UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the quarterly period ended June 30, ~~2019~~2020



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

For the transition period from to

Commission File Number: 1-12675 (Kilroy Realty Corporation)

Commission File Number: 000-54005 (Kilroy Realty, L.P.)

KILROY REALTY ~~CORP~~CORPORATION~~ORATION~~

KILROY REALTY, L.P.

(Exact name of registrant as specified in its charter)




Kilroy Realty Corporation	Maryland	95-4598246
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Kilroy Realty, L.P.	Delaware	95-4612685
	(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(Address of principal executive offices) (Zip Code)

(310) 481-8400



(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)



Securities registered pursuant to Section 12(b) of the Act:
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



Securities registered pursuant to Section 12(g) of the Act:
Registrant	Title of each class
Kilroy Realty, L.P.	Common Units Representing Limited Partnership Interests

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Kilroy Realty Corporation Yes ☑ No ☐

Kilroy Realty, L.P. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Kilroy Realty Corporation Yes ☑ No ☐

Kilroy Realty, L.P. Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Kilroy Realty Corporation

Large accelerated filer ☑ Accelerated filer ☐

Non-accelerated filer ☐ Smaller reporting company ☐

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. ☐

Kilroy Realty, L.P.

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated filer ☑ Smaller reporting company ☐

Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Kilroy Realty Corporation Yes ☐ No ☑

Kilroy Realty, L.P. Yes ☐ No ☑

As of July ~~19, 2019, 100,972,035~~24, 2020, 115,179,550 shares of Kilroy Realty Corporation common stock, par value $.01 per share, were outstanding.

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the period ended June 30, ~~2019~~2020 of Kilroy Realty Corporation and Kilroy Realty, L.P. Unless stated otherwise or the context otherwise requires, references to “Kilroy Realty Corporation” or the “Company,” “we,” “our,” and “us” mean Kilroy Realty Corporation, a Maryland corporation, and its controlled and consolidated subsidiaries, and references to “Kilroy Realty, L.P.” or the “Operating Partnership” mean Kilroy Realty, L.P., a Delaware limited partnership and its controlled and consolidated subsidiaries.

The Company is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of June 30, ~~2019,~~2020, the Company owned an approximate ~~98.0%~~98.3% common general partnership interest in the Operating Partnership. The remaining approximate ~~2.0%~~1.7% common limited partnership interests are owned by non-affiliated investors and certain directors and officers of the Company. As the sole general partner of the Operating Partnership, the Company exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control and can cause it to enter into certain major transactions, including acquisitions, dispositions, and refinancings and cause changes in its line of business, capital structure and distribution policies.

There are a few differences between the Company and the Operating Partnership that are reflected in the disclosures in this Form 10-Q. We believe it is important to understand the differences between the Company and the Operating Partnership in the context of how the Company and the Operating Partnership operate as an interrelated, consolidated company. The Company is a REIT, the only material asset of which is the partnership interests it holds in the Operating Partnership. As a result, the Company generally does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Company itself is not directly obligated under any indebtedness, but generally guarantees all of the debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the Company’s business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by the Company, which the Company generally contributes to the Operating Partnership in exchange for units of partnership interest, the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness or through the issuance of units of partnership interest.

Noncontrolling interests, stockholders’ equity and partners’ capital are the main areas of difference between the consolidated financial statements of the Company and those of the Operating Partnership. The common limited partnership interests in the Operating Partnership are accounted for as partners’ capital in the Operating Partnership’s financial statements and, to the extent not held by the Company, as noncontrolling interests in the Company’s financial statements. The Operating Partnership’s financial statements reflect the noncontrolling interest in Kilroy Realty Finance Partnership, L.P., a Delaware limited partnership (the “Finance Partnership”). This noncontrolling interest represents the Company’s 1% indirect general partnership interest in the Finance Partnership, which is directly held by Kilroy Realty Finance, Inc., a wholly owned subsidiary of the Company. The differences between stockholders’ equity, partners’ capital and noncontrolling interest result from the differences in the equity issued by the Company and the Operating Partnership, and in the Operating Partnership’s noncontrolling interest in the Finance Partnership.

We believe combining the quarterly reports on Form 10-Q of the Company and the Operating Partnership into this single report results in the following benefits:

Combined reports better reflect how management and the analyst community view the business as a single operating unit;

Combined reports enhance investors’ understanding of the Company and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

Combined reports are more efficient for the Company and the Operating Partnership and result in savings in time, effort and expense; and

Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between the Company and the Operating Partnership, this report presents the following separate sections for each of the Company and the Operating Partnership:

consolidated financial statements;

the following notes to the consolidated financial statements:


◦	Note 5,4, Stockholders’ Equity of the Company;


◦	Note 7,6, Partners’ Capital of the Operating Partnership;


◦	Note ~~12,~~11, Net Income Available to Common Stockholders Per Share of the Company;


◦	Note ~~13,~~12, Net Income Available to Common Unitholders Per Unit of the Operating Partnership;


◦	Note ~~14,~~13, Supplemental Cash Flow Information of the Company; and


◦	Note ~~15,~~14, Supplemental Cash Flow Information of the Operating Partnership;

“Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations


◦	—Liquidity and Capital Resources of the Company;” and


◦	—Liquidity and Capital Resources of the Operating Partnership.”

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

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED JUNE 30, ~~2019~~2020

TABLE OF CONTENTS



		Page
	PART I – FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY CORPORATION	1
	Consolidated Balance Sheets as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019	1
	Consolidated Statements of Operations for the Three and Six Months ended June 30, ~~2019~~2020 and ~~2018~~2019	2
	Consolidated Statements of Equity for the Three and Six Months ended June 30, ~~2019~~2020 and ~~2018~~2019	3
	Consolidated Statements of Cash Flows for the Six Months ended June 30, ~~2019~~2020 and ~~2018~~2019	5
Item 1.	FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY, L.P.	6
	Consolidated Balance Sheets as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019	6
	Consolidated Statements of Operations for the Three and Six Months ended June 30, ~~2019~~2020 and ~~2018~~2019	7
	Consolidated Statements of Capital for the Three and Six Months ended June 30, ~~2019~~2020 and ~~2018~~2019	8
	Consolidated Statements of Cash Flows for the Six Months ended June 30, ~~2019~~2020 and ~~2018~~2019	9
	Notes to Unaudited Consolidated Financial Statements	10
Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	2928
Item 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5759
Item 4.	CONTROLS AND PROCEDURES (KILROY REALTY CORPORATION AND KILROY REALTY, L.P.)	5759
	PART II – OTHER INFORMATION
Item 1.	LEGAL PROCEEDINGS	5860
Item 1A.	RISK FACTORS	5860
Item 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5862
Item 3.	DEFAULTS UPON SENIOR SECURITIES	5862
Item 4.	MINE SAFETY DISCLOSURES	5862
Item 5.	OTHER INFORMATION	5862
Item 6.	EXHIBITS	5963
SIGNATURES		6064

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) OF KILROY REALTY CORPORATION

KILROY REALTY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except share data)


	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
ASSETS
REAL ESTATE ASSETS:
Land and improvements	$	1,284,582		$	1,160,138		$	1,546,209		$	1,466,166
Buildings and improvements	5,712,448			5,207,984			6,289,816			5,866,477
Undeveloped land and construction in progress	1,827,528			2,058,510			2,109,196			2,296,130
Total real estate assets held for investment	8,824,558			8,426,632			9,945,221			9,628,773
Accumulated depreciation and amortization	(1,480,766		)	(1,391,368		)	(1,684,837		)	(1,561,361		)
Total real estate assets held for investment, net	7,343,792			7,035,264			8,260,384			8,067,412
CASH AND CASH EQUIVALENTS	52,415			51,604
CASH AND CASH EQUIVALENTS (Note 4)							605,012			60,044
RESTRICTED CASH	6,300			119,430			16,300			16,300
MARKETABLE SECURITIES (Note 11)	25,203			21,779
CURRENT RECEIVABLES, NET (Note 1)	27,563			20,176
DEFERRED RENT RECEIVABLES, NET (Note 1)	297,358			267,007
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 1)	203,451			197,574
RIGHT OF USE GROUND LEASE ASSETS (Notes 1 and 10)	82,647			—
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 3)	55,992			52,873
MARKETABLE SECURITIES (Note 10)							23,175			27,098
CURRENT RECEIVABLES, NET							20,925			26,489
DEFERRED RENT RECEIVABLES, NET							358,914			337,937
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET							209,637			212,805
RIGHT OF USE GROUND LEASE ASSETS (Note 9)							95,940			96,348
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 2)							68,378			55,661
TOTAL ASSETS	$	8,094,721		$	7,765,707		$	9,658,665		$	8,900,094
LIABILITIES AND EQUITY
LIABILITIES:
Secured debt, net (Notes 4 and 11)	$	259,455		$	335,531
Unsecured debt, net (Notes 4 and 11)	2,553,651			2,552,070
Unsecured line of credit (Notes 4, 11 and 16)	375,000			45,000
Secured debt, net (Notes 3 and 10)							$	256,113		$	258,593
Unsecured debt, net (Notes 3, and 10)							3,399,105			3,049,185
Unsecured line of credit (Notes 3 and 10)							—			245,000
Accounts payable, accrued expenses and other liabilities	385,567			374,415			401,378			418,848
Ground lease liabilities (Notes 1 and 10)	87,082			—
Accrued dividends and distributions (Note 16)	50,800			47,559
Ground lease liabilities (Note 9)							98,093			98,400
Accrued dividends and distributions (Note 15)							57,600			53,219
Deferred revenue and acquisition-related intangible liabilities, net	136,266			149,646			129,264			139,488
Rents received in advance and tenant security deposits	59,997			60,225			63,523			66,503
Total liabilities	3,907,818			3,564,446			4,405,076			4,329,236
COMMITMENTS AND CONTINGENCIES (Note 10)
COMMITMENTS AND CONTINGENCIES (Note 9)
EQUITY:
Stockholders’ Equity (Note 5):
Common stock, $.01 par value, 150,000,000 shares authorized, 100,972,035 and 100,746,988 shares issued and outstanding, respectively	1,010			1,007
Stockholders’ Equity (Note 4):
Common stock, $.01 par value, 280,000,000 and 150,000,000 shares authorized, respectively, 115,176,538 and 106,016,287 shares issued and outstanding, respectively							1,152			1,060
Additional paid-in capital	3,984,867			3,976,953			5,084,362			4,350,917
Distributions in excess of earnings (Note 1)	(70,345		)	(48,053		)
Distributions in excess of earnings							(113,223		)	(58,467		)
Total stockholders’ equity	3,915,532			3,929,907			4,972,291			4,293,510
Noncontrolling Interests (Notes 1 and 6):
Noncontrolling Interests (Notes 1 and 5):
Common units of the Operating Partnership	78,463			78,991			83,502			81,917
Noncontrolling interests in consolidated property partnerships	192,908			192,363			197,796			195,431
Total noncontrolling interests	271,371			271,354			281,298			277,348
Total equity	4,186,903			4,201,261			5,253,589			4,570,858
TOTAL LIABILITIES AND EQUITY	$	8,094,721		$	7,765,707		$	9,658,665		$	8,900,094

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except share and per share data)

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
REVENUES (Note 1)
Rental income $ 197,629
$ 164,515
$ 397,011
$ 327,386
Tenant reimbursements —
19,567
—
38,717
Other property income 2,863
2,990
4,683
3,791
Total revenues 200,492
187,072
401,694
369,894
EXPENSES
Property expenses (Note 1) 38,536
32,567
76,685
64,238
Real estate taxes 17,926
17,813
36,565
34,959
Provision for bad debts (Note 1) —
5,641
—
5,376
Ground leases (Notes 1 and 10) 2,114
1,586
4,086
3,147
General and administrative expenses 19,857
21,763
43,198
37,322
Leasing costs (Note 1) 2,650
—
4,407
—
Depreciation and amortization 68,252
64,006
134,387
126,721
Total expenses 149,335
143,376
299,328
271,763
OTHER (EXPENSES) INCOME
Interest income and other net investment gain (Note 11) 616
771
2,444
805
Interest expense (Note 4) (11,727 ) (12,712 ) (22,970 ) (26,210 )
Gains on sales of depreciable operating properties (Note 2) 7,169
—
7,169
—
Total other (expenses) income (3,942 ) (11,941 ) (13,357 ) (25,405 )
NET INCOME 47,215
31,755
89,009
72,726
Net income attributable to noncontrolling common units of the Operating Partnership (871 ) (566 ) (1,571 ) (1,317 )
Net income attributable to noncontrolling interests in consolidated property partnerships (4,150 ) (3,640 ) (8,341 ) (7,614 )
Total income attributable to noncontrolling interests (5,021 ) (4,206 ) (9,912 ) (8,931 )
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 42,194
$ 27,549
$ 79,097
$ 63,795
Net income available to common stockholders per share – basic (Note 12) $ 0.41
$ 0.27
$ 0.77
$ 0.63
Net income available to common stockholders per share – diluted (Note 12) $ 0.41
$ 0.27
$ 0.77
$ 0.63
Weighted average common shares outstanding – basic (Note 12) 100,972,355
99,691,700
100,937,069
99,220,577
Weighted average common shares outstanding – diluted (Note 12) 101,809,541
100,150,856
101,618,953
99,687,682



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
REVENUES
Rental income (Note 8)	$	218,356		$	197,629		$	436,989		$	397,011
Other property income	1,067			2,863			3,762			4,683
Total revenues	219,423			200,492			440,751			401,694
EXPENSES
Property expenses	37,829			38,536			76,812			76,685
Real estate taxes	21,854			17,926			44,056			36,565
Ground leases (Note 9)	2,330			2,114			4,647			4,086
General and administrative expenses (Notes 7 and 10)	38,597			19,857			57,607			43,198
Leasing costs	1,330			2,650			2,786			4,407
Depreciation and amortization	80,085			68,252			154,455			134,387
Total expenses	182,025			149,335			340,363			299,328
OTHER (EXPENSES) INCOME
Interest income and other net investment gain (loss) (Note 10)	2,838			616			(290		)	2,444
Interest expense (Note 3)	(15,884		)	(11,727		)	(30,328		)	(22,970		)
Gains on sales of depreciable operating properties	—			7,169			—			7,169
Total other (expenses) income	(13,046		)	(3,942		)	(30,618		)	(13,357		)
NET INCOME	24,352			47,215			69,770			89,009
Net income attributable to noncontrolling common units of the Operating Partnership	(367		)	(871		)	(1,072		)	(1,571		)
Net income attributable to noncontrolling interests in consolidated property partnerships	(4,367		)	(4,150		)	(9,263		)	(8,341		)
Total income attributable to noncontrolling interests	(4,734		)	(5,021		)	(10,335		)	(9,912		)
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	19,618		$	42,194		$	59,435		$	79,097
Net income available to common stockholders per share – basic (Note 11)	$	0.17		$	0.41		$	0.53		$	0.77
Net income available to common stockholders per share – diluted (Note 11)	$	0.17		$	0.41		$	0.52		$	0.77
Weighted average common shares outstanding – basic (Note 11)	115,084,897			100,972,355			110,980,066			100,937,069
Weighted average common shares outstanding – diluted (Note 11)	115,539,725			101,809,541			111,464,647			101,618,953

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY

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


	Common Stock											Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity			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, 2018	100,746,988		$	1,007		$	3,976,953		$	(48,053	)	$	3,929,907		$	271,354		$	4,201,261
BALANCE AS OF DECEMBER 31, 2019																					106,016,287		$	1,060		$	4,350,917		$	(58,467	)	$	4,293,510		$	277,348		$	4,570,858
Net income									36,903			36,903			4,891			41,794											39,817			39,817			5,601			45,418
Opening adjustment to Distributions in Excess of Earnings upon adoption of ASC 842 (Note 1)									(3,146		)	(3,146		)				(3,146		)
Issuance of common stock (Note 4)																					8,897,110		89			721,705						721,794						721,794
Issuance of share-based compensation awards						2,210						2,210						2,210								1,720						1,720						1,720
Non-cash amortization of share-based compensation (Note 8)						8,817						8,817						8,817
Non-cash amortization of share-based compensation (Note 7)																										8,653						8,653						8,653
Settlement of restricted stock units for shares of common stock	393,240		4			(4		)				—						—			269,972		3			(3		)				—						—
Repurchase of common stock, stock options and restricted stock units	(175,204	)	(1		)	(12,129		)				(12,130		)				(12,130		)	(117,445	)	(1		)	(9,798		)				(9,799		)				(9,799		)
Exchange of common units of the Operating Partnership	2,000		—			78						78			(78		)	—			2,000		—			81						81			(81		)	—
Distributions to noncontrolling interests in consolidated property partnerships												—			(6,309		)	(6,309		)												—			(2,617		)	(2,617		)
Adjustment for noncontrolling interest						279						279			(279		)	—								(6,094		)				(6,094		)	6,094			—
Dividends declared per common share and common unit ($0.455 per share/unit)									(48,394		)	(48,394		)	(921		)	(49,315		)
BALANCE AS OF MARCH 31, 2019	100,967,024		1,010			3,976,204			(62,690		)	3,914,524			268,658			4,183,182
Dividends declared per common share and common unit ($0.485 per share/unit)																													(57,532		)	(57,532		)	(980		)	(58,512		)
BALANCE AS OF MARCH 31, 2020																					115,067,924		1,151			5,067,181			(76,182		)	4,992,150			285,365			5,277,515
Net income									42,194			42,194			5,021			47,215											19,618			19,618			4,734			24,352
Issuance of common stock																					—		—			(45		)				(45		)				(45		)
Issuance of share-based compensation awards						820						820						820								805						805						805
Non-cash amortization of share-based compensation (Note 8)						8,732						8,732						8,732
Exercise of stock options	1,500		—			64						64						64
Non-cash amortization of share-based compensation (Note 7)																										13,576						13,576						13,576
Settlement of restricted stock units for shares of common stock	16,270		—			—						—						—			33,581		—			—						—						—
Repurchase and cancellation of common stock, stock options, and restricted stock units	(12,759	)	—			(793		)				(793		)				(793		)
Repurchase of common stock, stock options and restricted stock units																					(11,668	)	—			(735		)				(735		)				(735		)
Exchange of common units of the Operating Partnership																					86,701		1			3,761						3,762			(3,762		)	—
Distributions to noncontrolling interests in consolidated property partnerships												—			(1,487		)	(1,487		)												—			(4,281		)	(4,281		)
Adjustment for noncontrolling interest						(160		)				(160		)	160			—								(181		)				(181		)	181			—
Dividends declared per common share and common unit ($0.485 per share/unit)									(49,849		)	(49,849		)	(981		)	(50,830		)									(56,659		)	(56,659		)	(939		)	(57,598		)
BALANCE AS OF JUNE 30, 2019	100,972,035		$	1,010		$	3,984,867		$	(70,345	)	$	3,915,532		$	271,371		$4,186,903
BALANCE AS OF JUNE 30, 2020																					115,176,538		$	1,152		$	5,084,362		$	(113,223	)	$	4,972,291		$	281,298		$	5,253,589

