


(2)	The purchase price of the 2 acquisitions completed during the year ended December 31, 2018 were individually less than 5% and in aggregate less than 10% of the Company’s total assets as of December 31, 2017.


~~(2)~~(3)	Represents buildings, building improvements and tenant improvements.

~~(3)~~(4)

~~Represents~~For the 2019 operating property acquisition, represents in-place leases (approximately $9.2 million with a weighted average amortization period of 3.3 years) and leasing commissions (approximately $2.9 million with a weighted average amortization period of 3.5 years). For the 2018 operating property acquisitions, represents in-place leases (approximately $11.8 million with a weighted average amortization period of 1.3 ~~years~~ years) and leasing commissions (approximately $1.8 million with a weighted average amortization period of 6.6 ~~years~~years).

F - 28

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(5)

We evaluated the ground lease assumed in connection with the 2019 operating property acquisition and concluded it met the criteria to be classified as an operating lease. The discount rate used in determining the present value of the minimum future lease payments was 4.79%. The right of use asset ground lease asset is equal to the ground lease liability adjusted for above and below market intangibles and deferred leasing costs. Refer to Note 18 “Commitments and Contingencies” for further discussion of the Company's ground lease obligations.


~~(4)~~(6)	~~Represents~~For the 2019 operating property acquisition, represents below-market leases (approximately $10.0 million with a weighted average amortization period of 3.5 years). For the 2018 operating property acquisitions, represents below-market leases (approximately $8.9 million with a weighted average amortization period of 9.8 ~~years~~ years).

Development Project Acquisitions

~~On June 1, 2018,~~During the year ended December 31, 2019, we acquired the following ~~39-acre~~development sites in two transactions from unrelated third parties. The acquisitions were funded from various sources of liquidity including proceeds from the Company’s unsecured revolving credit facility, the issuance of debt and the settlement of the Company’s 2018 forward equity sales agreements. During the year ended December 31, 2018, we acquired a development site ~~which is located~~ adjacent to the ~~three~~3 operating properties we acquired in January 2018, from an unrelated third party. The acquisition was funded with proceeds from the Company’s unsecured revolving credit facility and the Company’s at-the-market stock offering program.

Project

Date of Acquisition

City/Submarket

Type

Purchase Price (in millions) ⁽¹⁾

Date of Acquisition

City/Submarket

Purchase Price (in millions)

Kilroy Oyster Point

June 1, 2018

South San Francisco

Land

308.2

2019 Acquisitions

1335 Broadway & 901 Park Boulevard, San Diego, CA⁽¹⁾

August 19, 2019

East Village

40.0

Seattle CBD Project ⁽²⁾

December 12, 2019

Seattle CBD

133.0

Total 2019 Acquisitions

173.0

2018 Acquisitions

Kilroy Oyster Point⁽³⁾

June 1, 2018

South San Francisco

308.2

Total 2018 Acquisitions

308.2

________________________

(1)

Excludes acquisition-related costs. In connection with this acquisition, we also recorded $4.0 million in accrued liabilities and environmental remediation liabilities at the date of acquisition, which are not included in the purchase price above. As of December 31, 2019, the purchase price and our current estimate of assumed liabilities are included in undeveloped land and construction in progress and the assumed liabilities are included in accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets.

(2)

Excludes acquisition-related costs. In connection with this acquisition, we also recorded $6.3 million in accrued liabilities and environmental remediation liabilities at the date of acquisition, which are not included in the purchase price above. As of December 31, 2019, the purchase price and our current estimate of assumed liabilities are included in undeveloped land and construction in progress and the assumed liabilities are included in accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets. In addition, as of December 31, 2019, the Company had $10.0 million in restricted cash, which is excluded from the purchase price above, related to this acquisition which may be payable to the seller only if certain events occur within three years following the date of acquisition.

(3)

Excludes acquisition-related costs. In connection with this acquisition, we also recorded $40.6 million in accrued liabilities and environmental remediation liabilities at the date of acquisition, which are not included in the purchase price above. As of December 31, 2018, the purchase price and our current estimate of assumed liabilities are included in undeveloped land and construction in progress and the assumed liabilities are included in accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets.

~~On October 10, 2017,~~In addition to the ~~Company completed the acquisition of a 1.2 acre~~acquisitions listed above, during 2019, we acquired an additional land parcel for an existing development ~~site located in the Little Italy neighborhood of downtown San Diego, California in three separate transactions from separate unrelated third parties~~project for ~~a total purchase price of $19.4 million and the assumption of $1.4 million of accrued liabilities.~~$99.5 million.

Acquisition Costs

During the years ended December 31, 2019, 2018, ~~2017,~~ and ~~2016,~~2017, we capitalized $1.6 million, $3.8 million, ~~$4.6 million,~~ and ~~$0.5~~$4.6 million, respectively, of acquisition costs. ~~During the year ended December 31, 2016, we expensed $1.9 million of acquisition costs.~~

F - 29

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

4. Dispositions

Operating Property Dispositions

The following table summarizes the operating properties sold during the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016:~~2017:


Location	Month of Disposition	Number of Buildings	Rentable Square Feet (unaudited)	Sales Price (in millions) ⁽¹⁾		Month of Disposition	Number of Buildings	Rentable Square Feet (unaudited)	Sales Price (in millions) ⁽¹⁾
2019 Dispositions
2829 Townsgate Road, Thousand Oaks, CA						May	1	84,098	$	18.3
2211 Michelson Drive, Irvine, CA						October	1	271,556	115.5
Total 2019 Dispositions							2	355,654	$	133.8

2018 Dispositions
1310-1327 Chesapeake Terrace, Sunnyvale, CA	November	4	266,982	$	160.3	November	4	266,982	$	160.3
Plaza Yarrow Bay Properties⁽²⁾	November	4	279,924	134.5		November	4	279,924	134.5
23925, 23975, & 24025 Park Sorrento, Calabasas, CA	December	3	225,340	78.2		December	3	225,340	78.2
Total 2018 Dispositions		11	772,246	$	373.0		11	772,246	$	373.0

2017 Dispositions
5717 Pacific Center Boulevard, San Diego, CA	January	1	67,995	$	12.1	January	1	67,995	$	12.1
Sorrento Mesa and Mission Valley Properties ⁽³⁾	September	10	675,143	174.5		September	10	675,143	174.5
Total 2017 Dispositions		11	743,138	$	186.6		11	743,138	$	186.6

2016 Dispositions
Torrey Santa Fe Properties⁽⁴⁾	January	4	465,812	$	262.3
4930, 4939 & 4955 Directors Place, San Diego, CA ⁽⁵⁾	July	2	136,908	49.0
Total 2016 Dispositions		6	602,720	$	311.3

__________________


(1)	Represents gross sales price before ~~the impact of~~ broker commissions and closing costs.