~~See accompanying notes to consolidated financial statements.~~

~~KILROY REALTY CORPORATION~~

~~CONSOLIDATED STATEMENTS OF EQUITY~~

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



	Common Stock											Total Stock- holders’ Equity			Noncontrolling Interests			Total Equity
	Number of Shares		Common Stock			Additional Paid-in Capital			Distributions in Excess of Earnings
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									36,903			36,903			4,891			41,794
Opening adjustment to Distributions in Excess of Earnings upon adoption of ASC 842									(3,146		)	(3,146		)				(3,146		)
Issuance of share-based compensation awards						2,210						2,210						2,210
Non-cash amortization of share-based compensation						8,817						8,817						8,817
Settlement of restricted stock units for shares of common stock	393,240		4			(4		)				—						—
Repurchase of common stock, stock options and restricted stock units	(175,204	)	(1		)	(12,129		)				(12,130		)				(12,130		)
Exchange of common units of the Operating Partnership	2,000		—			78						78			(78		)	—
Distributions to noncontrolling interests in consolidated property partnerships												—			(6,309		)	(6,309		)
Adjustment for noncontrolling interest						279						279			(279		)	—
Dividends declared per common share and common unit ($0.455 per share/unit)									(48,394		)	(48,394		)	(921		)	(49,315		)
BALANCE AS OF MARCH 31, 2019	100,967,024		1,010			3,976,204			(62,690		)	3,914,524			268,658			4,183,182
Net income									42,194			42,194			5,021			47,215
Issuance of share-based compensation awards						820						820						820
Non-cash amortization of share-based compensation						8,732						8,732						8,732
Exercise of stock options	1,500		—			64						64						64
Settlement of restricted stock units for shares of common stock	16,270		—			—						—						—
Repurchase and cancellation of common stock, stock options, and restricted stock units	(12,759	)	—			(793		)				(793		)				(793		)
Distributions to noncontrolling interests in consolidated property partnerships												—			(1,487		)	(1,487		)
Adjustment for noncontrolling interest						(160		)				(160		)	160			—
Dividends declared per common share and common unit ($0.485 per share/unit)									(49,849		)	(49,849		)	(981		)	(50,830		)
BALANCE AS OF JUNE 30, 2019	100,972,035		$	1,010		$	3,984,867		$	(70,345	)	$	3,915,532		$	271,371		$	4,186,903

Common Stock
Total
Stock-
holders’
Equity
Noncontrolling Interests
Total
Equity

Number of
Shares

Common
Stock

Additional
Paid-in
Capital

Distributions
in Excess of
Earnings

BALANCE AS OF DECEMBER 31, 2017 98,620,333
$ 986
3,822,492
$ (122,685 ) $ 3,700,793
$ 259,523
$ 3,960,316
Net income 36,246
36,246
4,725
40,971
Issuance of share-based compensation awards 1,864
1,864
1,864
Non-cash amortization of share-based compensation 5,094
5,094
5,094
Settlement of restricted stock units for shares of common stock 405,067
4
(4 ) —
—
Repurchase of common stock, stock options and restricted stock units (192,195 ) (2 ) (13,640 ) (13,642 ) (13,642 )
Exchange of common units of the Operating Partnership 6,503
—
244
244
(244 ) —
Distributions to noncontrolling interests in consolidated property partnerships —
(2,177 ) (2,177 )
Adjustment for noncontrolling interest 335
335
(335 ) —
Dividends declared per common share and common unit ($0.425 per share/unit) (44,075 ) (44,075 ) (879 ) (44,954 )
BALANCE AS OF MARCH 31, 2018 98,839,708
988
3,816,385
(130,514 ) 3,686,859
260,613
3,947,472
Net income 27,549
27,549
4,206
31,755
Issuance of common stock 1,719,195
17
124,130
124,147
124,147
Issuance of share-based compensation awards 589
589
589
Non-cash amortization of share-based compensation 11,503
11,503
11,503
Exercise of stock options 1,000
—
41
41
41
Exchange of common units of the Operating Partnership —
1
—
1
(1 ) —
Distributions to noncontrolling interests in consolidated property partnerships —
(4,288 ) (4,288 )
Adjustment for noncontrolling interest (1,359 ) (1,359 ) 1,359
—
Dividends declared per common share and common unit ($0.455 per share/unit) (46,403 ) (46,403 ) (943 ) (47,346 )
BALANCE AS OF JUNE 30, 2018 100,559,903
$ 1,006
$ 3,951,289
$ (149,368 ) $ 3,802,927
$ 260,946
$ 4,063,873

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)


	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	89,009		$	72,726		$	69,770		$	89,009
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate assets and leasing costs	131,982			124,633			148,419			131,982
Depreciation of non-real estate furniture, fixtures and equipment	2,405			2,088			6,036			2,405
(Recoveries of) provision for bad debts and write-offs (Note 1)	(3,091		)	5,376
Revenue reversals (recoveries) for doubtful accounts (Note 8)							12,381			(3,091		)
Non-cash amortization of share-based compensation awards	14,082			12,267			18,311			14,082
Non-cash amortization of deferred financing costs and debt discounts and premiums	717			582			1,076			717
Non-cash amortization of net below market rents	(4,415		)	(5,481		)	(4,500		)	(4,415		)
Gain on sale of depreciable operating properties (Note 2)	(7,169		)	—
Gain on sale of depreciable operating properties							—			(7,169		)
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements	(8,181		)	(8,869		)	(8,793		)	(8,181		)
Straight-line rents	(29,937		)	(10,566		)	(33,514		)	(29,937		)
Amortization of right of use ground lease assets	291			—			408			291
Net change in other operating assets	(15,540		)	(5,513		)	13,991			(15,540		)
Net change in other operating liabilities	(4,493		)	1,600			437			(4,493		)
Net cash provided by operating activities	165,660			188,843			224,022			165,660
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development properties and undeveloped land	(372,750		)	(204,039		)	(293,711		)	(372,750		)
Expenditures for operating properties	(61,557		)	(74,079		)
Net proceeds received from dispositions (Note 2)	17,271			—
Expenditures for acquisition of operating properties	—			(111,029		)
Expenditures for acquisition of undeveloped land	—			(311,299		)
Net decrease in acquisition-related deposits	—			21,000
Proceeds received from repayment of note receivable	—			15,100
Expenditures for operating properties and other capital assets							(80,630		)	(61,557		)
Net proceeds received from dispositions							—			17,271
Net cash used in investing activities	(417,036		)	(664,346		)	(374,341		)	(417,036		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on unsecured revolving credit facility (Note 4)	425,000			505,000
Repayments on unsecured revolving credit facility (Notes 4 and 16)	(95,000		)	(180,000		)
Borrowings on unsecured debt	—			120,000
Principal payments and repayments of secured debt (Note 4)	(75,384		)	(1,768		)
Net proceeds from issuance of common stock (Note 4)							721,749			—
Proceeds from the issuance of unsecured debt (Note 3)							350,000			—
Borrowings on unsecured revolving credit facility (Note 3)							190,000			425,000
Repayments on unsecured revolving credit facility (Note 3)							(435,000		)	(95,000		)
Principal payments and repayments of secured debt (Note 3)							(2,543		)	(75,384		)
Financing costs	(1,335		)	(1,840		)	(2,283		)	(1,335		)
Net proceeds from issuance of common stock	—			124,147
Repurchase of common stock and restricted stock units	(12,618		)	(13,642		)	(10,534		)	(12,618		)
Proceeds from exercise of stock options	64			41			—			64
Distributions to noncontrolling interests in consolidated property partnerships	(7,812		)	(6,485		)	(6,915		)	(7,812		)
Dividends and distributions paid to common stockholders and common unitholders	(93,858		)	(85,931		)	(109,187		)	(93,858		)
Net cash provided by financing activities	139,057			459,522			695,287			139,057
Net decrease in cash and cash equivalents and restricted cash	(112,319		)	(15,981		)
Net increase (decrease) in cash and cash equivalents and restricted cash							544,968			(112,319		)
Cash and cash equivalents and restricted cash, beginning of period	171,034			66,798			76,344			171,034
Cash and cash equivalents and restricted cash, end of period	$	58,715		$	50,817		$	621,312		$	58,715

See accompanying notes to consolidated financial statements.

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

KILROY REALTY, L.P.

CONSOLIDATED BALANCE SHEETS

(Unaudited; in thousands, except unit data)


	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
ASSETS
REAL ESTATE ASSETS:
Land and improvements	$	1,284,582		$	1,160,138		$	1,546,209		$	1,466,166
Buildings and improvements	5,712,448			5,207,984			6,289,816			5,866,477
Undeveloped land and construction in progress	1,827,528			2,058,510			2,109,196			2,296,130
Total real estate assets held for investment	8,824,558			8,426,632			9,945,221			9,628,773
Accumulated depreciation and amortization	(1,480,766		)	(1,391,368		)	(1,684,837		)	(1,561,361		)
Total real estate assets held for investment, net	7,343,792			7,035,264			8,260,384			8,067,412
CASH AND CASH EQUIVALENTS	52,415			51,604
CASH AND CASH EQUIVALENTS (Note 4)							605,012			60,044
RESTRICTED CASH	6,300			119,430			16,300			16,300
MARKETABLE SECURITIES (Note 11)	25,203			21,779
CURRENT RECEIVABLES, NET (Note 1)	27,563			20,176
DEFERRED RENT RECEIVABLES, NET (Note 1)	297,358			267,007
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET (Note 1)	203,451			197,574
RIGHT OF USE GROUND LEASE ASSETS (Notes 1 and 10)	82,647			—
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 3)	55,992			52,873
MARKETABLE SECURITIES (Note 10)							23,175			27,098
CURRENT RECEIVABLES, NET							20,925			26,489
DEFERRED RENT RECEIVABLES, NET							358,914			337,937
DEFERRED LEASING COSTS AND ACQUISITION-RELATED INTANGIBLE ASSETS, NET							209,637			212,805
RIGHT OF USE GROUND LEASE ASSETS (Note 9)							95,940			96,348
PREPAID EXPENSES AND OTHER ASSETS, NET (Note 2)							68,378			55,661
TOTAL ASSETS	$	8,094,721		$	7,765,707		$	9,658,665		$	8,900,094
LIABILITIES AND CAPITAL
LIABILITIES:
Secured debt, net (Notes 4 and 11)	$	259,455		$	335,531
Unsecured debt, net (Notes 4 and 11)	2,553,651			2,552,070
Unsecured line of credit (Notes 4, 11 and 16)	375,000			45,000
Secured debt, net (Notes 3 and 10)							$	256,113		$	258,593
Unsecured debt, net (Notes 3, 10)							3,399,105			3,049,185
Unsecured line of credit (Notes 3 and 10)							—			245,000
Accounts payable, accrued expenses and other liabilities	385,567			374,415			401,378			418,848
Ground lease liabilities (Notes 1 and 10)	87,082			—
Accrued distributions (Note 16)	50,800			47,559
Ground lease liabilities (Note 9)							98,093			98,400
Accrued distributions (Note 15)							57,600			53,219
Deferred revenue and acquisition-related intangible liabilities, net	136,266			149,646			129,264			139,488
Rents received in advance and tenant security deposits	59,997			60,225			63,523			66,503
Total liabilities	3,907,818			3,564,446			4,405,076			4,329,236
COMMITMENTS AND CONTINGENCIES (Note 10)
COMMITMENTS AND CONTINGENCIES (Note 9)
CAPITAL:
Common units, 100,972,035 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 6)	3,988,538			4,003,700
Common units, 115,176,538 and 106,016,287 held by the general partner and 1,934,586 and 2,023,287 held by common limited partners issued and outstanding, respectively (Note 6)							5,049,844			4,369,758
Noncontrolling interests in consolidated property partnerships and subsidiaries (Note 1)	198,365			197,561			203,745			201,100
Total capital	4,186,903			4,201,261			5,253,589			4,570,858
TOTAL LIABILITIES AND CAPITAL	$	8,094,721		$	7,765,707		$	9,658,665		$	8,900,094

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited; in thousands, except unit and per unit data)

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
REVENUES (Note 1)
Rental income $ 197,629
$ 164,515
$ 397,011
$ 327,386
Tenant reimbursements —
19,567
—
38,717
Other property income 2,863
2,990
4,683
3,791
Total revenues 200,492
187,072
401,694
369,894
EXPENSES
Property expenses (Note 1) 38,536
32,567
76,685
64,238
Real estate taxes 17,926
17,813
36,565
34,959
Provision for bad debts (Note 1) —
5,641
—
5,376
Ground leases (Note 1 and 10) 2,114
1,586
4,086
3,147
General and administrative expenses 19,857
21,763
43,198
37,322
Leasing costs (Note 1) 2,650
—
4,407
—
Depreciation and amortization 68,252
64,006
134,387
126,721
Total expenses 149,335
143,376
299,328
271,763
OTHER (EXPENSES) INCOME
Interest income and other net investment gain (Note 11) 616
771
2,444
805
Interest expense (Note 4) (11,727 ) (12,712 ) (22,970 ) (26,210 )
Gains on sales of depreciable operating properties (Note 2) 7,169
—
7,169
—
Total other (expenses) income (3,942 ) (11,941 ) (13,357 ) (25,405 )
NET INCOME 47,215
31,755
89,009
72,726
Net income attributable to noncontrolling interests in consolidated property partnerships and subsidiaries (4,314 ) (3,740 ) (8,600 ) (7,818 )
NET INCOME AVAILABLE TO COMMON UNITHOLDERS $ 42,901
$ 28,015
$ 80,409
$ 64,908
Net income available to common unitholders per unit – basic (Note 13) $ 0.41
$ 0.27
$ 0.77
$ 0.63
Net income available to common unitholders per unit – diluted (Note 13) $ 0.41
$ 0.27
$ 0.77
$ 0.63
Weighted average common units outstanding – basic (Note 13) 102,995,642
101,762,390
102,960,599
101,291,549
Weighted average common units outstanding – diluted (Note 13) 103,832,828
102,221,546
103,642,483
101,758,654



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
REVENUES
Rental income (Note 8)	$	218,356		$	197,629		$	436,989		$	397,011
Other property income	1,067			2,863			3,762			4,683
Total revenues	219,423			200,492			440,751			401,694
EXPENSES
Property expenses	37,829			38,536			76,812			76,685
Real estate taxes	21,854			17,926			44,056			36,565
Ground leases (Note 9)	2,330			2,114			4,647			4,086
General and administrative expenses (Notes 7 and 10)	38,597			19,857			57,607			43,198
Leasing costs	1,330			2,650			2,786			4,407
Depreciation and amortization	80,085			68,252			154,455			134,387
Total expenses	182,025			149,335			340,363			299,328
OTHER (EXPENSES) INCOME
Interest income and other net investment gain (loss) (Note 10)	2,838			616			(290		)	2,444
Interest expense (Note 3)	(15,884		)	(11,727		)	(30,328		)	(22,970		)
Gains on sales of depreciable operating properties	—			7,169			—			7,169
Total other (expenses) income	(13,046		)	(3,942		)	(30,618		)	(13,357		)
NET INCOME	24,352			47,215			69,770			89,009
Net income attributable to noncontrolling interests in consolidated property partnerships and subsidiaries	(4,514		)	(4,314		)	(9,543		)	(8,600		)
NET INCOME AVAILABLE TO COMMON UNITHOLDERS	$	19,838		$	42,901		$	60,227		$	80,409
Net income available to common unitholders per unit – basic (Note 12)	$	0.16		$	0.41		$	0.52		$	0.77
Net income available to common unitholders per unit – diluted (Note 12)	$	0.16		$	0.41		$	0.52		$	0.77
Weighted average common units outstanding – basic (Note 12)	117,098,562			102,995,642			112,997,795			102,960,599
Weighted average common units outstanding – diluted (Note 12)	117,553,390			103,832,828			113,482,376			103,642,483

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CAPITAL

(Unaudited; in thousands, except unit and per unit data)


	Partners’ Capital					Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries						Partners’ Capital					Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
	Number of Common Units		Common Units						Total Capital			Number of Common Units		Common Units						Total Capital
BALANCE AS OF DECEMBER 31, 2018	102,772,275		$	4,003,700		$	197,561		$	4,201,261
BALANCE AS OF DECEMBER 31, 2019												108,039,574		$	4,369,758		$	201,100		$	4,570,858
Net income			37,508			4,286			41,794					40,389			5,029			45,418
Opening adjustment to Partners’ Capital upon adoption of ASC 842 (Note 1)			(3,146		)				(3,146		)
Issuance of common units (Note 4)												8,897,110		721,794						721,794
Issuance of share-based compensation awards			2,210						2,210					1,720						1,720
Non-cash amortization of share-based compensation (Note 8)			8,817						8,817
Non-cash amortization of share-based compensation (Note 7)														8,653						8,653
Settlement of restricted stock units	393,240		—						—			269,972		—						—
Repurchase of common units, stock options and restricted stock units	(175,204	)	(12,130		)				(12,130		)	(117,445	)	(9,799		)				(9,799		)
Distributions to noncontrolling interests in consolidated property partnerships						(6,309		)	(6,309		)						(2,617		)	(2,617		)
Distributions declared per common unit ($0.455 per unit)			(49,315		)				(49,315		)
BALANCE AS OF MARCH 31, 2019	102,990,311		3,987,644			195,538			4,183,182
Distributions declared per common unit ($0.485 per unit)														(58,512		)				(58,512		)
BALANCE AS OF MARCH 31, 2020												117,089,211		5,074,003			203,512			5,277,515
Net income			42,901			4,314			47,215					19,838			4,514			24,352
Issuance of common units												—		(45		)				(45		)
Issuance of share-based compensation awards			820						820					805						805
Non-cash amortization of share-based compensation (Note 8)			8,732						8,732
Exercise of stock options	1,500		64						64
Non-cash amortization of share-based compensation (Note 7)														13,576						13,576
Settlement of restricted stock units	16,270		—						—			33,581		—						—
Repurchase and cancellation of common units, stock options, and restricted stock units	(12,759	)	(793		)				(793		)
Repurchase of common units, stock options and restricted stock units												(11,668	)	(735		)				(735		)
Distributions to noncontrolling interests in consolidated property partnerships						(1,487		)	(1,487		)						(4,281		)	(4,281		)
Distributions declared per common unit ($0.485 per unit)			(50,830		)				(50,830		)			(57,598		)				(57,598		)
BALANCE AS OF JUNE 30, 2019	102,995,322		$	3,988,538		$	198,365		$4,186,903
BALANCE AS OF JUNE 30, 2020												117,111,124		$	5,049,844		$	203,745		$	5,253,589

Partners’ Capital Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries

Number of
Common
Units

Common
Units

Total
Capital
BALANCE AS OF DECEMBER 31, 2017 100,697,526
$ 3,773,941
$ 186,375
$ 3,960,316
Net income 36,893
4,078
40,971
Issuance of share-based compensation awards 1,864
1,864
Non-cash amortization of share-based compensation 5,094
5,094
Settlement of restricted stock units 405,067
—
—
Repurchase of common units, stock options and restricted stock units (192,195 ) (13,642 ) (13,642 )
Distributions to noncontrolling interests in consolidated property partnerships (2,177 ) (2,177 )
Distributions declared per common unit ($0.425 per unit) (44,954 ) (44,954 )
BALANCE AS OF MARCH 31, 2018 100,910,398
3,759,196
188,276
3,947,472
Net income 28,015
3,740
31,755
Issuance of common units 1,719,195
124,147
124,147
Issuance of share-based compensation awards 589
589
Non-cash amortization of share-based compensation 11,503
11,503
Exercise of stock options 1,000
41
41
Distributions to noncontrolling interests in consolidated property partnerships (4,288 ) (4,288 )
Distributions declared per common unit ($0.455 per unit) (47,346 ) (47,346 )
BALANCE AS OF JUNE 30, 2018 102,630,593
$ 3,876,145
$ 187,728
$ 4,063,873



	Partners’ Capital					Noncontrolling Interests in Consolidated Property Partnerships and Subsidiaries
	Number of Common Units		Common Units						Total Capital
BALANCE AS OF DECEMBER 31, 2018	102,772,275		$	4,003,700		$	197,561		$	4,201,261
Net income			37,508			4,286			41,794
Opening adjustment to Partners’ Capital upon adoption of ASC 842			(3,146		)				(3,146		)
Issuance of share-based compensation awards			2,210						2,210
Non-cash amortization of share-based compensation			8,817						8,817
Settlement of restricted stock units	393,240		—						—
Repurchase of common units, stock options and restricted stock units	(175,204	)	(12,130		)				(12,130		)
Distributions to noncontrolling interests in consolidated property partnerships						(6,309		)	(6,309		)
Distributions declared per common unit ($0.455 per unit)			(49,315		)				(49,315		)
BALANCE AS OF MARCH 31, 2019	102,990,311		3,987,644			195,538			4,183,182
Net income			42,901			4,314			47,215
Issuance of share-based compensation awards			820						820
Non-cash amortization of share-based compensation			8,732						8,732
Exercise of stock options	1,500		64						64
Settlement of restricted stock units	16,270		—						—
Repurchase and cancellation of common units, stock options, and restricted stock units	(12,759	)	(793		)				(793		)
Distributions to noncontrolling interests in consolidated property partnerships						(1,487		)	(1,487		)
Distributions declared per common unit ($0.485 per unit)			(50,830		)				(50,830		)
BALANCE AS OF JUNE 30, 2019	102,995,322		$	3,988,538		$	198,365		$	4,186,903

See accompanying notes to consolidated financial statements.

KILROY REALTY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited; in thousands)


	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	89,009		$	72,726		$	69,770		$	89,009
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate assets and leasing costs	131,982			124,633			148,419			131,982
Depreciation of non-real estate furniture, fixtures and equipment	2,405			2,088			6,036			2,405
(Recoveries of) provision for bad debts and write-offs (Note 1)	(3,091		)	5,376
Revenue reversals (recoveries) for doubtful accounts (Note 8)							12,381			(3,091		)
Non-cash amortization of share-based compensation awards	14,082			12,267			18,311			14,082
Non-cash amortization of deferred financing costs and debt discounts and premiums	717			582			1,076			717
Non-cash amortization of net below market rents	(4,415		)	(5,481		)	(4,500		)	(4,415		)
Gain on sale of depreciable operating properties (Note 2)	(7,169		)	—
Gain on sale of depreciable operating properties							—			(7,169		)
Non-cash amortization of deferred revenue related to tenant-funded tenant improvements	(8,181		)	(8,869		)	(8,793		)	(8,181		)
Straight-line rents	(29,937		)	(10,566		)	(33,514		)	(29,937		)
Amortization of right of use ground lease assets	291			—			408			291
Net change in other operating assets	(15,540		)	(5,513		)	13,991			(15,540		)
Net change in other operating liabilities	(4,493		)	1,600			437			(4,493		)
Net cash provided by operating activities	165,660			188,843			224,022			165,660
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for development properties and undeveloped land	(372,750		)	(204,039		)	(293,711		)	(372,750		)
Expenditures for operating properties	(61,557		)	(74,079		)
Net proceeds received from dispositions (Note 2)	17,271			—
Expenditures for acquisition of operating properties	—			(111,029		)
Expenditures for acquisition of undeveloped land	—			(311,299		)
Net decrease in acquisition-related deposits	—			21,000
Proceeds received from repayment of note receivable	—			15,100
Expenditures for operating properties and other capital assets							(80,630		)	(61,557		)
Net proceeds received from dispositions							—			17,271
Net cash used in investing activities	(417,036		)	(664,346		)	(374,341		)	(417,036		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on unsecured revolving credit facility (Note 4)	425,000			505,000
Repayments on unsecured revolving credit facility (Notes 4 and 16)	(95,000		)	(180,000		)
Borrowings on unsecured debt	—			120,000
Principal payments and repayments of secured debt (Note 4)	(75,384		)	(1,768		)
Net proceeds from issuance of common units (Note 4)							721,749			—
Proceeds from the issuance of unsecured debt (Note 3)							350,000			—
Borrowings on unsecured revolving credit facility (Note 3)							190,000			425,000
Repayments on unsecured revolving credit facility (Note 3)							(435,000		)	(95,000		)
Principal payments and repayments of secured debt (Note 3)							(2,543		)	(75,384		)
Financing costs	(1,335		)	(1,840		)	(2,283		)	(1,335		)
Net proceeds from issuance of common units	—			124,147
Repurchase of common units and restricted stock units	(12,618		)	(13,642		)	(10,534		)	(12,618		)
Proceeds from exercise of stock options	64			41			—			64
Distributions to noncontrolling interests in consolidated property partnerships	(7,812		)	(6,485		)	(6,915		)	(7,812		)
Distributions paid to common unitholders	(93,858		)	(85,931		)	(109,187		)	(93,858		)
Net cash provided by financing activities	139,057			459,522			695,287			139,057
Net decrease in cash and cash equivalents and restricted cash	(112,319		)	(15,981		)
Net increase (decrease) in cash and cash equivalents and restricted cash							544,968			(112,319		)
Cash and cash equivalents and restricted cash, beginning of period	171,034			66,798			76,344			171,034
Cash and cash equivalents and restricted cash, end of period	$58,715			$	50,817		$	621,312		$	58,715

See accompanying notes to consolidated financial statements.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization, Ownership and Basis of Presentation

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 June 30, ~~2019:~~2020:

Number of
Buildings

Rentable
Square Feet

Number of
Tenants

Percentage
Occupied
Percentage Leased
Stabilized Office Properties 94
13,546,615
461
93.8 % 97.2 %



	Number of Buildings	Rentable Square Feet	Number of Tenants	Percentage Occupied		Percentage Leased
Stabilized Office Properties⁽¹⁾	114	14,327,872	473	92.3	%	96.0	%

________________________


(1)	Includes stabilized retail space.

Number of
Buildings
Number of
Units
2019 Average Occupancy
Stabilized Residential Property 1
200
73.4 %



	Number of Buildings	Number of Units	2020 Average Occupancy
Stabilized Residential Property	1	200	89.3	%

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 ~~three~~six months ended June 30, ~~2019,~~2020, we added ~~one~~2 development ~~project~~projects to our stabilized ~~office~~ portfolio consisting of ~~394,340~~750,370 square feet of office space in San Francisco, California and 95,871square feet of retail space in San Diego, California. As of June 30, ~~2019,~~2020, the following properties were excluded from our stabilized portfolio. We did not have any redevelopment properties or properties held for sale at June 30, ~~2019.~~2020.

Number of
Properties/Projects

Estimated Rentable
Square Feet ⁽¹⁾
In-process development projects - tenant improvement⁽²⁾
2 846,000
In-process development projects - under construction ⁽³⁾
5 2,095,000

~~________________________~~


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


~~(2)~~	~~Includes 96,000 square feet of retail space.~~


~~(3)~~	~~In addition to the estimated office rentable square feet noted above, development projects under construction also include 801 residential units.~~



	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾ / Units
In-process development projects - tenant improvement	3	1,275,000
In-process development projects - under construction ⁽²⁾	5	1,016,000
Completed residential development project ⁽³⁾	2	462 units

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

________________________


(1)	Estimated rentable square feet upon completion.


(2)	In addition to the estimated office and life science rentable square feet noted above, development projects under construction also include 339 residential units.


(3)	Represents recently completed residential phases I and II at our mixed-use development in San Diego, California that are not yet stabilized.

Our stabilized portfolio also excludes our future development pipeline, which as of June 30, ~~2019~~2020 was comprised of ~~fourpotential~~5 future development sites, representing approximately 5961 gross acres of undeveloped land.

As of June 30, ~~2019,~~2020, 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~~in the tenant improvement phase and 1 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. Two~~partnerships and 2 development projects held by consolidated variable interest entities established to facilitate potential transactions intended to qualify as like kind exchanges pursuant to Section 1031 of the ~~three~~Code (“Section 1031 Exchange”). NaN of the 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 June 30, ~~2019,~~2020, 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 June 30, ~~2019,~~2020, 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.

Ownership and 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.

As of June 30, ~~2019,~~2020, the Company owned an approximate ~~98.0%~~98.3% common general partnership interest in the Operating Partnership. The remaining approximate ~~2.0%~~1.7% common limited partnership interest in the Operating Partnership as of June 30, ~~2019~~2020 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.

The accompanying interim financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conjunction with the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures required for annual financial statements have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, the interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying interim financial statements reflect all adjustments of a normal and recurring nature that are considered necessary for a fair presentation of the results for the interim periods presented. However, the results of operations for the interim periods are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2019.~~2020. The interim financial statements for the Company and the Operating Partnership should be read in conjunction with the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Variable Interest Entities

The Operating Partnership is a variable interest entity (“VIE”) that is consolidated by the Company as the primary beneficiary as the Operating Partnership is a limited partnership in which the common limited partners do not have substantive kick-out or participating rights. At June 30, 2019, the consolidated financial statements of the Company included two VIEs in addition to the Operating Partnership: 100 First LLC and 303 Second LLC. At June 30, 2019, the Operating Partnership was determined to be the primary beneficiary of these two VIEs since the Operating Partnership had the ability to control the activities that most significantly impact each of the VIE’s economic performance. As of June 30, 2019, the two VIEs’ total assets, liabilities and noncontrolling interests included on our consolidated balance sheet were approximately $457.3 million (of which $392.0 million related to real estate held for investment), approximately $30.9 million and approximately $187.0 million, respectively. Revenues,

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

participating rights. At June 30, 2020, 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 and 303 Second LLC, and 2 entities established during the fourth quarter of 2019 to facilitate potential future Section 1031 Exchanges. At June 30, 2020, 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 June 30, 2020, the 4 VIEs’ total assets, liabilities and noncontrolling interests included on our consolidated balance sheet were approximately $686.4 million (of which $598.0 million related to real estate held for investment), approximately $42.7 million and approximately $192.1 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,~~2019, the consolidated financial statements of the Company ~~and the Operating Partnership~~ included ~~three~~4 VIEs in which we were deemed to be the primary ~~beneficiary:~~beneficiary (in addition to the Operating Partnership): 2 of the consolidated property partnerships, 100 First LLC and 303 Second LLC, and ~~an entity~~2 entities established during the fourth quarter of ~~2018~~2019 to facilitate a ~~transaction intended to qualify as a like-kind exchange pursuant to~~ Section 1031 ~~of the Code (“Section 1031 Exchange”). In January 2019, the Section 1031 Exchange was successfully completed and the related VIE was terminated.~~Exchange. At December 31, ~~2018,~~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. At December 31, 2019, the impact of consolidating the VIEs increased the Company’s total assets, liabilities and noncontrolling interests on our consolidated balance sheet by approximately ~~$615.4~~$676.7 million (of which ~~$543.9~~$598.0 million related to real estate held for investment), approximately ~~$45.1~~$40.1 million and approximately ~~$186.4~~$189.6 million, respectively.

Accounting Pronouncements Adopted January 1, ~~2019~~

Effective January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) 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.

~~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 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 will be 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, rental revenues, tenant reimbursements 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 three and six months ended June 30, 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 three and six months ended June 30, 2019, we incurred additional property expenses of $3.1 million and $6.1 million, respectively, 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 three and six months ended June 30, 2019:

Three Months Ended Six Months Ended
June 30, 2019 June 30, 2019
(in thousands)
Fixed lease payments $ 173,013
$ 344,827
Variable lease payments 24,616
52,184
Total rental income $ 197,629
$ 397,011

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

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

~~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 Company will no longer capitalize internal leasing costs and third-party legal leasing costs and instead will expense 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 three and six months ended June 30, 2019, the Company expensed approximately $3.4 million and $6.0 million, respectively, 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.

~~Allowances for Tenant and Deferred Rent Receivables~~

Upon the adoption of Topic 842 on January 1, 2019, our determination of the adequacy of the Company’s allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts 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. In addition, for tenant and deferred rent receivables deemed probable of collection we also may record an allowance under other authoritative GAAP depending upon our evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income on our consolidated statements of operations.

~~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 four existing ground leases which were classified as operating leases. We elected to apply the practical expedient to use hindsight in determining the lease term of our existing ground leases. As discussed above, the Company also 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. 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, refer to Note 10.

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.

~~The following are our updated significant accounting policies that have been affected by the adoption of Topic 842.~~

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

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

~~Significant Accounting Policies~~

~~Revenue Recognition and Allowances for Tenant and Deferred Rent Receivables~~

We recognize revenue from rent, tenant reimbursements, 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.

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, 2019, the allowances are increased or decreased through provision for bad debts on our consolidated statements of operations. Upon the adoption of Topic 842 on January 1, 2019, our determination of the adequacy of the Company's allowances for tenant receivables includes a binary assessment of whether or not the amounts due under a tenant’s lease agreement are probable of collection. For such amounts that are deemed probable of collection, revenue continues to be recorded on a straight-line basis over the lease term. For such amounts 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. In addition, for tenant and deferred rent receivables deemed probable of collection we also may record an allowance under other authoritative GAAP depending upon our evaluation of the individual receivables, specific credit enhancements, current economic conditions, and other relevant factors. Such allowances are recorded as increases or decreases through rental income on our consolidated statements of operations. For the ~~three~~ ~~months ended June 30, 2019, we recorded a provision for bad debts of $0.2 million. For the~~ ~~six~~ months ended June 30, 2019, we recorded a net reversal of allowance for tenant and deferred rent receivables of $3.3 million primarily due to the improved credit quality of a tenant that we previously recorded a provision against during the three months ended June 30, 2018. For the three and six months ended June 30, 2018, we recorded a provision for bad debts of $5.6 million and $5.4 million, respectively, primarily related to this tenant.