(2)	The Plaza Yarrow Bay Properties include the following properties: 10210, 10220 and 10230 NE Points Drive & 3933 Lake Washington Boulevard NE in Kirkland, Washington.


(3)	The Sorrento Mesa and Mission Valley Properties includes the following properties: 10390, 10394, 10398, 10421, 10445 and 10455 Pacific Center Court, 2355, 2365, 2375 and 2385 Northside Drive and Pacific Corporate Center - Lot 8, a 5.0 acre undeveloped land parcel.


~~(4)~~	~~The Torrey Santa Fe Properties include the following properties: 7525, 7535, 7545 and 7555 Torrey Santa Fe.~~


~~(5)~~	~~Includes two operating properties totaling 136,908 rentable square feet and a 7.0 acre undeveloped land parcel.~~

The total gains on the sales of the operating properties sold during the years ended December 31, 2019, 2018 and 2017 ~~and 2016~~ were $36.8 million, $142.9 million and $39.5 million, ~~and $164.3 million,~~ respectively.

Land Dispositions

We did not dispose of any land parcels during the year ended December 31, 2019. During the year ended December 31, 2018, in connection with the Plaza Yarrow Bay Properties disposition listed above, we recognized a gain on sale of land of $11.8 million. During the year ended December 31, 2017, in connection with the Sorrento Mesa and Mission Valley Properties disposition listed above, we recognized a gain on sale of land of $0.4 million. ~~The following table summarizes the land dispositions completed during the year ended December 31, 2016:~~

Properties Submarket Month of Disposition
Gross Site Acreage
(unaudited)

Sales Price⁽¹⁾
(in millions)
2016 Land Dispositions
Carlsbad Oaks - Lot 7 Carlsbad January 7.6 $ 4.5
Carlsbad Oaks - Lots 4 & 5 Carlsbad June 11.2 6.0
Carlsbad Oaks - Lot 8 Carlsbad June 13.2 8.9
Total 2016 Land Dispositions ⁽²⁾⁽³⁾
32.0 $ 19.4

~~__________________~~


~~(1)~~	~~Represents gross sales price before the impact of commissions and closing costs.~~


~~(2)~~	~~In connection with these land dispositions, $2.3 million of secured debt was assumed by the buyers.~~


~~(3)~~	~~The 2016 land dispositions resulted in a net loss on sales of $0.3 million.~~

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

Restricted Cash Related to Dispositions

We did not have any restricted cash related to dispositions or Section 1031 Exchanges as of December 31, 2019.As of December 31, 2018, approximately $113.1 million of net proceeds related to the operating property dispositions during the year ended December 31, 2018 were temporarily being held at a qualified intermediary at our direction, for the purpose of facilitating a Section 1031 Exchange. The cash proceeds were included in restricted cash on our consolidated balance sheets at December 31, 2018. During January 2019, the Section 1031 Exchange related to this VIE was successfully completed and the cash proceeds were released from the qualified intermediary. ~~We did not have any restricted cash related to dispositions or Section 1031 Exchanges as of December 31, 2017.~~

F - 30

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


5.	Deferred Leasing Costs and ~~Acquisition-related~~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 December 31, ~~2018~~2019 and ~~2017:~~2018:


	December 31, 2018			December 31, 2017			December 31, 2019			December 31, 2018
	(in thousands)						(in thousands)
Deferred Leasing Costs and Acquisition-related Intangible Assets, net:
Deferred leasing costs	$	266,905		$	248,598		$	286,026		$	266,905
Accumulated amortization	(100,805		)	(101,917		)	(100,145		)	(100,805		)
Deferred leasing costs, net	166,100			146,681			185,881			166,100
Above-market operating leases	2,836			4,199			611			2,836
Accumulated amortization	(2,150		)	(3,068		)	(116		)	(2,150		)
Above-market operating leases, net	686			1,131			495			686
In-place leases	66,526			82,097			58,076			66,526
Accumulated amortization	(36,174		)	(46,625		)	(31,647		)	(36,174		)
In-place leases, net	30,352			35,472			26,429			30,352
Below-market ground lease obligation	490			490			—			490
Accumulated amortization	(54		)	(46		)	—			(54		)
Below-market ground lease obligation, net(1)	436			444			—			436
Total deferred leasing costs and acquisition-related intangible assets, net	$	197,574		$	183,728		$	212,805		$	197,574
Acquisition-related Intangible Liabilities, net:⁽¹⁾⁽²⁾
Below-market operating leases	$	53,523		$	65,440		$	51,263		$	53,523
Accumulated amortization	(29,978		)	(40,495		)	(27,171		)	(29,978		)
Below-market operating leases, net	23,545			24,945			24,092			23,545
Above-market ground lease obligation	6,320			6,320			—			6,320
Accumulated amortization	(727		)	(626		)	—			(727		)
Above-market ground lease obligation, net(1)	5,593			5,694			—			5,593
Total acquisition-related intangible liabilities, net	$	29,138		$	30,639		$	24,092		$	29,138

_______________

(1)

Upon adoption of Topic 842 on January 1, 2019 (refer to Note 2 “Basis of Presentation and Significant Accounting Policies”), we no longer separately recognize above or below-market ground lease obligations. Such amounts are reflected in the net book value of the right of use ground lease asset on our consolidated balance sheets. Refer to Note 18 “Commitments and Contingencies” for further discussion of our ground lease obligations.


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

F - 31

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The following table sets forth amortization related to deferred leasing costs and acquisition-related intangibles for the years ended December 31, 2019, 2018 ~~2017~~ and ~~2016.~~2017.


	Year Ended December 31,									Year Ended December 31,
	2018			2017			2016			2019			2018			2017
	(in thousands)									(in thousands)
Deferred leasing costs ⁽¹⁾	$	34,341		$	31,675		$	28,639		$	35,779		$	34,341		$	31,675
Above-market operating leases ⁽²⁾	444			2,240			1,509			192			444			2,240
In-place leases ⁽¹⁾	15,915			18,650			11,676			18,615			15,915			18,650
Below-market ground lease obligation ⁽³⁾	8			8			8			—			8			8
Below-market operating leases ⁽⁴⁾	(10,192		)	(10,768		)	(8,674		)	(9,398		)	(10,192		)	(10,768		)
Above-market ground lease obligation ⁽⁵⁾⁽³⁾	(101		)	(101		)	(101		)	—			(101		)	(101		)
Total	$	40,415		$	41,704		$	33,057		$	45,188		$	40,415		$	41,704

_______________


(1)	The amortization of deferred leasing costs and in-place leases is recorded to depreciation and amortization expense and the amortization of lease incentives is recorded as a reduction to rental income 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~~Upon adoption of ~~the~~Topic 842 on January 1, 2019 (refer to Note 2 “Basis of Presentation and Significant Accounting Policies”), we no longer separately recognize above or below-market ground lease ~~obligation is recorded as an increase~~obligations. Refer to Note 18 “Commitments and Contingencies” for further discussion of our ground lease ~~expense in the consolidated statements of operations for the periods presented.~~obligations.


(4)	The amortization of below-market operating leases is recorded as an increase to rental income in the consolidated statements of operations for the periods presented.


~~(5)~~	~~The amortization of the above-market ground lease obligation is recorded as a decrease to ground lease expense in the consolidated statements of operations for the periods presented.~~

The following table sets forth the estimated annual amortization expense related to deferred leasing costs and acquisition-related intangibles as of December 31, ~~2018~~2019 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⁾			Deferred Leasing Costs		Above-Market Operating Leases ⁽¹⁾		In-Place Leases		Below-Market Operating Leases ⁽²⁾
	(in thousands)														(in thousands)
2019	31,980		192		16,675		8		(7,779		)	(100		)
2020	26,868		38		5,963		8		(4,621		)	(100		)	30,897		38		11,379		(7,258		)
2021	21,787		38		2,861		8		(1,938		)	(100		)	27,043		38		6,668		(4,543		)
2022	18,683		38		1,589		8		(1,486		)	(100		)	23,642		38		4,001		(3,553		)
2023	14,914		38		648		8		(988		)	(100		)	19,904		38		1,641		(1,866		)
2024															16,976		38		602		(1,090		)
Thereafter	51,868		342		2,616		396		(6,733		)	(5,093		)	67,419		305		2,138		(5,782		)
Total	$	166,100	$	686	$	30,352	$	436	$	(23,545	)	$	(5,593	)	$	185,881	$	495	$	26,429	$	(24,092	)

_______________


(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.~~

F - 32

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


6.	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 December 31, ~~2018~~2019 and ~~2017:~~2018:



	December 31, 2019			December 31, 2018
	(in thousands)
Current receivables	$	27,660		$	24,815
Allowance for uncollectible tenant receivables⁽¹⁾	(1,171		)	(4,639		)
Current receivables, net	$	26,489		$	20,176

December 31, 2018 December 31, 2017
(in thousands)
Current receivables $ 24,815
$ 19,235
Allowance for uncollectible tenant receivables (4,639 ) (2,309 )
Current receivables, net $ 20,176
$ 16,926
_______________


(1)	Refer to Note 2 “Basis of Presentation and Significant Accounting Policies” for discussion of our accounting policies related to the allowance for uncollectible tenant receivables and Note 20 “Other Significant Transactions” for additional information regarding changes in our allowance for uncollectible tenant receivables.

Deferred Rent Receivables, net

Deferred rent receivables, net consisted of the following as of December 31, ~~2018~~2019 and ~~2017:~~2018:



	December 31, 2019			December 31, 2018
	(in thousands)
Deferred rent receivables	$	339,489		$	270,346
Allowance for deferred rent receivables ⁽¹⁾	(1,552		)	(3,339		)
Deferred rent receivables, net	$	337,937		$	267,007

_______________


(1)	Refer to Note 2 “Basis of Presentation and Significant Accounting Policies” for discussion of our accounting policies related to the allowance for deferred rent receivables and Note 20 “Other Significant Transactions” for additional information regarding changes in our allowance for deferred rent receivables.

December 31, 2018 December 31, 2017
(in thousands)
Deferred rent receivables $ 270,346
$ 249,629
Allowance for deferred rent receivables (3,339 ) (3,238 )
Deferred rent receivables, net
$ 267,007
$ 246,391


7.	Prepaid Expenses and Other Assets, Net

Prepaid expenses and other assets, net consisted of the following at December 31, ~~2018~~2019 and ~~2017:~~2018:


	December 31, 2018		December 31, 2017		December 31, 2019		December 31, 2018
	(in thousands)				(in thousands)
Furniture, fixtures and other long-lived assets, net	$	36,833	$	39,686	$	35,286	$	36,833
Notes receivable⁽¹⁾	2,113		19,912		1,651		2,113
Prepaid expenses & acquisition deposits	13,927		55,108
Total Prepaid Expenses and Other Assets, Net	$	52,873	$	114,706
Prepaid expenses					18,724		13,927
Total prepaid expenses and other assets, net					$	55,661	$	52,873

_______________


(1)	~~During the year ended December 31, 2018, a note receivable with a balance of $15.1 million was repaid to the Company.~~ Notes receivable are shown net of a valuation allowance of approximately $3.6 millionand $2.9 million as of December 31, ~~2018.~~2019 and 2018, respectively.