Rental revenue recognition commences when 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 complete and 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 or controls the physical use of the leased 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 over the term of the related lease.

When we conclude that the tenant is the owner of tenant improvements for accounting purposes, we record our contribution towards those 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 income 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.

~~Tenant Reimbursements~~

Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes and other recoverable costs, are recognized in rental income subsequent to the adoption of Topic 842 in the period the recoverable costs are incurred. Tenant reimbursements 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.

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

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

~~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 accounted for at the point in time when control of the goods or services transfers to the customer and our performance obligation is satisfied.

~~Accounting Pronouncements Effective in~~ 2020 ~~and Beyond~~

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

~~On June 16, 2016, the~~Effective January 1, 2020, we adopted Financial Accounting Standards Board (“FASB”) FASB ~~issued ASU~~Accounting Standards Update (“ASU”) No. 2016-13 (“ASU 2016-13”) ~~to amend~~, which amends 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 ~~Instrument~~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~~The adoption ~~is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company does~~did not ~~anticipate that the guidance will~~ have a material impact on ~~its~~our consolidated financial statements or notes to ~~its~~our consolidated financial statements.

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

~~On August 28, 2018, the~~Effective January 1, 2020, we adopted FASB ~~issued~~ ASU No. 2018-13 (“ASU 2018-13”) ~~to amend~~, which amends 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 (the “Concepts Statement”), which the FASB finalized on August 28, 2018. The FASB used the guidance in the Concepts Statement to improve the effectiveness of Topic 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~~The adoption ~~is permitted for any eliminated or modified disclosures. The Company currently anticipates that the guidance will~~did not have a ~~significant~~material impact on ~~the disclosures in the~~our consolidated financial statements or notes to ~~its~~our consolidated financial statements.

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

~~On August 29, 2018, the~~Effective January 1, 2020, we adopted FASB ~~issued~~ ASU No. 2018-15 (“ASU 2018-15”) ~~to amend~~, which amends 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~~The 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 thedid not have a material impact ~~of ASU 2018-15~~ on ~~its~~our consolidated financial statements ~~and~~or notes to ~~its~~our consolidated financial statements.

COVID-19 Pandemic

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

COVID-19 Lease Modification Accounting Relief

Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, many lessors may be required to provide rent deferrals and other lease concessions to lessees. While the lease modification guidance in Accounting Standards Codification (“ASC”) Topic 842 (“Topic 842”) addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, this guidance did not contemplate concessions being so rapidly executed to address the sudden liquidity constraints of some lessees arising from the COVID-19 pandemic and restrictions intended to prevent its spread.

In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows the Company, if certain criteria have been met, to bypass the lease by lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company has elected to apply such relief and availed itself of the election to avoid performing a lease by lease analysis. In addition, the Company has elected to apply the lease modification accounting framework consistently to leases within the property types in which it invests, specifically office, residential and retail properties.

2. ~~Dispositions~~Prepaid Expenses and Other Assets, Net

~~Operating Property Dispositions~~

~~The~~Prepaid expenses and other assets, net consisted of the following ~~table summarizes the operating property sold during the six months ended~~at June 30, 2020 and December 31, 2019:

Location Month of Disposition Number of Buildings Rentable Square Feet
Sales Price
(in millions) ⁽¹⁾
2829 Townsgate Road, Thousand Oaks, CA May 1 84,098
$ 18.3



	June 30, 2020		December 31, 2019
	(in thousands)
Furniture, fixtures and other long-lived assets, net	$	53,060	$	35,286
Prepaid expenses	15,318		18,724
Note receivable ⁽¹⁾	—		1,651
Total prepaid expenses and other assets, net	$	68,378	$	55,661

~~__________________~~________________________

(1)

~~Represents gross sales price before~~During the ~~impact~~six months ended June 30, 2020, the balance of ~~broker commissions~~the note receivable was written-off and ~~closing costs.~~the note receivable was placed on non-accrual status. We do not recognize interest income on non-accrual financing receivables. As of December 31, 2019 the note receivable was shown net of a valuation allowance of approximately $3.6 million.

~~The total gain on the sale of the operating property sold during the six months ended June 30, 2019 was $7.2 million.~~

1513

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

3. ~~Prepaid Expenses and Other Assets, Net~~

~~Prepaid expenses and other assets, net consisted of the following at June 30, 2019 and December 31, 2018:~~

June 30, 2019 December 31, 2018
(in thousands)
Furniture, fixtures and other long-lived assets, net $ 36,466
$ 36,833
Notes receivable, net ⁽¹⁾
1,542
2,113
Prepaid expenses 17,984
13,927
Total prepaid expenses and other assets, net $ 55,992
$ 52,873

~~________________________~~


~~(1)~~	~~Notes receivable are shown net of a valuation allowance of approximately $3.6 million and $2.9 million as of June 30, 2019 and December 31, 2018, respectively.~~

4. Secured and Unsecured Debt of the Operating Partnership

~~Secured Debt~~

~~On February 11, 2019, the Company repaid at par a secured mortgage note payable for $74.3 million that was due in June 2019.~~

~~Unsecured Debt~~

The Company generally guarantees all of the Operating Partnership’s unsecured debt obligations including the unsecured revolving credit facility, the unsecured term loan facility and all of the unsecured senior notes.

Unsecured Senior Notes - Private Placement

On April 28, 2020, the Operating Partnership entered into a Note Purchase Agreement in connection with the issuance and sale of $350.0 million principal amount of the Operating Partnership’s 4.27% Senior Notes due January 31, 2031 (the “Notes”), pursuant to a private placement. The Notes mature on their due date, unless earlier redeemed or prepaid pursuant to the terms of the Note Purchase Agreement. Interest on the Notes is payable semi-annually in arrears on April 18 and October 18 of each year beginning October 18, 2020.

The Operating Partnership may, at its option and upon notice to the purchasers of the Notes, prepay at any time all, or from time to time, any part of the principal amount then outstanding (in an amount not less than 5% of the aggregate principal amount 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 Note Purchase Agreement.

In connection with the issuance of the Notes, the Company entered into an agreement whereby it will guarantee the payment by the Operating Partnership of all amounts due with respect to the Notes and the performance by the Operating Partnership of its obligations under the Note Purchase Agreement.

Unsecured Revolving Credit Facility and Term Loan Facility

The following table summarizes the balance and terms of our unsecured revolving credit facility as of June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
	(in thousands)						(in thousands)
Outstanding borrowings	$	375,000		$	45,000		$	—		$	245,000
Remaining borrowing capacity	375,000			705,000			750,000			505,000
Total borrowing capacity ⁽¹⁾	$	750,000		$	750,000		$	750,000		$	750,000
Interest rate ⁽²⁾	3.41		%	3.48		%	1.16		%	2.76		%
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 June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

(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 June 30, ~~2019~~2020 and December 31, ~~2018, $4.0~~2019, $2.7 million and ~~$4.7~~$3.4 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.~~debt and to supplement cash balances given uncertainties and volatility in market conditions.

The following table summarizes the balance and terms of our unsecured term loan facility as of June 30, 2020 and December 31, 2019:



	June 30, 2020			December 31, 2019
	(in thousands)
Outstanding borrowings	$	150,000		$	150,000
Remaining borrowing capacity	—			—
Total borrowing capacity ⁽¹⁾	$	150,000		$	150,000
Interest rate ⁽²⁾	1.28		%	2.85		%
Undrawn facility fee-annual rate	0.200%
Maturity date	July 2022

1614

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~The following table summarizes the balance and terms of our unsecured term loan facility as of June 30, 2019 and December 31, 2018:~~

June 30, 2019 December 31, 2018
(in thousands)
Outstanding borrowings $ 150,000
$ 150,000
Remaining borrowing capacity —
—
Total borrowing capacity ⁽¹⁾
$ 150,000
$ 150,000
Interest rate ⁽²⁾
3.52 % 3.49 %
Undrawn facility fee-annual rate ⁽³⁾
0.200%
Maturity date July 2022

________________________


(1)	As of June 30, ~~2019~~2020 and December 31, ~~2018, $0.8~~2019, $0.5 million and ~~$0.9~~$0.7 million of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured term loan facility.


(2)	Our unsecured term loan facility interest rate was calculated based on the contractual rate of LIBOR plus 1.100% as of June 30, ~~2019~~2020 and December 31, ~~2018.~~


~~(3)~~	~~Prior to borrowing the full capacity of our unsecured term loan facility, the undrawn facility fee was calculated based on any unused borrowing capacity and was paid on a quarterly basis.~~2019.

Debt Covenants and Restrictions

The unsecured revolving credit facility, the unsecured term loan facility, the unsecured senior notes, the Series A and B Notes due 2026, ~~and~~ Series A and B Notes due 2027 and 2029, and Notes due 2031 and certain other secured debt arrangements contain covenants and restrictions requiring us to meet certain financial ratios and reporting requirements. Some of the more restrictive financial covenants include a maximum ratio of total debt to total asset value, a minimum fixed-charge coverage ratio, a minimum unsecured debt ratio and a minimum unencumbered asset pool debt service coverage ratio. Noncompliance with one or more of the covenants and restrictions could result in the full principal balance of the associated debt becoming immediately due and payable. We believe we were in compliance with all of our debt covenants as of June 30, ~~2019.~~2020.

Debt Maturities

The following table summarizes the stated debt maturities and scheduled amortization payments ~~of our issued and outstanding debt~~ as of June 30, ~~2019:~~2020:


Year	(in thousands)		(in thousands)
Remaining 2019	$	925
2020	5,137
Remaining 2020			$	2,594
2021	5,342		5,342
2022	530,554		155,554
2023	305,775		305,775
2024	431,006		431,006
2025			406,245
Thereafter	1,931,688		2,375,442
Total aggregate principal value ⁽¹⁾	$	3,210,427	$	3,681,958

________________________


(1)	Includes gross principal balance of outstanding debt before the effect of the following at June 30, ~~2019~~2020: ~~$16.1~~$20.7 million of unamortized deferred financing costs for the unsecured term loan facility, unsecured senior notes and secured debt and ~~$6.2~~$6.0 million of unamortized discounts for the unsecured senior notes.

Capitalized Interest and Loan Fees

The following table sets forth gross interest expense, including debt discount/premium and deferred financing cost amortization, net of capitalized interest, for the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. The interest expense capitalized was recorded as a cost of development and increased the carrying value of undeveloped land and construction in progress.


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(in thousands)												(in thousands)
Gross interest expense	$	32,607		$	28,523		$	63,287		$	55,603		$	36,400		$	32,607		$	72,262		$	63,287
Capitalized interest and deferred financing costs	(20,880		)	(15,811		)	(40,317		)	(29,393		)	(20,516		)	(20,880		)	(41,934		)	(40,317		)
Interest expense	$11,727			$	12,712		$	22,970		$	26,210		$	15,884		$	11,727		$	30,328		$	22,970

1715

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

5.4. Stockholders’ Equity of the Company

Increase in Authorized Shares

On May 19, 2020, the Company’s stockholders approved a proposal to amend and restate the Company’s charter to increase the number of authorized shares of common stock that the Company has the authority to issue from 150,000,000 shares to 280,000,000 shares.

Forward Equity Offering and Settlement

On February 18, 2020, the Company entered into forward equity sale agreements with certain financial institutions acting as forward purchasers in connection with an offering of 5,750,000 shares of common stock at an initial gross offering price of $494.5 million, or $86.00 per share, before underwriting discounts, commissions and offering expenses. The forward purchasers borrowed and sold an aggregate of 5,750,000 shares of common stock in the offering. The Company did not receive any proceeds from the sale of its shares of common stock by the forward purchasers at the time of the offering.

On March 25, 2020, the Company physically settled these forward equity sale agreements. Upon settlement, the Company issued 5,750,000 shares of common stock for net proceeds of $474.9 million and contributed the net proceeds to the Operating Partnership in exchange for an equal number of units in the Operating Partnership.

At-The-Market Stock Offering Program

Under our at-the-market stock offering program, which commenced in June 2018, we may offer and sell shares of our common stock having an aggregate gross sales price up to $500.0 million from time to time in “at-the-market” offerings. In connection with ~~the~~our at-the-market program, the Company may enter into forward equity sale agreements with certain financial institutions acting as forward purchasers whereby, at our discretion, the forward purchasers may borrow and sell shares of our common stock under our at-the-market program. The use of a forward equity sale agreement allows the Company to lock in a share price on the sale of shares of our common stock at the time the agreement is executed but defer settling the forward equity sale agreements and receiving the proceeds from the sale of shares until a later date.

During the ~~six months~~year ended ~~June 30,~~December 31, 2019, wethe Company executed various 12-month forward equity sale agreements under our at-the-market program with financial institutions acting as forward purchasers ~~under our at-the-market stock offering program~~ to sell ~~1,201,204~~an aggregate of 3,147,110 shares of common stock at a weighted average sales price of ~~$75.92~~$80.08 per share before ~~underwriting discounts,~~ commissions and offering expenses. The Company did not receive any proceeds from the sale of its shares of common ~~shares~~stock by the forward ~~purchasers. The~~purchasers at the time of sale.

In March 2020, the Company ~~currently expects to fully~~ physically ~~settle the~~settled all forward equity sale agreements ~~and receive cash proceeds upon one or more settlement dates, at the Company’s discretion, prior to the final settlement dates under the forward equity sale agreements~~entered into in March and April 2020, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward equity sale agreement multiplied by the relevant forward price per share. The weighted average forward sale price that we expect to receive upon physical settlement of the agreements will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers’ stock borrowing costs and (iii) scheduled dividends during the term of the agreements. We have not settled any portion of these forward equity sale agreements as of the date of this filing.2019. Upon ~~physical~~ settlement, the Company ~~will contribute~~issued 3,147,110 shares of common stock for net proceeds of $247.3 million and contributed the net proceeds ~~from the issuance of shares of our common stock~~ to the Operating Partnership in exchange for an equal number of units in the Operating Partnership.

~~Since commencement of the program, we have completed sales of 447,466 shares of common stock through June 30, 2019 and 1,201,204 shares have been sold by forward purchasers under~~ We did not enter into any forward equity sale agreements ~~which have not been settled as of the date of this filing. We did not settle any forward sales of common stock~~ under our at-the-market program during the six months ended June 30, ~~2019 and as~~2020.

Since commencement of our current at-the-market program, we have completed sales of 3,594,576 shares of common stock through June 30, 2020. As of June 30, ~~2019~~2020, we may offer and sell shares of our common stock having an aggregate gross sales price up to approximately ~~$375.0~~$214.2 million ~~remains available~~under our current at-the-market program.

The Company did not complete any direct sales of common stock under the program during the three or six months ended June 30, 2020. The following table sets forth information regarding settlements of forward equity sale agreements under our at-the-market offering program for the six months ended June 30, 2020:



	Six Months Ended June 30, 2020
	(in millions, except share and per share data)
Shares of common stock settled during the period	3,147,110
Weighted average price per share of common stock	$	80.08
Aggregate gross proceeds	$	252.0
Aggregate net proceeds after selling commissions	$	247.3

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

The proceeds from sales will be used to ~~be sold under this program.~~fund development expenditures and general corporate purposes. Actual future sales will depend upon a variety of factors, including but not limited to, market conditions, the trading price of the Company’s common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under this program.

~~2018 Common Stock Forward Equity Sale Agreements~~

In August 2018, the Company entered into forward equity sale agreements with certain financial institutions acting as forward purchasers in connection with an offering of 5,000,000 shares of common stock at an initial gross offering price of $360.5 million, or $72.10 per share, before underwriting discounts, commissions and offering expenses. The forward purchasers borrowed and sold an aggregate of 5,000,000 shares of common stock in the offering. The Company did not receive any proceeds from the sale of its shares of common stock by the forward purchasers at the time of the offering. The forward sale price that we will receive upon physical settlement of the agreements, which was initially $71.68 per share, will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers’ stock borrowing costs and (iii) scheduled dividends during the term of the forward equity sale agreements.

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

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

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

Common Units of the Operating Partnership

The Company owned an approximate ~~98.0%~~98.3%, ~~98.0%~~98.1%, and 98.0% common general partnership interest in the Operating Partnership as of June 30, ~~2019,~~2020, December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively. The remaining approximate ~~2.0%~~1.7%, ~~2.0%~~1.9%, and 2.0% common limited partnership interest as of June 30, ~~2019,~~2020, December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively, was owned by non-affiliated investors and certain of our executive officers and directors in the form of noncontrolling common units. There were 1,934,586, 2,023,287 ~~2,025,287~~ and ~~2,070,690~~2,023,287 common units outstanding held by these investors, executive officers and directors as of June 30, ~~2019,~~2020, December 31, ~~2018~~2019 and June 30, ~~2018,~~2019, respectively.

The noncontrolling common units may be redeemed by unitholders for cash. Except under certain circumstances, we, at our option, may satisfy the cash redemption obligation with shares of the Company’s common stock on a one-for-one basis. If satisfied in cash, the value for each noncontrolling common unit upon redemption is the amount equal to the average of the closing quoted price per share of the Company’s common stock, par value $.01 per share, as reported on the NYSE for the ~~ten~~10 trading days immediately preceding the applicable redemption date. The aggregate value upon redemption of the then-outstanding noncontrolling common units was ~~$153.4~~$118.0 million and ~~$126.4~~$167.7 million as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019, respectively. This redemption value does not necessarily represent the amount that would be distributed with respect to each noncontrolling common unit in the event of our termination or liquidation. In the event of our termination or liquidation, it is expected in most cases that each common unit would be entitled to a liquidating distribution equal to the liquidating distribution payable in respect of each share of the Company’s common stock.