F - 33

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

8. Secured and Unsecured Debt of the Company

In this Note 8, the “Company” refers solely to Kilroy Realty Corporation and not to any of our subsidiaries. The Company itself does not hold any indebtedness. All of our secured and unsecured debt is held directly by the Operating Partnership.

The Company generally guarantees all the Operating Partnership’s unsecured debt obligations including the unsecured revolving credit facility, the $150.0 million unsecured term loan facility and all of the unsecured senior notes. At December 31, ~~2018~~2019 and ~~2017,~~2018, the Operating Partnership had ~~$2.6~~$3.3 billion and ~~$2.0~~$2.6 billion, respectively, outstanding in total, including unamortized discounts and deferred financing costs, under these unsecured debt obligations.

In addition, although the remaining $0.3 billionof the Operating Partnership’s debt as of December 31, ~~2018~~2019 and ~~2017,~~2018, is secured and non-recourse to the Company, the Company provides limited customary secured debt guarantees for items such as voluntary bankruptcy, fraud, misapplication of payments and environmental liabilities.

Debt Covenants and Restrictions

One of the covenants contained within the unsecured revolving credit facility and the unsecured term loan facility as discussed further below in Note 9 prohibits the Company from paying dividends during an event of default in excess of an amount which results in distributions to us in an amount sufficient to permit us to pay dividends to our stockholders that we reasonably believe are necessary to (a) maintain our qualification as a REIT for federal and state income tax purposes and (b) avoid the payment of federal or state income or excise tax.

9. Secured and Unsecured Debt of the Operating Partnership

Secured Debt

The following table sets forth the composition of our secured debt as of December 31, ~~2018~~2019 and ~~2017:~~2018:


	Annual Stated Interest Rate ⁽¹⁾	GAAP Effective Rate ⁽¹⁾⁽²⁾		Maturity Date		December 31,							Annual Stated Interest Rate ⁽¹⁾		GAAP Effective Rate ⁽¹⁾⁽²⁾		Maturity Date	December 31,
Type of Debt	Annual Stated Interest Rate ⁽¹⁾			Maturity Date	2018				2017						GAAP Effective Rate ⁽¹⁾⁽²⁾	2019			2018
						(in thousands)							Annual Stated Interest Rate ⁽¹⁾						(in thousands)
Mortgage note payable	3.57%	GAAP Effective Rate ⁽¹⁾⁽²⁾	3.57%		December 2026		$	170,000			$	170,000		3.57%		3.57%	Maturity Date	December 2026		$	170,000			$	170,000
Mortgage note payable ⁽³⁾	4.48%	4.48%		July 2027		91,332				93,081			4.48%		4.48%		July 2027	89,502				91,332
Mortgage note payable ⁽³⁾⁽⁴⁾	6.05%	3.50%		June 2019		75,238				78,894			6.05%		3.50%		June 2019	—				75,238
Total secured debt						$	336,570			$	341,975							$	259,502			$	336,570
Unamortized Deferred Financing Costs						(1,039		)		(1,175		)						(909		)		(1,039		)
Total secured debt, net						$	335,531			$	340,800							$	258,593			$	335,531

______________


(1)	All interest rates presented are fixed-rate interest rates.


(2)	Represents the effective interest rate including the amortization of initial issuance discounts/premiums excluding the amortization of deferred financing costs.


(3)	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.


(4)	~~As of December 31, 2018 and 2017, the mortgage loan had unamortized debt premiums of $0.8 millionand $2.6 million, respectively.~~ In February 2019, the Company repaid this mortgage note payable at par.

The Operating Partnership’s secured debt was collateralized by operating properties with a combined net book value of approximately ~~$324.6~~$251.2 millionas of December 31, ~~2018.~~2019.

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.

As of December 31, ~~2018,~~2019, all of the Operating Partnership’s secured loans contained restrictions that would require the payment of prepayment penalties for the acceleration of outstanding debt. The mortgage notes payable are secured

F - 34

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

by deeds of trust on certain of our properties and the assignment of certain rents and leases associated with those properties.

Unsecured Senior Notes

The following table summarizes the balance and significant terms of the registered unsecured senior notes issued by the Operating Partnership and outstanding, including unamortized discounts of ~~$6.6~~$6.5 millionand ~~$6.3~~$6.6 million and unamortized deferred financing costs of ~~$15.4~~$18.7 million and ~~$12.5~~$15.4 million as of December 31, 2019 and 2018, ~~and 2017,~~ respectively:


					Net Carrying Amount as of December 31,										Net Carrying Amount as of December 31,
	Issuance date	Maturity date	Stated coupon rate	Effective interest rate⁽¹⁾	2018			2017			Issuance date	Maturity date	Stated coupon rate	Effective interest rate⁽¹⁾	2019			2018
					(in thousands)										(in thousands)
4.750% Unsecured Senior Notes ⁽²⁾	November 2018	December 2028	4.750%	4.800%	$	400,000		$	—
3.050% Unsecured Senior Notes ⁽²⁾											September 2019	February 2030	3.050%	3.064%	$	500,000		$	—
Unamortized discount and deferred financing costs					(4,960		)	—							(5,998		)	—
Net carrying amount					$	395,040		$	—						$	494,002		$	—

4.350% Unsecured Senior Notes⁽³⁾	October 2018	October 2026	4.350%	4.350%	$	200,000		$	—
4.750% Unsecured Senior Notes ⁽³⁾											November 2018	December 2028	4.750%	4.800%	$	400,000		$	400,000
Unamortized discount and deferred financing costs					(1,375		)	—							(4,446		)	(4,960		)
Net carrying amount					$	198,625		$	—						$	395,554		$	395,040

4.300% Unsecured Senior Notes ⁽³⁾	July 2018	July 2026	4.300%	4.300%	$	50,000		$	—
4.350% Unsecured Senior Notes⁽⁴⁾											October 2018	October 2026	4.350%	4.350%	$	200,000		$	200,000
Unamortized discount and deferred financing costs					(342		)	—							(1,186		)	(1,375		)
Net carrying amount					$	49,658		$	—						$	198,814		$	198,625

3.450% Unsecured Senior Notes ⁽⁴⁾	December 2017	December 2024	3.450%	3.470%	$	425,000		$	425,000
4.300% Unsecured Senior Notes ⁽⁴⁾											July 2018	July 2026	4.300%	4.300%	$	50,000		$	50,000
Unamortized discount and deferred financing costs					(3,493		)	(4,047		)					(290		)	(342		)
Net carrying amount					$	421,507		$	420,953						$	49,710		$	49,658

3.450% Unsecured Senior Notes ⁽⁵⁾	February 2017	February 2029	3.450%	3.450%	$	75,000		$	75,000		December 2017	December 2024	3.450%	3.470%	$	425,000		$	425,000
Unamortized discount and deferred financing costs					(432		)	(475		)					(2,907		)	(3,493		)
Net carrying amount					$	74,568		$	74,525						$	422,093		$	421,507

3.350% Unsecured Senior Notes ⁽⁵⁾	February 2017	February 2027	3.350%	3.350%	$	175,000		$	175,000
3.450% Unsecured Senior Notes ⁽⁶⁾											February 2017	February 2029	3.450%	3.450%	$	75,000		$	75,000
Unamortized discount and deferred financing costs					(941		)	(1,056		)					(390		)	(432		)
Net carrying amount					$	174,059		$	173,944						$	74,610		$	74,568

4.375% Unsecured Senior Notes ⁽⁶⁾	September 2015	October 2025	4.375%	4.444%	$	400,000		$	400,000
3.350% Unsecured Senior Notes ⁽⁶⁾											February 2017	February 2027	3.350%	3.350%	$	175,000		$	175,000
Unamortized discount and deferred financing costs					(3,738		)	(4,292		)					(825		)	(941		)
Net carrying amount					$	396,262		$	395,708						$	174,175		$	174,059

4.250% Unsecured Senior Notes ⁽⁷⁾	July 2014	August 2029	4.250%	4.350%	$	400,000		$	400,000
4.375% Unsecured Senior Notes ⁽⁷⁾											September 2015	October 2025	4.375%	4.444%	$	400,000		$	400,000
Unamortized discount and deferred financing costs					(5,632		)	(6,164		)					(3,185		)	(3,738		)
Net carrying amount					$	394,368		$	393,836						$	396,815		$	396,262

3.800% Unsecured Senior Notes ⁽⁸⁾	January 2013	January 2023	3.800%	3.800%	$	300,000		$	300,000
4.250% Unsecured Senior Notes ⁽⁸⁾											July 2014	August 2029	4.250%	4.350%	$	400,000		$	400,000
Unamortized discount and deferred financing costs					(1,108		)	(1,382		)					(5,100		)	(5,632		)
Net carrying amount					$	298,892		$	298,618						$	394,900		$	394,368

6.625% Unsecured Senior Notes ⁽⁹⁾	May 2010	June 2020	6.625%	6.744%	$	—		$	250,000
3.800% Unsecured Senior Notes ⁽⁹⁾											January 2013	January 2023	3.800%	3.800%	$	300,000		$	300,000
Unamortized discount and deferred financing costs					—			(1,321		)					(834		)	(1,108		)
Net carrying amount					$	—		$	248,679						$	299,166		$	298,892

Total Unsecured Senior Notes, Net					$	2,402,979		$	2,006,263						$	2,899,839		$	2,402,979

________________________


(1)	Represents the effective interest rate including the amortization of initial issuance discounts, excluding the amortization of deferred financing costs.


(2)	Interest on these notes is payable semi-annually in arrears on ~~June~~February 15th and ~~December~~August 15th of each year, beginning on ~~June~~February 15, ~~2019.~~2020.


(3)	~~Interest on these notes is payable semi-annually in arrears on April 18th and October 18th of each year, beginning in April 18, 2019.~~


~~(4)~~	Interest on these notes is payable semi-annually in arrears on June 15th and December 15th of each year.


(4)	Interest on these notes is payable semi-annually in arrears on April 18th and October 18th of each year.


(5)	Interest on these notes is payable semi-annually in arrears on June 15th and December 15th of each year.


(6)	Interest on these notes is payable semi-annually in arrears on February 17th and August 17th of each year.


~~(6)~~(7)	Interest on these notes is payable semi-annually in arrears on April 1st and October 1st of each year.


~~(7)~~(8)	Interest on these notes is payable semi-annually in arrears on February 15th and August 15th of each year.


~~(8)~~(9)	Interest on these notes is payable semi-annually in arrears on January 15th and July 15th of each year.


~~(9)~~	~~Interest on these notes is payable semi-annually in arrears on June 1st and December 1st of each year.~~

F - 35

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

Unsecured Senior Notes - Registered Offerings

In September 2019, the Operating Partnership issued $500.0 million of aggregate principal amount of unsecured senior notes in a registered public offering. The outstanding balance of the unsecured senior notes is included in unsecured debt, net of an initial issuance discount of $0.6 million, on our consolidated balance sheets. The unsecured senior notes, which are scheduled to mature on February 15, 2030, require semi-annual interest payments each February and August based on a stated annual interest rate of 3.050%. The Operating Partnership may redeem the notes at any time prior to February 15, 2030, either in whole or in part, subject to the payment of an early redemption premium prior to a par call option period commencing three months prior to maturity.