7.6. Partners’ Capital of the Operating Partnership

Common Units Outstanding

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


	June 30, 2019		December 31, 2018		June 30, 2018		June 30, 2020		December 31, 2019		June 30, 2019
Company owned common units in the Operating Partnership	100,972,035		100,746,988		100,559,903		115,176,538		106,016,287		100,972,035
Company owned general partnership interest	98.0	%	98.0	%	98.0	%	98.3	%	98.1	%	98.0	%
Noncontrolling common units of the Operating Partnership	2,023,287		2,025,287		2,070,690		1,934,586		2,023,287		2,023,287
Ownership interest of noncontrolling interest	2.0	%	2.0	%	2.0	%	1.7	%	1.9	%	2.0	%

For further discussion of the noncontrolling common units as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019, refer to Note 6.5.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

7. Share-Based Compensation

Stockholder Approved ~~Equity~~Share-Based Incentive Compensation ~~Plans~~Plan

As of June 30, ~~2019,~~2020, we maintained ~~one~~1 share-based incentive compensation plan, the Kilroy Realty 2006 Incentive Award Plan, as amended (the “2006 Plan”). The Company has a currently effective registration statement registering ~~9.2~~10.7 million shares of our common stock for possible issuance under ~~the~~our 2006 ~~Plan. As of June 30, 2019,~~Plan and approximately ~~0.2~~1.6 million shares ~~were~~are available for grant under the 2006 Plan. The calculation of shares available for grant is presented after taking into account a reserve for a sufficient number of shares to cover the vesting and payment of 2006 Plan awards that were outstanding on that date, including performance-based vesting awards at (i) levels actually achieved for the performance conditions (as defined below) for which the performance period has been completed and (ii) at maximum levels for the other performance and market conditions (as defined below) for awards still in a performance period.

~~2019~~2020 Share-Based Compensation Grants

In ~~February 2019,~~January 2020, the Executive Compensation Committee of the Company’s Board of Directors awarded ~~288,378~~263,626 restricted stock units (“RSUs”) to certain officers of the Company under the 2006 Plan, which included ~~143,396~~154,267 RSUs (at the target level

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

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

of performance) that are subject to market and/or performance-based vesting requirements (the ~~“2019~~“2020 Performance-Based RSUs”) and ~~144,982~~109,359 RSUs that are subject to time-based vesting requirements (the ~~“2019~~“2020 Time-Based RSUs”). During the three months ended June 30, 2020, 1,514 of the 2020 Time-Based RSUs were forfeited and in July 2020, 12,263 of the 2020 Performance-Based RSUs were forfeited.

~~2019~~2020 Performance-Based RSU Grant

The ~~2019~~2020 Performance-Based RSUs are scheduled to vest at the end of a three year period (consisting of calendar years ~~2019-2021)~~2020-2022). A target number of ~~2019~~2020 Performance-Based RSUs were awarded, and the final number of ~~2019~~2020 Performance-Based RSUs that vest (which may be more or less than the target number) will be based upon (1) the achievement of pre-set FFO per share goals for the year ending December 31, ~~2019~~2020 that applies to 100% of the Performance-Based RSUs awarded (the “FFO performance condition”) and (2) a performance measure that applies to 50% of the award based upon a measure of the Company’s average debt to EBITDA ratio for the three year performance period (the “debt to EBITDA ratio performance condition”) and a market measure that applies to the other 50% of the award based upon the relative ranking of the Company’s total stockholder return for the three year performance period compared to the total stockholder returns of an established comparison group of companies over the same period (the “market condition”). The ~~2019~~2020 Performance-Based RSUs are also subject to a three year service vesting provision (the “service vesting condition”) and are scheduled to cliff vest on the date the final vesting percentage is determined following the end of the three year performance period under the awards. The number of ~~2019~~2020 Performance-Based RSUs ultimately earned could fluctuate from the target number of ~~2019~~2020 Performance-Based RSUs granted based upon the levels of achievement for the FFO performance condition, the debt to EBITDA ratio performance condition, the market condition, and the extent to which the service vesting condition is satisfied. The estimate of the number of ~~2019~~2020 Performance-Based RSUs earned is evaluated quarterly during the performance period based on our estimate for each of the performance conditions measured against the applicable goals. ~~As of~~During the six months ended June 30, ~~2019,~~2020, we recognized $2.0 million of compensation expense for the ~~number~~2020 Performance-Based RSU grant. In the event we achieve a lower level of ~~2019 Performance-Based RSUs estimated~~performance or fail to ~~be earned based on~~meet the ~~Company’s estimate~~FFO performance condition, we would reverse a portion or all of the ~~performance conditions measured against~~$2.0 million of compensation expense in the ~~applicable goals was 212,957, and the compensation cost recorded to date for this program was based on that estimate.~~second half of 2020. Compensation expense for the ~~2019~~2020 Performance-Based RSU grant is recognized on a straight-line basis over the requisite service period for each participant, which is generally the three year service vesting period.

Each ~~2019~~2020 Performance-Based RSU represents the right, subject to the applicable vesting conditions, to receive ~~one~~1 share of our common stock in the future. The determination of the grant date fair value of the portion of the ~~2019~~2020 Performance-Based RSU grants covered by the debt to EBITDA ratio performance condition was based on the ~~$69.89~~$82.57 share price on the ~~February 1, 2019~~January 31, 2020 grant date. The determination of the grant date fair value of the portion of the ~~2019~~2020 Performance-Based RSU grants covered by the market condition was calculated using a Monte Carlo simulation pricing model based on the assumptions in the table below, which resulted in a ~~$72.57~~$84.54 grant date fair value per share.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)



	Fair Value Assumptions
Valuation date	~~February 1, 2019~~January 31, 2020
Expected share price volatility	~~19.0%~~17.0%
Risk-free interest rate	~~2.48%~~1.35%
Fair value per share on valuation date⁽¹⁾	~~72.57~~$84.54

________________________


(1)	Using the same Monte Carlo methodology and assumptions, the grant date fair value of one participant’s 2020 Performance-Based RSU grants was calculated as $85.52 per share.

The computation of expected volatility is based on a blend of the historical volatility of our shares of common stock over approximately 5.8 years, as that is expected to be most consistent with future volatility and equates to a time period twice as long as the approximate 2.9-year performance period of the RSUs, and implied volatility data based on the observed pricing of six month publicly-traded options on our shares of common stock. The risk-free interest rate is based on the yield curve on zero-coupon U.S. Treasury STRIP securities in effect at ~~February 1, 2019.~~January 31, 2020.

The total grant date fair value of the ~~2019~~2020 Performance-Based RSU awards was ~~$10.2~~$12.9 million on the ~~February 1, 2019~~January 31, 2020 grant date of the awards. For the three and sixmonths ended June 30, ~~2019,~~2020, we recorded compensation expense based upon the grant date fair value per share for each component multiplied by the estimated number of RSUs to be ~~earned as discussed above.~~earned.

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

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

~~2019~~2020 Time-Based RSU Grant

The ~~2019~~2020 Time-Based RSUs are scheduled to vest in ~~three~~3 equal annual installments beginning on January 5, ~~2020~~2021 through January 5, ~~2022.~~2023. Compensation expense for the ~~2019~~2020 Time-Based RSUs is recognized on a straight-line basis over the requisite service period for each participant, which is generally the three year service vesting period. Each ~~2019~~2020 Time-Based RSU represents the right to receive ~~one~~1 share of our common stock in the future. The total grant date fair value of the ~~2019~~2020 Time-Based RSU awards was ~~$10.1~~$9.0 million, which was based on the ~~$69.89~~$82.57 closing share price of the Company’s common stock on the NYSE on the ~~February 1, 2019~~January 31, 2020 grant date of the awards.

2019 and 2018 Performance-Based RSUs

Total compensation cost for 2019 and 2018 performance-based RSUs for the three and six months ended June 30, 2020 assumes the 2019 and 2018 debt to EBITDA ratio performance conditions are met at the maximum level of achievement.

Share-Based Compensation Cost Recorded During the Period

Share-based compensation costs for the three and six months ended June 30, 2020 include $4.1 million and $4.3 million, respectively, of accelerated share-based compensation costs related to severance packages, including for the previously announced executive officer departure. The total compensation cost for all share-based compensation programs was ~~$8.7~~$13.6 million and ~~$11.5~~$8.7 million for the three months ended June 30, 2020 and 2019, respectively, and ~~2018, respectively,~~$22.2 million and $17.5 million ~~and $16.6 million~~ for thesix months ended June 30, 2020 and 2019, respectively. Of the total share-based compensation costs, $2.0 million and $3.9 million was capitalized as part of real estate assets for the three and six months ended June 30, ~~2019~~2020 and ~~2018, respectively. Of the total share-based compensation costs,~~ $1.9 million and $3.5 million was capitalized as part of real estate assets for the three and six months ended June 30, 2019, ~~and $2.8 million and $4.3 million was capitalized as part of real estate assets and deferred leasing costs for the three and six months ended June 30, 2018.~~respectively. As of June 30, ~~2019,~~2020, there was approximately ~~$70.5~~$52.1 million of total unrecognized compensation cost related to nonvested incentive awards granted under share-based compensation arrangements that is expected to be recognized over a weighted-average period of ~~2.5~~1.9 years. The remaining compensation cost related to these nonvested incentive awards had been recognized in periods prior to June 30, ~~2019.~~

~~9. Future Minimum Rent~~

~~We have operating leases with tenants that expire at various dates through~~2043 that are generally subject to scheduled fixed increases with certain leases containing adjustments in rent based on the Consumer Price Index. Generally, the leases grant tenants renewal options. Leases also provide for additional rents based on certain operating expenses. Future contractual minimum rent under operating leases as of June 30, 2019 (under Topic 842) for future periods is summarized as follows:2020.

Year Ending (in thousands)
Remaining 2019 $ 293,414
2020 669,541
2021 698,248
2022 712,674
2023 687,633
2024 659,640
Thereafter 3,291,426
Total ⁽¹⁾
$ 7,012,576

~~______________~~


~~(1)~~	~~Excludes residential leases and leases with a term of one year or less.~~

~~Future contractual minimum rent under operating leases as of December 31, 2018 for future periods is summarized as follows:~~Severance Compensation

For the three and six months ended June 30, 2020, compensation costs included in general and administrative expenses on our consolidated statements of operations include $14.1 million of cash severance costs related to the previously announced executive officer departure, in addition to the accelerated share-based compensation costs noted in the paragraph above.

Year Ending (in thousands)
2019 $ 566,783
2020 632,875
2021 631,835
2022 620,684
2023 586,371
Thereafter 3,240,143
Total ⁽¹⁾
$ 6,278,691

~~______________~~


~~(1)~~	~~Excludes residential leases and leases with a term of one year or less.~~

2119

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~10.~~8. Rental Income and Future Minimum Rent

Our rental income is primarily comprised of payments defined under leases and are either subject to scheduled fixed increases or adjustments in rent based on the Consumer Price Index. Additionally, rental income includes variable payments for tenant reimbursements of property-related expenses and payments based on a percentage of tenant’s sales.

Under ASC Topic 842, we must perform 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.

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.

The table below sets forth the allocation of rental income between fixed and variable payments and collectability reversals or recoveries for the three and six months ended June 30, 2020 and 2019:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(in thousands)
Fixed lease payments	$	194,486		$	173,230		$	387,961		$	342,180
Variable lease payments	29,764			24,616			61,409			52,184
Collectability (reversals) recoveries	(5,894		)	(217		)	(12,381		)	2,647
Total rental income	$	218,356		$	197,629		$	436,989		$	397,011

______________


(1)	Represents adjustments to rental income related to our assessment of the collectability of amounts due under leases with our tenants. For the three and six months ended June 30, 2020, includes a reduction in revenue of $5.9 million and $12.4 million, respectively, primarily as a result of the COVID-19 pandemic.

We have operating leases with tenants that expire at various dates through2044. Generally, the leases grant tenants renewal options. Future contractual minimum rent under operating leases as of June 30, 2020 for future periods is summarized as follows:



Year Ending	(in thousands)
Remaining 2020	$	348,479
2021	727,344
2022	802,787
2023	788,673
2024	746,047
2025	714,321
Thereafter	3,420,018
Total ⁽¹⁾	$	7,547,669

______________


(1)	Excludes residential leases and leases with a term of one year or less.

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

9. Commitments and Contingencies

General

As of June 30, ~~2019~~2020, we had commitments of approximately ~~$1.2 billion,~~$814.8 million, excluding our ground lease commitments, for contracts and executed leases directly related to our operating ~~properties~~ and development ~~projects.~~properties.

Ground Leases

The following table summarizes our properties that are held subject to long-term noncancellable ground lease obligations and the respective contractual expiration dates:



Property	Contractual Expiration Date ⁽¹⁾
601 108th Ave NE, Bellevue, WA	November 2093
701, 801 and 837 N. 34th Street, Seattle, WA ⁽²⁾	December 2041
1701 Page Mill Road and 3150 Porter Drive, Palo Alto, CA	December 2067
Kilroy Airport Center Phases I, II, and III, Long Beach, CA	July 2084
3243 S. La Cienega Boulevard, Los Angeles, CA	October 2106

____________________


(1)	Reflects the contractual expiration date prior to the impact of any extension or purchase options held by the Company.


(2)	The Company has ~~three~~3 10-year and ~~one~~1 45-year extension options for this ground lease, which if exercised would extend the expiration date to December 2116. These ~~extensions~~extension options are not assumed to be exercised in our calculation of the present value of the future minimum lease payments for this lease.

On January 1, 2019, we adopted Topic 842 and recognized ground lease liabilities on our consolidated balance sheets equal to the present value of the minimum lease payments required in accordance with each ground lease. We also recognized right of use ground lease assets equal to the ground lease liabilities adjusted for above and below market ground lease intangibles and deferred leasing costs. To determine the discount rates used to calculate the present value of the minimum future lease payments for our ground leases, we used a hypothetical curve derived from unsecured corporate borrowing rates over the lease ~~terms.~~term. The weighted average discount rate ~~for~~used to determine the present value of our ~~ground leases~~minimum lease payments was ~~5.15%~~5.11%. ~~On January 1, 2019, we recognized right of use ground lease assets totaling $82.9 million and ground lease liabilities totaling $87.4 million.~~ As of June 30, ~~2019,~~2020, the weighted average remaining lease term of our ground leases is 5255 years. For the three months ended June 30, 2020 and 2019, variable lease costs totaling $0.9 million and $0.8 million, respectively, were recorded to ground lease expense on our consolidated statements of operations. For the six months ended June 30, 2020 and 2019, variable lease costs totaling ~~$0.8~~$1.7 million and $1.5 million, respectively, were recorded to ground leases expense on our consolidated statements of operations.

The minimum commitment under our ground leases as of June 30, ~~2019 (under Topic 842)~~2020 for future periods is summarized as follows:


Year Ending	(in thousands)			(in thousands)
Remaining 2019	$	2,577
2020	5,154
Remaining 2020				$	2,821
2021	5,154			5,641
2022	5,154			5,642
2023	5,154			5,662
2024	5,154			5,662
2025				5,662
Thereafter	228,465			280,723
Total undiscounted cash flows⁽⁵⁾⁽⁶⁾	256,812			311,813
Present value discount	(169,730		)	(213,720		)
Ground lease liabilities	$	87,082		$	98,093

________________________


(1)	Excludes contingent future rent payments based on gross income or adjusted gross income and reflects the minimum ground lease obligations before the impact of ground lease extension options.

(2)

One of our ground lease obligations is subject to a fair market value adjustment every five years; however, the lease includes ground rent subprotection and infrastructure rent credits which currently limit our annual rental obligations to $1.0 million. The contractual obligations for that ground lease included above assumes the lesser of $1.0 million or annual lease rental obligation in effect as of June 30, ~~2019.~~2020.

(3)

One of our ground lease obligations includes a component which is based on the percentage of gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every five years based on 50% of the average annual percentage rent for the previous five years. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at June 30, ~~2019~~2020 for the remainder of the lease term since we cannot predict future adjustments.

(4)

One of our ground lease obligations is subject to a fair market value adjustment every five years based on a combination of CPI adjustments and third-party appraisals limited to maximum increases annually. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at June 30, ~~2019~~2020 for the remainder of the lease term since we cannot predict future adjustments.

(5)

One of our ground lease obligations includes a component which is based on the percentage of adjusted gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every ten years by an amount equal to 60% of the average annual percentage rent for the previous three years. The contractual obligations for this lease included above assume the current annual ground lease obligation in effect at June 30, ~~2019~~2020 for the remainder of the lease term since we cannot predict future adjustments.


(6)	One of our ground lease obligations is subject to fixed 5% ground rent increases every five years, with the next increase occurring on December 1, 2022.

2221

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~The minimum commitment under our ground leases as of December 31, 2018 for future periods is summarized as follows:~~

Year Ending
(in thousands)
2019 $ 5,154
2020 5,154
2021 5,154
2022 5,154
2023 5,154
Thereafter 233,619
Total^{(1)(2)(3)(4)(5)}
$ 259,389

~~________________________~~


~~(1)~~	~~Excludes contingent future rent payments based on gross income or adjusted gross income and reflects the minimum ground lease obligations before the impact of ground lease extension options.~~

~~(2)~~

~~(3)~~

One of our ground lease obligations includes a component which is based on the percentage of gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every five years based on 50% of the average annual percentage rent for the previous five years. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at December 31, 2018 for the remainder of the lease term since we cannot predict future adjustments.

~~(4)~~

One of our ground lease obligations is subject to a fair market value adjustment every five years based on a combination of CPI adjustments and third-party appraisals limited to maximum increases annually. The contractual obligations for that lease included above assume the current annual ground lease obligation in effect at December 31, 2018 for the remainder of the lease term since we cannot predict future adjustments.

~~(5)~~

One of our ground lease obligations includes a component which is based on the percentage of adjusted gross income that exceeds the minimum ground rent. The minimum rent is subject to increases every ten years by an amount equal to 60% of the average annual percentage rent for the previous three years. The contractual obligations for this lease included above assume the current annual ground lease obligation in effect at December 31, 2018 for the remainder of the lease term since we cannot predict future adjustments.

Environmental Matters

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

As of June 30, ~~2019,~~2020, we had accrued environmental remediation liabilities of approximately ~~$71.6~~$61.9 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 prior to and 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.

We record estimated environmental remediation obligations for acquired properties at the acquisition date when we are aware of such costs and when such costs are probable of being incurred and can be reasonably estimated. Estimated costs related to development environmental remediation liabilities are recorded as an increase to the cost of the development project. Actual costs are recorded as a decrease to the liability when incurred. These accruals are adjusted as an increase or decrease to the development project costs and as an increase or decrease to the accrued environmental remediation liability if we obtain further information or circumstances change. The environmental remediation obligations recorded at June 30, ~~2019~~2020 were not discounted to their present values since the amount and timing of cash payments are not fixed. It is possible that we could incur additional environmental remediation costs in connection with these development projects. However, potential additional environmental costs for these development projects 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.

Other than the accrued environmental liabilities discussed above, we are not aware of any unasserted claims and assessments with respect to an environmental liability that we believe would require additional disclosure or the recording of an additional loss contingency.

2322

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~11.~~10. Fair Value Measurements and Disclosures

Assets and Liabilities Reported at Fair Value

The only assets we record at fair value on our consolidated financial statements are the marketable securities related to our Deferred Compensation Plan. The following table sets forth the fair value of our marketable securities as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019:


	Fair Value (Level 1) ⁽¹⁾				Fair Value (Level 1) ⁽¹⁾
	June 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019
Description	(in thousands)				(in thousands)
Marketable securities ⁽²⁾	$	25,203	$	21,779	$	23,175	$	27,098

________________________


(1)	Based on quoted prices in active markets for identical securities.


(2)	The marketable securities are held in a limited rabbi trust.

We report the change in the fair value of the marketable securities at the end of each accounting period in interest income and other net investment ~~gain/loss~~gain (loss) in the consolidated statements of operations.

We also adjust the related Deferred Compensation Plan liability to fair value at the end of each accounting period based on the performance of the benchmark funds selected by each participant, which results in a corresponding increase or decrease to compensation cost for the period.

The following table sets forth the net gain (loss) on marketable securities recorded during the three and six months ended June 30, ~~2019~~2020 and ~~2018:~~2019:


	Three Months Ended June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020			2019
Description	(in thousands)				(in thousands)				(in thousands)				(in thousands)
Net gain on marketable securities	$	544	$	422	$	2,225	$	18
Net gain (loss) on marketable securities									$	2,662	$	544	$	(564	)	$	2,225

Financial Instruments Disclosed at Fair Value

The following table sets forth the carrying value and the fair value of our other financial instruments as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019:


	June 30, 2019				December 31, 2018				June 30, 2020				December 31, 2019
	Carrying Value		Fair Value ⁽¹⁾		Carrying Value		Fair Value⁽¹⁾		Carrying Value		Fair Value ⁽¹⁾		Carrying Value		Fair Value⁽¹⁾
	(in thousands)								(in thousands)
Liabilities
Secured debt, net	$	259,455	$	271,536	$	335,531	$	335,885	$	256,113	$	269,707	$	258,593	$	272,997
Unsecured debt, net	$	2,553,651	$	2,702,274	$	2,552,070	$	2,546,386	$	3,399,105	$	3,591,247	$	3,049,185	$	3,252,217
Unsecured line of credit	$	375,000	$	375,508	$	45,000	$	45,058	$	—	$	—	$	245,000	$	245,195

________________________


(1)	Fair value calculated using Level II inputs, which are based on model-derived valuations in which significant inputs and significant value drivers are observable in active markets.

2423

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~12.~~11. Net Income Available to Common Stockholders Per Share of the Company

The following table reconciles the numerator and denominator in computing the Company’s basic and diluted per-share computations for net income available to common stockholders for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(in thousands, except share and per share amounts)												(in thousands, except share and per share amounts)
Numerator:
Net income attributable to Kilroy Realty Corporation	$	42,194		$	27,549		$	79,097		$	63,795
Net income available to common stockholders													$	19,618		$	42,194		$	59,435		$	79,097
Allocation to participating securities ⁽¹⁾	(543		)	(514		)	(1,052		)	(985		)	(542		)	(543		)	(1,085		)	(1,052		)
Numerator for basic and diluted net income available to common stockholders	$	41,651		$	27,035		$	78,045		$	62,810		$	19,076		$	41,651		$	58,350		$	78,045
Denominator:
Basic weighted average vested shares outstanding	100,972,355			99,691,700			100,937,069			99,220,577			115,084,897			100,972,355			110,980,066			100,937,069
Effect of dilutive securities	837,186			459,156			681,884			467,105			454,828			837,186			484,581			681,884
Diluted weighted average vested shares and common share equivalents outstanding	101,809,541			100,150,856			101,618,953			99,687,682
Diluted weighted average vested shares and common stock equivalents outstanding													115,539,725			101,809,541			111,464,647			101,618,953
Basic earnings per share:
Net income available to common stockholders per share	$	0.41		$	0.27		$	0.77		$	0.63		$	0.17		$	0.41		$	0.53		$	0.77
Diluted earnings per share:
Net income available to common stockholders per share	$	0.41		$	0.27		$	0.77		$	0.63		$	0.17		$	0.41		$	0.52		$	0.77

________________________


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

Share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities. The impact of potentially dilutive common shares, including stock options, RSUs ~~shares issuable under forward equity sale agreements~~ and other securities are considered in our diluted earnings per share calculation for the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. Certain market measure-based RSUs are not included in dilutive securities for the three and six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, as not all performance metrics had been met by the end of the applicable reporting periods. See Note 87 “Share-Based Compensation” for additional information regarding share-based compensation.

2524

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~13.~~12. Net Income Available to Common Unitholders Per Unit of the Operating Partnership

The following table reconciles the numerator and denominator in computing the Operating Partnership’s basic and diluted per-unit computations for net income available to common unitholders for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(in thousands, except unit and per unit amounts)												(in thousands, except unit and per unit amounts)
Numerator:
Net income attributable to Kilroy Realty, L.P.	$	42,901		$	28,015		$	80,409		$	64,908
Net income available to common unitholders													$	19,838		$	42,901		$	60,227		$	80,409
Allocation to participating securities ⁽¹⁾	(543		)	(514		)	(1,052		)	(985		)	(542		)	(543		)	(1,085		)	(1,052		)
Numerator for basic and diluted net income available to common unitholders	$	42,358		$	27,501		$	79,357		$	63,923		$	19,296		$	42,358		$	59,142		$	79,357
Denominator:
Basic weighted average vested units outstanding	102,995,642			101,762,390			102,960,599			101,291,549			117,098,562			102,995,642			112,997,795			102,960,599
Effect of dilutive securities	837,186			459,156			681,884			467,105			454,828			837,186			484,581			681,884
Diluted weighted average vested units and common unit equivalents outstanding	103,832,828			102,221,546			103,642,483			101,758,654			117,553,390			103,832,828			113,482,376			103,642,483
Basic earnings per unit:
Net income available to common unitholders per unit	$	0.41		$	0.27		$	0.77		$	0.63		$	0.16		$	0.41		$	0.52		$	0.77
Diluted earnings per unit:
Net income available to common unitholders per unit	$	0.41		$	0.27		$	0.77		$	0.63		$	0.16		$	0.41		$	0.52		$	0.77

________________________


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

Share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are considered participating securities. The impact of potentially dilutive common units, including stock options, RSUs ~~shares issuable under forward equity sale agreements~~ and other securities are considered in our diluted earnings per share calculation for the three and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019. Certain market measure-based RSUs are not included in dilutive securities for the three and six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, as not all performance metrics had been met by the end of the applicable reporting periods. See Note 87 “Share-Based Compensation” for additional information regarding share-based compensation.

2625

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

~~14.~~13. Supplemental Cash Flow Information of the Company

Supplemental cash flow information ~~is included as~~ follows (in thousands):


	Six Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2020		2019
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of capitalized interest of $38,780 and $28,267 as of June 30, 2019 and 2018, respectively	$	23,009	$	25,136
Cash paid for interest, net of capitalized interest of $39,952 and $38,780 as of June 30, 2020 and 2019, respectively					$	25,494	$	23,009
Cash paid for amounts included in the measurement of ground lease liabilities	$	2,699	$	2,349	$	2,905	$	2,699
NON-CASH INVESTING TRANSACTIONS:
Accrual for expenditures for operating properties and development properties	$	129,500	$	80,198	$	131,892	$	129,500
Assumption of accrued liabilities in connection with acquisitions	$	—	$	40,624
Tenant improvements funded directly by tenants	$	7,017	$	4,611	$	7,210	$	7,017
Initial measurement of operating right of use ground lease assets	$	82,938	$	—	$	—	$	82,938
Initial measurement of operating ground lease liabilities	$	87,409	$	—	$	—	$	87,409
NON-CASH FINANCING TRANSACTIONS:
Accrual of dividends and distributions payable to common stockholders and common unitholders	$	50,800	$	47,348
Accrual of dividends and distributions payable to common stockholders and common unitholders (Note 15)					$	57,600	$	50,800
Exchange of common units of the Operating Partnership into shares of the Company’s common stock	$	78	$	245	$	3,843	$	78

The following is a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.


					Six Months Ended June 30,
	Six Months Ended June 30,				2020		2019
	2019		2018		(in thousands)
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents at beginning of period	$	51,604	$	57,649	$	60,044	$	51,604
Restricted cash at beginning of period	119,430		9,149		16,300		119,430
Cash and cash equivalents and restricted cash at beginning of period	$	171,034	$	66,798	$	76,344	$	171,034

Cash and cash equivalents at end of period	$	52,415	$	50,817	$	605,012	$	52,415
Restricted cash at end of period	6,300		—		16,300		6,300
Cash and cash equivalents and restricted cash at end of period	$	58,715	$	50,817	$	621,312	$	58,715

~~15.~~14. Supplemental Cash Flow Information of the Operating Partnership:

Supplemental cash flow information ~~is included as~~ follows (in thousands):


	Six Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2020		2019
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid for interest, net of capitalized interest of $38,780 and $28,267 as of June 30, 2019 and 2018, respectively	$	23,009	$	25,136
Cash paid for interest, net of capitalized interest of $39,952 and $38,780 as of June 30, 2020 and 2019, respectively					$	25,494	$	23,009
Cash paid for amounts included in the measurement of ground lease liabilities	$	2,699	$	2,349	$	2,905	$	2,699
NON-CASH INVESTING TRANSACTIONS:
Accrual for expenditures for operating properties and development properties	$	129,500	$	80,198	$	131,892	$	129,500
Assumption of accrued liabilities in connection with acquisitions	$	—	$	40,624
Tenant improvements funded directly by tenants	$	7,017	$	4,611	$	7,210	$	7,017
Initial measurement of operating right of use ground lease assets	$	82,938	$	—	$	—	$	82,938
Initial measurement of operating ground lease liabilities	$	87,409	$	—	$	—	$	87,409
NON-CASH FINANCING TRANSACTIONS:
Accrual of distributions payable to common unitholders	$	50,800	$	47,348
Accrual of distributions payable to common unitholders (Note 15)					$	57,600	$	50,800

The following is a reconciliation of our cash and cash equivalents and restricted cash at the beginning and end of the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.

2726

KILROY REALTY CORPORATION AND KILROY REALTY, L.P.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


					Six Months Ended June 30,
	Six Months Ended June 30,				2020		2019
	2019		2018		(in thousands)
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH:
Cash and cash equivalents at beginning of period	$	51,604	$	57,649	$	60,044	$	51,604
Restricted cash at beginning of period	119,430		9,149		16,300		119,430
Cash and cash equivalents and restricted cash at beginning of period	$	171,034	$	66,798	$	76,344	$	171,034

Cash and cash equivalents at end of period	$	52,415	$	50,817	$	605,012	$	52,415
Restricted cash at end of period	6,300		—		16,300		6,300
Cash and cash equivalents and restricted cash at end of period	$	58,715	$	50,817	$	621,312	$	58,715

~~16.~~15. Subsequent Events

On July ~~17, 2019,~~15, 2020, aggregate dividends, distributions and dividend equivalents of ~~$50.8~~$57.6 millionwere paid to common stockholders, common unitholders and RSU holders of record on June ~~28, 2019.~~30, 2020.

On July 22, 2019, the Company physically settled the forward equity sale agreements entered into in August 2018. Upon settlement, the Company issued 5,000,000 shares of common stock for net proceeds of $354.3 million and contributed the net proceeds to the Operating Partnership in exchange for an equal number of units in the Operating Partnership, which was then used to pay down the unsecured revolving credit facility. As of the date of this report, $60.0 million was outstanding on the unsecured revolving credit facility. Refer to Note 5 for additional information.

2827

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following discussion relates to our consolidated financial statements and should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. The results of operations discussion is combined for the Company and the Operating Partnership because there are no material differences in the results of operations between the two reporting entities.

Forward-Looking Statements

Statements contained in this “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are not historical facts may be forward-looking statements. Forward-looking statements include, among other things, statements or information concerning 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 remediation; 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.~~REIT; and uncertainties regarding the impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business and the economy generally. 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 and in “Part II – Other Information, Item 1A. Risk Factors” of this report, as well as ~~“Item~~in “Part I, Item 1A. Risk ~~Factors,”~~Factors” and ~~in our “Item~~“Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, ~~2018~~2019 and their respective other filings with the SEC. All forward-looking statements are based on information that was available and speak only as of the 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.

Overview and Background

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%~~98.3%, ~~98.0%~~98.1%, and 98.0% general partnership interest in the Operating Partnership as of June 30, ~~2019~~2020, December 31, ~~2018~~2019 and June 30, ~~2018~~2019. 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.

~~Critical Accounting Policies~~COVID-19 Response

~~Effective January 1, 2019,~~In accordance with local and state government guidance and social distancing recommendations, the majority of our employees have worked remotely since March 2020. Our robust technology infrastructure was capable of supporting this model. We implemented rigorous protocols for remote work across the Company, ~~adopted Financial Accounting Standards Board ASU No. 2016-02 “Leases (Topic 842)” (“Topic 842”). For discussion~~including increased frequency of team update calls and frequent communication across leadership and working levels. We are leveraging technology to ensure our teams stay connected and productive, and that our culture remains strong even in these unusual circumstances.

During the three months ended June 30, 2020, we were highly focused on planning for the health and safety of our tenants and employees and preparing our buildings in accordance with the policies, protocols and applicable legal requirements in our regions. We engaged a hygienist to assist us in designing new standard operating procedures for our buildings that include, but are not limited to, air filtration, water quality, janitorial products and procedures, social separation and screening during building access and elevator use, the use of personal protective equipment, signage, and management of construction activities.

During the three months ended June 30, 2020, we implemented a rent relief program for the majority of our retail tenants whereby we deferred rent for the months of April to July 2020 in exchange for a four-month extension of their current lease term at future rental rates. We expect that we will continue to offer deferrals to the majority of our retail tenants, given that most cannot resume operations in certain of our markets where strong state and local government restrictions remain or were put back into effect. We did not create such a program for our office tenants and we evaluate office rent relief requests on a specific case by case basis. Our top 15 tenants represent 47.4% of our total annualized base rental revenues and as of June 30, 2020 we had collected 100% of the ~~impact~~rent due from our top 15 tenants since the beginning of ~~this adoption~~the COVID-19 pandemic. For residential tenants, deferrals of gross rent billings have been extended in accordance with the applicable local orders, which often require repayment within 12 months if such local ordinances are not extended.

We analyze our total lease receivable balances, tenant creditworthiness, specific industry trends and conditions, and current economic trends and conditions in order to evaluate whether we believe substantially all of the amounts due under a tenant’s lease agreement are deemed probable of collection over the term of the lease. For leases that are deemed probable of collection, revenue continues to be recorded on ~~our significant accounting policies, see~~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.

The following table sets forth information regarding the percent of contractual base rent and common area maintenance (“CAM”) billings (“gross rent billings”) billed, collected, forgiven, and deferred for the three months ended June 30, 2020:



					COVID-19 Modifications ⁽³⁾					Non-COVID-19 Modifications ⁽⁴⁾
Property Type	Gross Rent Billings ⁽¹⁾ (in thousands)		Rent Collected ⁽²⁾		Rent Forgiven ⁽⁵⁾		Rent Deferred			Rent Deferred		Rent Outstanding⁽⁸⁾
Property Type	Gross Rent Billings ⁽¹⁾ (in thousands)		Rent Collected ⁽²⁾		Rent Forgiven ⁽⁵⁾		Collected⁽⁶⁾	Outstanding ⁽⁷⁾		Collected⁽⁶⁾	Outstanding⁽⁷⁾	Rent Outstanding⁽⁸⁾

Office	$	190,245	97.7	%	—		—	0.4	%	—	—	1.9	%
Residential	4,226		88.0	%	—		—	7.6	%	—	—	4.4	%
Retail	7,521		32.3	%	3.5	%	—	34.5	%	—	—	29.7	%

Total	$	201,992	95.1	%	0.1	%	—	1.8	%	—	—	3.0	%

________________________


(1)	Gross rent billings represents the total contractual base rent (including tenant direct-billed parking) and CAM billings before any COVID-19 related rent concessions for the three months ended June 30, 2020.