In November 2018, the Operating Partnership issued $400.0 million of aggregate principal amount of unsecured senior notes in a registered public ~~offering, as shown on the table above.~~offering. The outstanding balance of the unsecured senior notes is included in unsecured debt, net of initial issuance discount of~~$1.5~~ $1.5 million, on our consolidated balance sheets. The unsecured senior notes, which are scheduled to mature on December 15, 2028, require semi-annual interest payments each June and December based on a stated annual interest rate of 4.750%. The Operating Partnership may redeem the notes at any time prior to December 15, 2028, either in whole or in part, subject to the payment of an early redemption premium subject to a par call option.

In December 2018, we used a portion of the net proceeds from the issuance of our $400.0 million, 4.750% unsecured senior notes to early redeem, at our option, the $250.0 million aggregate principal amount of our outstanding 6.625% unsecured senior notes that were scheduled to mature on June 1, 2020. In connection with our early redemption, we incurred a~~$12.6~~ $12.6 millionloss on early extinguishment of debt comprised of an $11.8 million premium paid to the note holders at the redemption date and a~~$0.8 millionwrite-off of the unamortized discount and unamortized deferred financing costs.~~

In December 2017, the Operating Partnership issued $425.0 million of aggregate principal amount of unsecured senior notes in a registered public offering, as shown on the table above. The outstanding balance of the unsecured senior notes is included in unsecured debt, net of initial issuance discount of $0.6 million, on our consolidated balance sheet. The unsecured senior notes, which are scheduled to mature on December 15, 2024, require semi-annual interest payments each June and December based on a stated annual interest rate of 3.450%. The Operating Partnership may redeem the notes at any time prior to September 15, 2024, either in whole or in part, subject to the payment of an early redemption premium.

In December 2017, we used a portion of the net proceeds from the issuance of our $425.0 million, 3.450% unsecured senior notes to early redeem, at our option, the $325.0 million aggregate principal amount of our outstanding 4.800% unsecured senior notes that were scheduled to mature on July 15, 2018. In connection with our early redemption, we incurred a $5.3 million loss on early extinguishment of debt comprised of $5.0 million premium paid to the note holders at the redemption date and $0.3 $0.8 million write-off of the unamortized discount and unamortized deferred financing costs.

Unsecured Senior Notes - Private Placement

In May 2018, the Operating Partnership entered into a note purchase agreement in a private placement (the “2018 Note Purchase Agreement”) in connection with the issuance and sale of $50.0 million principal amount of the Operating Partnership’s 4.30% Senior Notes, Series A, due July 18, 2026 (the “Series A Notes due 2026”), and $200.0 million principal amount of the Operating Partnership’s 4.35% Senior Notes, Series B, due October 18, 2026 (the “Series B Notes due 2026” and, together with the Series A Notes, the “Series A and B Notes due 2026”), as shown in the table above. The Company drew the full amount of the Series A Notes due 2026 on July 18, 2018. On October 22, 2018, the Company drew the full amount of the Series B Notes due 2026. The Series A and B Notes due 2026 mature on their respective due dates, unless earlier redeemed or prepaid pursuant to the terms of the 2018 Note Purchase Agreement. Interest on the Series A and B Notes due 2026 is payable semi-annually in arrears on April 18 and October 18 of each year beginning April 18, 2019. As of December 31, ~~2018,~~2019, there was $50.0 million and $200.0 million issued and outstanding aggregate principal amount of Series A and Series B Notes due 2026, respectively.

In September 2016, the Operating Partnership entered into a note purchase agreement in a private placement (the “2016 Note Purchase Agreement”), in connection with the issuance and sale of $175.0 million principal amount of the Operating Partnership’s 3.35% Senior Notes, Series A, due February 17, 2027 (the “Series A Notes due 2027”), and $75.0 million principal amount of the Operating Partnership’s 3.45% Senior Notes, Series B, due February 17, 2029 (the “Series B Notes due 2029” and, together with the Series A Notes due 2027, the “Series A and B Notes due 2027 and 2029”), as shown on the table above. In February 2017, the Operating Partnership issued the $175.0 million principal amount of its Series A Notes due 2027 and the $75.0 million principal amount of its Series B Notes due 2029. The Series A and B Notes due 2027 and 2029 mature on their respective due dates unless earlier redeemed or prepaid pursuant to the terms of the 2016 Note Purchase Agreement. Interest on the Series A and B Notes due 2027 and 2029 is payable semi-annually in arrears on February 17 and August 17 of each year. As of December 31, 2018, there was

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

~~$175.0 million and $75.0 million issued and outstanding aggregate principal amount of Series A and B Notes, respectively.~~

The Operating Partnership may, at its option and upon notice to the purchasers of the Series A and B Notes due 2026, ~~and Series A and B Notes due 2027 and 2029,~~ prepay at any time all, or from time to time any part of the principal amounts then outstanding (in an amount not less than 5% of the aggregate principal amount of the Series A and B Notes due 2026 ~~and Series A and B Notes due 2027 and 2029~~ then outstanding in the case of a partial prepayment), at 100% of the principal amount so prepaid, plus the make-whole amount determined for the prepayment date with respect to such principal amount as set forth in the ~~2016 &~~ 2018 Note Purchase ~~Agreements.~~Agreement.

In connection with the issuance of the Series A and B Notes due 2026, ~~and Series A and B Notes due 2027 and 2029,~~ the Company entered into an agreement whereby it will guarantee the payment by the Operating Partnership of all amounts due with respect to the Series A and B Notes due 2026 and ~~Series A and B Notes due 2027 and~~ the performance by the Operating Partnership of its obligations under the ~~2016 &~~ 2018 Note Purchase ~~Agreements.~~Agreement.

Unsecured Revolving Credit Facility and Term Loan Facility

In July 2017, the Operating Partnership amended and restated the terms of its unsecured revolving credit facility and unsecured term loan facility (together, the “Facility”). The amendment and restatement increased the size of the unsecured revolving credit facility from $600.0 million to $750.0 million, maintained the size of the unsecured term loan facility of $150.0 million, reduced the borrowing costs and extended the maturity date of the Facility to July 2022.