(2)	Cash collections through June 30, 2020 as a percentage of gross rent billings.


(3)	Rent concessions that qualify for the accounting relief provided by the FASB (as described in Note 1 “Organization and Basis of Presentation” to our consolidated financial statements included in this report), as total amounts due under the lease agreement are substantially the same or less than those that existed in the contract before modification.

(4)

Rent concessions that do not qualify for the accounting relief provided by the FASB (as described in Note 1 “Organization and Basis of Presentation” to our consolidated financial statements included in this report), as total amounts due under the lease agreement are not substantially the same as those that existed in the contract before modification, or other modifications unrelated to the COVID-19 pandemic have been included.


(5)	Amounts permanently forgiven as a percentage of gross rent billings.


(6)	Collections of amounts deferred under repayment plans (as described above) and through lease term extensions as a percentage of gross rent billings.


(7)	Remaining amounts deferred under repayment plans and through lease term extensions as a percentage of gross rent billings.


(8)	Uncollected gross rent billings that have not been forgiven and are not subject to deferral arrangements as a percentage of gross rent billings. Such amounts are subject to the Company’s allowance for uncollectible accounts.

Deferrals of gross rent billings that have been extended to office and retail tenants during the period have been formalized by the execution of lease amendments that generally provide for repayment of deferred amounts through an extension of the lease term by an equivalent period of months to the deferral period.

As of the date of this report, across all property types, we have collected approximately 95% of our July 2020 gross rent billings, including 100% from all of our top 15 tenants. Excluding rent relief provided to certain tenants, across all property types, we collected 96% of our July 2020 gross rent billings. We are continuing to monitor the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on occupancy, rental rates and rent collections. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent for such period, as well as working with certain tenants who have requested rent deferrals, we can provide no assurance that such efforts or our efforts in future periods will be successful, particularly in the event that the COVID-19 pandemic, and restrictions intended to prevent its spread, continue for a prolonged period. Refer to “Part II – Other Information, Item IA. Risk Factors” included in this ~~report.~~report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.

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.

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.

The global impact of the COVID-19 pandemic has been rapidly evolving and, as cases of the illness caused by the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines and restrictions on travel. In addition, all the states where we own properties and/or have development projects (i.e., California and Washington), have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, density limitations, social distancing measures, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue, although, in certain cases, exceptions are available for essential retail, research and laboratory activities, essential building services, such as cleaning and maintenance, and certain essential construction projects. Our development portfolio was largely unaffected during the six months ended June 30, 2020; however, the COVID-19 pandemic, and restrictions intended to prevent its spread, may cause delays or increase costs associated with building materials or construction services necessary for construction which could adversely impact our ability to continue or complete construction as planned, on budget or at all for our development projects. Refer to “Part II – Other Information, Item IA. Risk Factors” included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevent its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.

Stabilized Development Projects

During the ~~three~~six months ended June 30, ~~2019,~~2020, we added the following ~~project~~projects to our stabilized portfolio:

•

100 Hooper, SOMA, San Francisco, California, which we commenced construction on in November 2016. This project encompasses 311,859 square feet of office and 82,481 square feet of production, distribution and repair (“PDR”) space configured across two buildings with a total estimated investment of approximately $275.0 million. The office portion of the project is 100% leased and occupied by Adobe Systems Inc. and the PDR space is86% leased as of the date of this report. We commenced revenue recognition on the lease with Adobe Systems Inc. on October 1, 2018. Cash rents on Phase I of the lease commenced in March 2019 and the remaining phases will commence through the second quarter of 2020.

~~In-Process Development Projects - Tenant Improvement~~

~~As of June 30, 2019, the following projects were in the tenant improvement phase:~~

The Exchange on 16th, Mission Bay, San Francisco, ~~California, which we~~California. We commenced construction on this project in June 2015. This project totals approximately ~~750,000~~750,370 gross rentable square feet consisting of ~~736,000~~738,081 square feet of office space and ~~14,000~~12,289 square feet of retail space at a total estimated investment of $585.0 million. The office space in the project is 100% leased to Dropbox, Inc. ~~During the three months ended June 30, 2019, we~~We completed construction and commenced revenue recognition on the first two phases comprising approximately 82% of the project in 2019 and on the final phase of the project ~~representing approximately 52% of~~during the ~~project. The remaining space~~

~~is currently expected to stabilize in the fourth quarter of 2019 and the third quarter of 2020. Cash rents will commence in the third quarter of 2019 through the first quarter of~~three months ended March 31, 2020.

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~~95,871 square feet of retail space with a total estimated investment of $100.0 million. ~~As of the date of this report,~~At June 30, 2020, the retail space of the project was ~~94%~~100% leased and ~~72%~~90% occupied.

Completed Residential Development Projects

As of June 30, 2020, we had completed two of the three phases of the following residential development project:

One Paseo (Residential Phases I & II) - Del Mar, San Diego, California. We commenced construction on Phases I and II of the residential component of this mixed-use project in December 2016 which are comprised of 237 and 225 residential units, respectively. We completed the first phase during the third quarter of 2019 and the second phase during the first quarter of 2020. The total estimated investment for these phases of the residential component of the project is approximately $290.0 million. As of June 30, 2020, 68% of the Phase I units were leased and 21% of the Phase II units were leased.

In-Process Development Projects - Tenant Improvement

As of June 30, 2020, the following projects were in the tenant improvement phase:

Netflix // On Vine, Hollywood, 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% leased to Netflix, Inc. We currently expect this project to stabilize in the first quarter of 2021.

•

333 Dexter, South Lake Union, Seattle, Washington. We commenced construction on this project in June 2017. This project encompasses approximately 635,000 square feet of office space at a total estimated investment of $410.0 million and 100% of the project is leased to a Fortune 50 publicly traded company. During the three months ended June 30, 2020, we completed construction and commenced revenue recognition on the first phase of the project, representing approximately 49% of the project. The remaining two phases are currently expected to stabilize in the second halves of 2021 and 2022.

One Paseo (Office) - Del Mar, San Diego, California. We commenced construction on the office component of this project in December 2018, which encompasses 285,000 square feet of office space at a total estimated investment of $205.0 million. At June 30, 2020, the office component of the project was 91% leased. During the three months ended June 30, 2020, we completed construction and commenced revenue recognition on 22,000 square feet, representing approximately 8% of the project. In July 2020, we commenced revenue recognition on an additional 36,000 square feet, bringing the total revenue commenced on this project to approximately 20% as of the date of his report. We currently expect the project to stabilize in the second quarter of 2021.

In-Process Development Projects - Under Construction

As of June 30, ~~2019,~~2020, we had ~~the following~~ five 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 ~~660,000~~656,000 square feet of office space at a total estimated investment of ~~$600.0 million.~~$570.0 million and is 100% leased to two tenants. We currently expect ~~the~~this project to ~~be delivered for tenant improvements~~stabilize in the ~~second half~~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 ~~life science~~office space at a total estimated investment of ~~$125.0~~$110.0 million. The project is 100% leased to a Fortune 50 publicly traded company. We currently ~~estimate the~~expect this project to ~~be delivered for tenant improvements mid-2020.~~stabilize in the first quarter of 2021.

~~Netflix and~~ Living // On Vine, Hollywood, ~~Los Angeles,~~ California. We commenced construction on the ~~office~~residential component of this ~~mixed-use~~ project in ~~January~~December 2018, which ~~includes~~encompasses 193 residential units at a total estimated investment of $195.0 million. We currently expect the ~~project’s overall infrastructure and site work~~residential component to be completed in the first quarter of 2021.


•	One Paseo (Residential Phase III) - Del Mar, San Diego, California. We commenced construction on Phase III of the residential component of this mixed-use project in December 2016, which is comprised of 146 residential units. The total estimated investment for Phase III of the residential component of the project is approximately$100.0 million. Phase III was completed and delivered in July 2020.

2100 Kettner, Little Italy, San Diego, California. We commenced construction on this project in September 2019. This project is comprised of approximately ~~355,000~~200,000 square feet of office space for a total estimated investment of ~~$300.0~~$140.0 million. The office space is 100% leased to Netflix, Inc. We commenced construction on the residential component of the project in December 2018, which totals 193 residential units at a total estimated investment of $195.0 million. The office component is currently expected to be delivered and ready for tenant improvements in the first quarter of 2020 and the residential component is currently expected to be completed in the fourth quarter of 2020.

333 Dexter, South Lake Union, Seattle, Washington, which we commenced construction on in June 2017. This project totals approximately 635,000 square feet of office space at a total estimated investment of $410.0 million. During the three months ended June 30, 2019, we executed a lease for 100% of the project with a Fortune 50 publicly traded company. Construction is currently in progress and the project is currently estimated to be stabilized in the second half of 2022.

One Paseo (Residential and Office) - Del Mar, San Diego, California. We commenced construction on the residential component of this mixed-use project in December 2016 which includes 608 residential units. The total estimated investment for the residential component of the project is approximately $375.0 million. The residential component of this project is expected to be completed and delivered in phases starting in the third quarter of 2019. We commenced construction on the office component of the project in December 2018, which encompasses 285,000 square feet of office space at a total estimated investment of $205.0 million. The office component of the project is currently expected to be delivered and ready for tenant improvements in the second quarter of 2020. As of the date of this report, the office component of the project is 60% leased.

Future Development Pipeline

As of June 30, ~~2019,~~2020, our future development pipeline included ~~four~~five future projects located in ~~San Diego County and~~Greater Seattle, the San Francisco Bay Area and San Diego County with an aggregate cost basis of approximately ~~$693.9 million~~$1.0 billion at which we believe we could developmore than ~~4.0~~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 ⁽¹⁾	Total Costs as of 6/30/2019 ($ in millions)⁽²⁾		Location	Approx. Developable Square Feet ⁽¹⁾	Total Costs as of 6/30/2020 ($ in millions) ⁽²⁾

San Diego County
2100 Kettner	Little Italy	175,000 - 200,000	$	29.1
Santa Fe Summit – Phases II and III	56 Corridor	600,000 - 650,000	80.0		56 Corridor	600,000 - 650,000	$	81.6
1335 Broadway & 901 Park Boulevard					East Village	TBD	46.6
San Francisco Bay Area
Kilroy Oyster Point - Phase II - IV	South San Francisco	1,750,000 - 1,900,000	315.2
Kilroy Oyster Point - Phases II - IV					South San Francisco	1,750,000 - 1,900,000	331.3
Flower Mart ⁽³⁾	SOMA	2,300,000	269.6		SOMA	2,300,000	418.7
Greater Seattle
SIX0 - Office & Residential					Seattle CBD	TBD	141.8
TOTAL:			$	693.9			$	1,020.0

________________________


(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 June 30, ~~2019.~~

~~(3)~~

On July 18, 2019, the San Francisco Planning Commission approved an initial office allocation of approximately 1.4 million square feet under Proposition M, as well as priority for a future phase allocation of approximately 350,000 square feet in 2021, with the remainder of the more than two million square feet of office space allocated after 2021. The Flower Mart Project’s development agreement must still be approved by the San Francisco Board of Supervisors and signed by the Mayor, which could be as early as October of this year. The Flower Mart project is an approximately 2.3 million square feet of office and retail mixed-use project located in Central SOMA.2020.

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 three and six months ended June 30, ~~2019,~~2020, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately ~~$2.0~~$2.1 billion and ~~$1.9~~$2.2 billion, respectively, asit was determined these projects qualified for interest and other carrying cost capitalization under GAAP. During the three and six months ended June 30, ~~2018,~~2019, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately ~~$1.5~~$2.0 billion and ~~$1.4~~$1.9 billion, respectively, as it was determined these projects qualified for interest and other carrying cost capitalization under GAAP. In the event of an extended cessation of development activities, such projects may potentially no longer qualify for capitalization of interest or other carrying costs. However, a cessation of development activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and other carrying costs. For the three and six months ended June 30, 2020, we capitalized $20.5 million and $41.9 million, respectively, of interest to our qualifying development projects. For the three and six months ended June 30, 2019, we capitalized $20.9 million and $40.3 million, respectively, of interest to our qualifying development projects. For the three and six months ended June 30, ~~2018,~~2020, we capitalized ~~$15.8~~$6.2 million and ~~$29.4~~$11.3 million, respectively, of ~~interest~~internal

costs to our qualifying development projects. For the three and six months ended June 30, 2019, we capitalized $6.3 million and $12.9 million, respectively, of internal costs to our qualifying development projects. ~~For the three and six months ended June 30, 2018, we capitalized $6.9 million and $13.3 million, respectively, of internal costs to our qualifying 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 the six months ended June 30, 2019, we completed the sale of one operating property to an unaffiliated third party for gross proceeds of $18.3 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, the availability of financing for potential buyers (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic’s impact on economic and market conditions, including the financial markets), 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 that make economic sense.~~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.

In connection with our growth strategy, we often have one or more potential acquisitions of properties and/or undeveloped land under consideration that are in varying stages of negotiation and due diligence review, or under contract, at any point in time. However, we cannot provide assurance that we will enter into any agreements to acquire ~~those~~ properties, or undeveloped land, or, ifthat the potential acquisitions contemplated by any agreements we ~~do, that those~~may enter into 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 ~~2019,~~2020, 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/or~~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 June 30, ~~2019,~~2020, there was approximately ~~$70.5~~$52.1 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 ~~2.5~~1.9 years. The ~~$70.5~~ultimate amount of compensation cost recognized related to outstanding nonvested RSUs issued under share-based compensation arrangements may vary for performance-based RSUs that are still in the performance period based on performance against applicable performance-based vesting goals. The $52.1 million of unrecognized compensation cost does not reflect the future compensation cost for any potential share-based awards that may be issued subsequent to June 30, ~~2019.~~2020. Share-based compensation expense for ~~outstanding and~~ 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. For additional information regarding our equity incentive awards, see Note 7 “Share-Based Compensation” to our consolidated financial statements included in this report.

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 three and six months ended June 30, ~~2019.~~2020.

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
Three Months Ended
June 30, 2019
23
14
439,146
411,856
58.8 % $ 59.52
$ 7.29
45.2 % 19.1 % 98
Six Months Ended
June 30, 2019
35
30
661,759
570,478
41.1 % $ 50.62
$ 6.83
41.0 % 17.1 % 89



	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)
Three Months Ended June 30, 2020	13	9	111,968	233,263	50.1	%	$	61.16	$	10.05	37.2	%	15.4	%	73
Six Months Ended June 30, 2020	23	18	159,894	323,330	40.4	%	$	54.49	$	8.38	36.4	%	16.6	%	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
Three Months Ended
June 30, 2019
29
14
486,062
411,856
$ 67.43
$ 8.89
68.7 % 41.3 % 91
Six Months Ended
June 30, 2019 39
30
530,811
570,478
$ 59.98
$ 8.37

65.4 % 40.0 % 86



	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)
Three Months Ended June 30, 2020	5	9	53,214	233,263	$	54.10	$	9.02	30.0	%	10.7	%	72
Six Months Ended June 30, 2020	12	18	184,875	323,330	$	56.72	$	8.62	36.9	%	18.6	%	79

________________________


(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 ~~excluding~~exclude tenant-funded tenant ~~improvements and certain tenant improvements used to fund base building~~ 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 ~~105,434~~48,603 ~~and 154,110~~ rentable square feet ~~respectively,~~ for the three months ended June 30, ~~2019~~2020, and ~~119,419~~commenced and ~~168,095~~executed leases of approximately 87,355 and 70,868 rentable square feet, respectively, for the six months ended June 30, ~~2019~~2020, 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)	During the three months ended June 30, ~~2019, 23~~2020, 4 new leases totaling ~~412,912~~51,726 square feet were signed but not commenced as of June 30, ~~2019.~~ 2020. For the six months ended June 30, ~~2019~~, 282020, 11 new leases totaling ~~428,373~~ ~~rentable~~178,626 square feet were signed but not commenced as of June 30, ~~2019.~~ 2020.

As of June 30, 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.~~capital, and potentially the current COVID-19 pandemic and restrictions intended to prevent its spread. 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. In addition, due to uncertainty of current market events as a result of the COVID-19 pandemic and the impact it has had on recent transaction volume in our markets, we are currently unable to provide meaningful information on the weighted average cash rental rates for our total stabilized portfolio compared to current market rates at June 30, 2020. In addition it is possible that the COVID-19 pandemic may have an adverse impact on our ability to renew leases or re-lease available space in our properties on favorable terms or at all in the future, including as a result of a deterioration in the economic and market conditions due to restrictions intended to prevent the spread of COVID-19. 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 remainder of ~~2019~~2020 and the next five years and by region for the remainder of ~~2019~~2020 and in ~~2020.~~2021.