The following table summarizes the balance and terms of our unsecured revolving credit facility as of December 31, ~~2018~~2019 and ~~2017:~~2018:

F - 36

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


	December 31, 2018			December 31, 2017			December 31, 2019			December 31, 2018
	(in thousands)						(in thousands)
Outstanding borrowings	$	45,000		$	—		$	245,000		$	45,000
Remaining borrowing capacity	705,000			750,000			505,000			705,000
Total borrowing capacity ⁽¹⁾	$	750,000		$	750,000		$	750,000		$	750,000
Interest rate ⁽²⁾	3.48		%	2.56		%	2.76		%	3.48		%
Facility fee-annual rate ⁽³⁾	0.200%						0.200%
Maturity date	July 2022						July 2022

_______________


(1)	We may elect to borrow, subject to bank approval and obtaining commitments for any additional borrowing capacity, up to an additional $600.0 million under an accordion feature under the terms of the unsecured revolving credit facility and unsecured term loan facility.


(2)	Our unsecured revolving credit facility interest rate was calculated based on the contractual rate of LIBOR plus 1.000% as of December 31, ~~2018~~2019 and ~~2017.~~2018.

(3)

Our facility fee is paid on a quarterly basis and is calculated based on the total borrowing capacity. In addition to the facility fee, we incurred debt origination and legal costs. As of December 31, 2019 and 2018, ~~and 2017, $4.7~~$3.4 million and ~~$6.0~~$4.7 million of unamortized deferred financing costs, respectively, which are included in prepaid expenses and other assets, net on our consolidated balance sheets, remained to be amortized through the maturity date of our unsecured revolving credit facility.

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

~~KILROY REALTY CORPORATION AND KILROY REALTY, L.P.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)~~

During the first quarter of 2018, we borrowed the full $150.0 million borrowing capacity of our unsecured term loan facility. In connection with the funding of the outstanding borrowings, we transferred $30.0 million of outstanding borrowings under the unsecured revolving credit facility to the balance of our unsecured term loan facility. As a result, only $120.0 million of cash proceeds were received from the funding of the unsecured term loan facility. The following table summarizes the balance and terms of our unsecured term loan facility as of December 31, 2019 and 2018, ~~and 2017:~~which is included in unsecured debt, net on our consolidated balance sheets:


	December 31, 2018			December 31, 2017			December 31, 2019			December 31, 2018
	(in thousands)						(in thousands)
Outstanding borrowings	$	150,000		$	—		$	150,000		$	150,000
Remaining borrowing capacity	—			150,000			—			—
Total borrowing capacity ⁽¹⁾	$	150,000		$	150,000		$	150,000		$	150,000
Interest rate ⁽²⁾	3.49		%	2.66		%	2.85		%	3.49		%
Undrawn facility fee-annual rate ⁽³⁾	0.200%						0.200%
Maturity date	July 2022						July 2022



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.)



Kilroy Realty Corporation
x☒	Large accelerated filer	o☐	Accelerated filer	o☐	Non-accelerated filer ~~(Do not check if a smaller reporting company~~)	o☐	Smaller reporting company
o☐	Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Kilroy Realty, L.P.
o☐	Large accelerated filer	o☐	Accelerated filer	x☒	Non-accelerated filer ~~(Do not check if a smaller reporting company)~~	o☐	Smaller reporting company
o☐	Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o



		Page
	PART I
Item 1.	Business	5
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	35
Item 2.	Properties	36
Item 3.	Legal Proceedings	4546
Item 4.	Mine Safety Disclosures	4546
	PART II
Item 5.	Market for Kilroy Realty Corporation’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	4647
	Market for Kilroy Realty, L.P.’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	4748
Item 6.	Selected Financial Data – Kilroy Realty Corporation	4950
	Selected Financial Data – Kilroy Realty, L.P.	5152
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5354
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	9693
Item 8.	Financial Statements and Supplementary Data	9794
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	9794
Item 9A.	Controls and Procedures	9895
Item 9B.	Other Information	~~102~~99
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~102~~99
Item 11.	Executive Compensation	~~102~~99
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~102~~99
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~102~~99
Item 14.	Principal Accountant Fees and Services	~~102~~99
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	~~103~~100
	SIGNATURES	~~108~~105


Year⁽¹⁾	Energy Consumption Data Coverage as % of Total Floor Area⁽²⁾		Total Energy Consumed by Floor Area with Data Coverage (MWh) ⁽³⁾	% of Energy Generated From Renewable Sources ⁽⁴⁾		Like-for-Like Change in Energy Consumption of Floor Area with Data Coverage⁽⁵⁾		% of Eligible Portfolio that has Obtained an Energy Rating and is Certified to ENERGY STAR⁽⁶⁾		Energy Consumption Data Coverage as % of Total Floor Area⁽²⁾		Total Energy Consumed by Floor Area with Data Coverage (MWh) ⁽³⁾	% of Energy Generated From Renewable Sources ⁽⁴⁾		Like-for-Like Change in Energy Consumption of Floor Area with Data Coverage⁽⁵⁾		% of Eligible Portfolio that has Obtained an Energy Rating and is Certified to ENERGY STAR⁽⁶⁾
2018										98	%	299,510	6	%	(2	)%	77	%
2017	96	%	382,688	3	%	(1	)%	73	%	96	%	309,248	5	%	(1	)%	73	%
2016	97	%	381,295	3	%	(2	)%	68	%	95	%	381,295	3	%	(2	)%	69	%
2015	92	%	254,518	3	%	(5	)%	65	%


Year⁽¹⁾	Water Withdrawal Data Coverage as a % of Total Floor Area⁽⁷⁾		Total Water Withdrawn by Portfolio (m3)⁽⁸⁾	Like-for-like Change in Water Withdrawn for Floor Area with Data Coverage⁽⁵⁾		Water Withdrawal Data Coverage as a % of Total Floor Area⁽⁷⁾		Total Water Withdrawn by Portfolio (m3)⁽⁸⁾	Like-for-like Change in Water Withdrawn for Floor Area with Data Coverage⁽⁵⁾
2018						96	%	980,859	5	%
2017	98	%	898,990	—	%	98	%	960,920	—	%
2016	94	%	856,290	(2	)%	90	%	856,290	(2	)%
2015	94	%	908,822	(11	)%



x☑	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



¨☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~12200 W. Olympic Boulevard, Suite 200, Los Angeles, California 90064~~

(~~Address of principal executive offices) (Zip Code)~~
Registrant’s telephone number, including area ~~code: (310) 481-8400~~code)



Registrant	Title of each class	Name of each exchange on which registered	Ticker Symbol
Kilroy Realty Corporation	Common Stock, $.01 par value	New York Stock Exchange	KRC


◦	—Liquidity and Capital Resources of the Operating Partnership;


◦	Note 9, Secured and Unsecured Debt of the Operating Partnership;


◦	Note 11, Noncontrolling Interests on the Company’s Consolidated Financial Statements;


◦	Note 12, Noncontrolling Interests on the Operating Partnership’s Consolidated Financial Statements;


◦	Note 14, Partners’ Capital of the Operating Partnership;


◦	Note 21, Net Income Available to Common Stockholders Per Share of the Company;


ITEM 1.	BUSINESS



Year⁽¹⁾	Scope 2 Market-Based GHG Data Coverage as a % of Total Floor Area ^(11)(13)		Scope 2 Market-Based GHG Emissions (Tonnes CO2) ^(12)(13)	Like-for-like Change in Scope 2 Market-Based GHG Emissions Data ⁽⁵⁾
2018	99	%	30,439	(12	)%
2017	99	%	35,375	N/A


◦	Note 22, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;


◦	Note 23, Supplemental Cash Flow Information of the Company;


◦	Note 24, Supplemental Cash Flow Information of the Operating Partnership;


◦	Note 26, Quarterly Financial Information of the Company (Unaudited); and


◦	Note 27, Quarterly Financial Information of the Operating Partnership (Unaudited).



	Number of Buildings	Number of Units	2019 Average Occupancy
Stabilized Residential Property	1	200	82.4	%


Year ⁽¹⁾	Scope 1 GHG Data Coverage as a % of Total Floor Area⁽⁹⁾		Scope 1 GHG Emissions (Tonnes CO2) ⁽¹⁰⁾	Like-for-like Change in Scope 1 GHG Emissions Data⁽⁵⁾		Scope 1 GHG Data Coverage as a % of Total Floor Area ⁽⁹⁾		Scope 1 GHG Emissions (Tonnes CO2) ⁽¹⁰⁾	Like-for-like Change in Scope 1 GHG Emissions Data⁽⁵⁾
2018						99	%	3,908	(4	)%
2017	100	%	4,641	6	%	100	%	4,120	6	%
2016	100	%	4,059	N/A		97	%	4,059	N/A


Year⁽¹⁾	Scope 2 GHG Data Coverage as a % of Total Floor Area ⁽¹¹⁾		Scope 2 GHG Emissions (Tonnes CO2) ⁽¹²⁾	Like-for-like Change in Scope 2 GHG Emissions Data ⁽⁵⁾		Scope 2 Location-Based GHG Data Coverage as a % of Total Floor Area ⁽¹¹⁾		Scope 2 Location-Based GHG Emissions (Tonnes CO2) ⁽¹²⁾	Like-for-like Change in Scope 2 Location-Based GHG Emissions Data ⁽⁵⁾
2018						99	%	33,207	(6	)%
2017	99	%	42,947	(10	)%	99	%	36,504	(10	)%
2016	97	%	44,145	N/A		97	%	44,145	N/A


(1)	Full ~~2018~~2019 calendar year energy, water and GHG emissions data is not available until after March 30, ~~2019.~~2020.


(5)	Data reported on a like-for-like comparison excludes assets that have been acquired or disposed over the past twenty-four months as of the end of the applicable year.


(6)	Eligible portfolio represents our office and residential properties that have had 50% or greater occupancy for 12 consecutive months at any point during the applicable year. Percentage is based on rentable square footage of our eligible portfolio that has obtained an energy rating and is certified to ENERGY ~~STAR~~^®STAR® as of the end of the applicable year.


(7)	Percentage based on gross square footage of portfolio floor area with complete water withdrawal data coverage as of the end of the applicable year. Floor area is considered to have complete water withdrawal data coverage when water withdrawal data (i.e., amounts withdrawn) is obtained by the Company for the relevant floor area during the fiscal year, regardless of when such data was obtained.


(8)	Water sources include surface water (including water from wetlands, rivers, lakes and oceans), groundwater, rainwater collected directly and stored by the Company, wastewater obtained from other entities, municipal water supplies or supply from other water utilities. Total water withdrawal based on floor area with complete water withdrawal data coverage as of the end of the applicable year.


(10)	Scope 1 emissions represent those produced by consuming onsite natural gas ~~consumption~~ procured by the Company.


(11)	Percentage based on gross square footage of portfolio floor area with complete Scope 2 GHG emissions data coverage as of the end of the applicable year. Floor area is considered to have complete Scope 2 GHG emissions data coverage when GHG emission data is obtained by the Company for the relevant floor area during the fiscal year, regardless of when such data was obtained.


(12)	Scope 2 emissions represent those produced by consuming onsite electricity ~~consumption~~ procured by the Company. ~~The~~


(13)	We began collecting market-based Scope 2 emissions ~~were calculated using a location-based method per the GHG Protocol Scope 2 Guidance.~~data in 2017.


(1)	Based on all leases at the respective properties in effect as of December 31, ~~2018.~~2019. Includes month-to-month leases as of December 31, ~~2018.~~2019.


(3)	For these properties, the leases are written on a ~~full service gross~~triple net basis.


(5)	For ~~these properties, the leases are written on a triple net basis.~~