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⁾
(in thousands)
Remainder of 2019⁽⁴⁾
38
664,585
5.3 % $ 37,442
6.1 % $ 56.34
2020 87
1,087,589
8.7 % 47,563
7.7 % 43.73
2021 83
864,357
7.0 % 37,107
6.0 % 42.93
2022 53
671,664
5.5 % 30,082
4.9 % 44.79
2023 69
1,180,599
9.4 % 63,722
10.3 % 53.97
2024 56
1,010,352
8.1 % 47,647
7.7 % 47.16
Total 386
5,479,146
44.0 % $ 263,563
42.7 % $ 48.10



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⁾
					(in thousands)
Remainder of 2020	35	395,942	3.1	%	$	17,080	2.5	%	$	43.14
2021	78	764,334	5.8	%	32,319		4.6	%	42.28
2022	65	749,808	5.8	%	32,351		4.7	%	43.15
2023	81	1,299,381	10.0	%	68,853		9.9	%	52.99
2024	58	945,844	7.3	%	46,338		6.6	%	48.99
2025	53	663,871	5.1	%	32,304		4.6	%	48.66
Total	370	4,819,180	37.1	%	$	229,245	32.9	%	$	47.57


Year ⁽⁴⁾	Region	# of Expiring Leases	Total Square Feet	% of Total Leased Sq. Ft.		Annualized Base Rent ⁽²⁾⁽³⁾		% of Total Annualized Base Rent ⁽²⁾		Annualized Rent per Sq. Ft. ⁽²⁾		Region	# of Expiring Leases	Total Square Feet	% of Total Leased Sq. Ft.		Annualized Base Rent ⁽²⁾⁽³⁾		% of Total Annualized Base Rent ⁽²⁾		Annualized Rent per Sq. Ft. ⁽²⁾
2019	Greater Los Angeles	15	42,765	0.3	%	$	2,220	0.4	%	$	51.91
	Orange County	1	4,636	0.1	%	133		—	%	28.69
	San Diego	6	40,154	0.3	%	1,580		0.3	%	39.35
	San Francisco Bay Area	12	564,784	4.5	%	33,102		5.3	%	58.61
	Greater Seattle	4	12,246	0.1	%	407		0.1	%	33.24
	Total	38	664,585	5.3	%	$	37,442	6.1	%	$	56.34

2020	Greater Los Angeles	50	459,422	3.7	%	$	19,654	3.2	%	$	42.78	Greater Los Angeles	22	243,813	1.9	%	$	9,465	1.4	%	$	38.82
	Orange County	5	38,526	0.3	%	1,238		0.2	%	32.13		San Diego	7	61,044	0.5	%	2,340		0.3	%	38.33
	San Diego	15	260,552	2.1	%	10,448		1.7	%	40.10		San Francisco Bay Area	5	68,651	0.5	%	4,545		0.7	%	66.20
	San Francisco Bay Area	13	240,366	1.9	%	13,662		2.2	%	56.84		Greater Seattle	1	22,434	0.2	%	730		0.1	%	32.54
	Greater Seattle	4	88,723	0.7	%	2,561		0.4	%	28.87		Total	35	395,942	3.1	%	$	17,080	2.5	%	$	43.14
	Total	87	1,087,589	8.7	%	$	47,563	7.7	%	$	43.73

2021												Greater Los Angeles	49	330,964	2.5	%	$	13,084	1.8	%	$	39.53
												San Diego	15	187,468	1.4	%	6,795		1.0	%	36.25
												San Francisco Bay Area	10	234,125	1.8	%	11,947		1.7	%	51.03
												Greater Seattle	4	11,777	0.1	%	493		0.1	%	41.86
												Total	78	764,334	5.8	%	$	32,319	4.6	%	$	42.28

________________________


(1)	For leases that have been renewed early with existing tenants, the expiration date and annualized base rent information presented takes into consideration the renewed lease terms. Excludes leases not commenced as of June 30, ~~2019,~~2020, space leased under month-to-month leases, storage leases, vacant space and future lease renewal options not executed as of June 30, ~~2019.~~2020.

(2)

Annualized base rent includes the impact of straight-lining rent escalations and the amortization of free rent periods and excludes the impact of the following: amortization of deferred revenue related tenant-funded tenant improvements, amortization of above/below market rents, amortization for lease incentives due under existing leases and expense reimbursement revenue. Additionally, the underlying leases contain various expense structures including full service gross, modified gross and triple net. Percentages represent percentage of total portfolio annualized contractual base rental revenue. For additional information on tenant improvement and leasing commission costs incurred by the Company for the current reporting period, please see further discussion under the caption “Information on Leases Commenced and Executed.”


(3)	Includes 100% of annualized base rent of consolidated property partnerships.


~~(4)~~	~~Adjusting for leases executed as of June 30, 2019 but not yet commenced, the remaining 2019 and 2020 expirations would be reduced by 486,434 and 155,408 square feet, respectively.~~

In addition to the ~~0.8~~1.1 million rentable square feet, or ~~6.2%~~7.7%, of currently available space in our stabilized portfolio, leases representing approximately ~~5.3%~~3.1% and ~~8.7%~~5.8% of the occupied square footage of our stabilized portfolio are scheduled to expire during the remainder of ~~2019~~2020 and in ~~2020,~~2021, respectively. The leases scheduled to expire during the remainder of ~~2019~~2020 and in ~~2020~~2021 represent approximately ~~1.8~~1.2 million rentable square feet or ~~13.8%~~7.1% of our total annualized base rental revenue. ~~Individual properties within any particular submarket presently may~~Adjusting for leases executed as of June 30, 2020 but not yet commenced, the remaining 2020 and 2021 expirations would be 290,226 and 587,282 square feet, respectively.

Sublease Space. Of our leased ~~either above, below, or at the current quoted market rates within that submarket. Our ability to re-lease available~~ space ~~depends upon both general market conditions and the market conditions in the specific regions in which individual properties are located.~~

~~For the~~as of June 30, 2020, approximately ~~0.7 million~~849,307 rentable square feet, or ~~6.1%~~5.9% of the square footage in our ~~total annualized base rental revenue scheduled to expire during~~stabilized portfolio, was available for sublease, primarily in the ~~remainder~~San Francisco Bay Area and Greater Seattle regions. Of the 5.9% of ~~2019, we believe that~~available sublease space in our stabilized portfolio as of June 30, 2020, approximately 2.7% was vacant space, and the ~~weighted average cash rental rates are approximately 30% below market.~~

~~For~~remaining 3.2% was occupied. Of the approximately ~~1.1 million~~849,307 rentable square feet ~~or 7.7%~~available for sublease as of ~~our total annualized base rental revenue~~June 30, 2020, approximately 17,137 rentable square feet representing two leases are scheduled to expire in 2020, ~~we believe that the weighted average cash rental rates are overall~~and approximately ~~15% below current average market rental rates, primarily due to our Greater Seattle and San Francisco Bay Area submarkets where we currently believe these expiring~~15,907 rentable square feet representing five leases are ~~approximately 30% below market.~~scheduled to expire in 2021.

Stabilized Portfolio Information

As of June 30, ~~2019,~~2020, our stabilized portfolio was comprised of 94114 office properties encompassing an aggregate of approximately ~~13.5~~14.3 million rentable square feet and 200 residential units at our residential tower in Hollywood, California. 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 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 as the historical cost of the property as the projects are placed in service.

We did not have any redevelopment ~~properties~~ or ~~properties~~ held for sale properties at June 30, ~~2019.~~2020. Our stabilized portfolio also excludes our future development pipeline, which as of June 30, ~~2019~~2020 was comprised of ~~four~~five potential development sites, representing approximately 5961 gross acres of undeveloped land on which we believe we have the potential to develop more than ~~4.0~~6.0 million rentable square feet, depending upon economic conditions.

~~During the~~ ~~three~~ ~~months ended June 30, 2019, we added one development project to our stabilized office portfolio consisting of 394,340 square feet in San Francisco, California.~~ As of June 30, ~~2019,~~2020, the following properties were excluded from our stabilized portfolio:


	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾	Number of Properties/Projects	Estimated Rentable Square Feet ⁽¹⁾/ Units
In-process development projects - tenant improvement ⁽²⁾	2	846,000	3	1,275,000
In-process development projects - under construction ⁽³⁾⁽²⁾	5	2,095,000	5	1,016,000
Completed residential development project ⁽³⁾			2	462 units

________________________


(1)	Estimated rentable square feet upon completion.


(2)	~~Includes 96,000 square feet of retail space.~~


~~(3)~~	In addition to the estimated office and life science rentable square feet noted above, development projects under construction also include ~~801~~339 residential units.


(3)	Represents recently completed residential phases I and II at our mixed-use development in San Diego, California that are not yet stabilized.

The following table reconciles the changes in the rentable square feet in our stabilized office portfolio of operating properties from June 30, ~~2018~~2019 to June 30, ~~2019:~~

2020:


	Number of Buildings		Rentable Square Feet		Number of Buildings		Rentable Square Feet
Total as of June 30, 2018	104		13,881,509
Total as of June 30, 2019					94		13,546,615
Acquisitions	1		110,030		19		151,908
Completed development properties placed in-service	1		377,152		2		846,241
Dispositions	(12	)	(856,344	)	(1	)	(271,556	)
Remeasurement	—		34,268		—		54,664
Total as of June 30, 2019 ⁽¹⁾	94		13,546,615
Total as of June 30, 2020 ⁽¹⁾					114		14,327,872

________________________


(1)	Includes four properties owned by consolidated property partnerships (see Note 1 “Organization, Ownership and Basis of Presentation” to our consolidated financial statements included in this report for additional information).

Occupancy Information

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


Region	Number of Buildings	Rentable Square Feet	Occupancy at ⁽¹⁾						Number of Buildings	Rentable Square Feet	Occupancy at ⁽¹⁾
Region	Number of Buildings	Rentable Square Feet	6/30/2019		3/31/2019		12/31/2018		Number of Buildings	Rentable Square Feet	6/30/2020		3/31/2020		12/31/2019
Greater Los Angeles	32	3,872,399	94.8	%	95.6	%	95.1	%	51	4,029,919	91.2	%	94.0	%	95.2	%
Orange County	1	271,556	66.4	%	90.3	%	89.6	%
San Diego County	21	2,045,941	90.2	%	90.2	%	89.3	%	22	2,146,253	87.4	%	88.3	%	89.7	%
San Francisco Bay Area	32	5,554,929	94.5	%	92.5	%	96.4	%	33	6,349,910	93.7	%	94.3	%	95.0	%
Greater Seattle	8	1,801,790	97.6	%	88.8	%	93.6	%	8	1,801,790	95.9	%	95.5	%	97.7	%
Total Stabilized Portfolio	94	13,546,615	93.8	%	92.5	%	94.4	%
Total Stabilized Office Portfolio									114	14,327,872	92.3	%	93.5	%	94.6	%

Average Occupancy
Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018
Stabilized Portfolio⁽¹⁾
93.5 % 94.6 % 93.3 % 94.7 %
Same Store Portfolio⁽²⁾
93.7 % 94.7 % 93.5 % 94.8 %
Residential Portfolio⁽³⁾
76.5 % 83.6 % 73.4 % 83.3 %



	Average Occupancy
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Stabilized Office Portfolio ⁽¹⁾	92.8	%	93.5	%	93.2	%	93.3	%
Same Store Portfolio ⁽²⁾	92.5	%	93.9	%	93.1	%	93.6	%
Residential Portfolio ⁽³⁾	85.0	%	76.5	%	89.3	%	73.4	%

________________________


(1)	Occupancy percentages reported are based on our stabilized office portfolio as of the end of the period ~~presented.~~presented and exclude occupancy percentages of properties held for sale.


(2)	Occupancy percentages reported are based on office properties owned and stabilized as of January 1, ~~2018~~2019 and still owned and stabilized as of June 30, ~~2019~~2020 and exclude our residential tower. See discussion under “Results of Operations” for additional information.


(3)	Our residential portfolio consists of our 200-unit residential tower located in Hollywood, ~~California.~~California and excludes 462 recently completed residential units that are not yet stabilized.

Significant Tenants

The following table sets forth information about our ~~fifteen~~15 largest tenants based upon annualized base rental revenues, as defined below, as of June 30, ~~2019:~~2020. We have collected July 2020 contractual rents from all of our top 15 tenants.


Tenant Name	Region	Annualized Base Rental Revenue⁽¹⁾⁽²⁾	Rentable Square Feet	Percentage of Total Annualized Base Rental Revenue⁽²⁾		Percentage of Total Rentable Square Feet		Region	Annualized Base Rental Revenue ^{(1) (2)}		Rentable Square Feet	Percentage of Total Annualized Base Rental Revenue		Percentage of Total Rentable Square Feet		Year(s) of Lease Expiration
Dropbox, Inc. ⁽³⁾	San Francisco Bay Area	35,054	529,552	5.7	%	3.9	%
									(in thousands)
Dropbox, Inc.								San Francisco Bay Area	$	55,998	738,081	7.9	%	5.0	%	2033
GM Cruise, LLC								San Francisco Bay Area	36,337		374,618	5.1	%	2.6	%	2031
LinkedIn Corporation / Microsoft Corporation	San Francisco Bay Area	29,752	663,460	4.8	%	4.9	%	San Francisco Bay Area	29,752		663,460	4.2	%	4.5	%	2024 / 2026
Adobe Systems Inc.	San Francisco Bay Area / Greater Seattle	27,928	513,111	4.5	%	3.8	%
Adobe Systems, Inc.								San Francisco Bay Area / Greater Seattle	27,897		513,111	3.9	%	3.5	%	2027 / 2031
salesforce.com, inc.	San Francisco Bay Area	24,076	451,763	3.9	%	3.3	%	San Francisco Bay Area	24,076		451,763	3.4	%	3.1	%	2031 / 2032
DIRECTV, LLC	Greater Los Angeles	23,152	684,411	3.8	%	5.1	%	Greater Los Angeles	23,152		684,411	3.3	%	4.7	%	2027
Box, Inc.	San Francisco Bay Area	22,441	371,792	3.6	%	2.7	%	San Francisco Bay Area	22,441		371,792	3.2	%	2.5	%	2021 / 2028
Okta, Inc.	San Francisco Bay Area	17,122	207,066	2.8	%	1.5	%	San Francisco Bay Area	18,263		218,100	2.6	%	1.5	%	2028
Riot Games, Inc.	Greater Los Angeles	15,514	251,509	2.5	%	1.9	%	Greater Los Angeles	15,554		251,509	2.2	%	1.7	%	2020 / 2023 / 2024
Synopsys, Inc.	San Francisco Bay Area	15,492	340,913	2.5	%	2.5	%	San Francisco Bay Area	15,492		340,913	2.2	%	2.3	%	2030
Fortune 50 Publicly-Traded Company⁽³⁾								Greater Seattle	15,355		311,983	2.2	%	2.1	%	2033
Viacom International, Inc.	Greater Los Angeles	13,718	211,343	2.2	%	1.6	%	Greater Los Angeles	13,718		211,343	1.9	%	1.4	%	2028
DoorDash, Inc.								San Francisco Bay Area	13,531		135,137	1.9	%	0.9	%	2032
Amazon.com	Greater Seattle	12,513	277,399	2.0	%	2.0	%	Greater Seattle	12,397		277,399	1.7	%	1.9	%	2030
Concur Technologies	Greater Seattle	10,643	288,322	1.7	%	2.1	%
Cisco Systems, Inc.	San Francisco Bay Area	9,830	135,296	1.6	%	1.0	%
Capital One, N.A.	San Francisco Bay Area	9,170	117,993	1.5	%	0.9	%
AMN Healthcare, Inc.	San Diego County	9,001	176,075	1.5	%	1.3	%

Total Top Fifteen Tenants		275,406	5,220,005	44.6	%	38.5	%

Nektar Therapeutics, Inc.								San Francisco Bay Area	12,297		135,350	1.7	%	0.9	%	2030
Total									$	336,260	5,678,970	47.4	%	38.6	%

________________________


(1)	~~Includes 100% of annualized base rental revenues of consolidated property partnerships.~~

~~(2)~~

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. Excludes month-to-month leases and vacant space as of June 30, ~~2019.~~2020.


(2)	Includes 100% of the annualized base rental revenues of consolidated property partnerships.

(3)

~~During the three months ended~~In June, ~~30, 2019,~~ the Company ~~completed construction and~~ commenced GAAP revenue recognition on ~~its~~Phase I of this tenant’s lease ~~with Dropbox, Inc. for the first phase of The Exchange on 16th,~~at 333 Dexter, which represents approximately ~~52%~~49% of the ~~750,000~~635,000 square foot ~~development~~ project located in ~~San Francisco’s Mission Bay district.~~the South Lake Union submarket of Seattle.

Results of Operations

Net Operating Income

Management internally evaluates the operating performance and financial results of our stabilized portfolio based on Net Operating Income. We define “Net Operating Income” ~~subsequent to the adoption of Topic 842~~ as consolidated operating revenues (rental income and other property income) less consolidated operating expenses (property expenses, real estate taxes and ground leases). Prior to the adoption of Topic 842 we defined Net Operating Income as consolidated operating revenues (rental income, tenant reimbursements and other property income) less consolidated operating expenses (property expenses, real estate taxes, provision for bad debts and ground leases).

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

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

Same Store Properties – includes the consolidated results of all of the office properties that were owned and included in our stabilized portfolio for two comparable reporting periods, i.e., owned and included in our stabilized portfolio as of January 1, ~~2018~~2019 and still owned and included in the stabilized portfolio as of June 30, ~~2019,~~2020, including our residential tower in Hollywood, California;

Development Properties – includes the results generated by certain of our in-process development projects, expenses for certain of our future development ~~projects~~project and the results generated by our 462 completed residential units that are not yet stabilized and the following stabilized development ~~projects, including one office and one retail property in the tenant improvement phase that commenced revenue recognition in the second quarter of 2019 and one~~properties:

◦One office development project that was added to the stabilized portfolio in the second quarter of 2019;

◦One office development project that was added to the stabilized portfolio in the first quarter of 2020; and

◦One retail development project that was added to the stabilized portfolio in the first quarter of 2020;

Acquisition Properties – includes the results, from the dates of acquisition through the periods presented, for the ~~four~~19-building creative office ~~buildings~~campus we acquired during ~~2018;~~2019; and

Disposition ~~Properties –~~Properties– includes the results of the ~~11 properties~~one property disposed of in the ~~fourth~~second quarter of ~~2018~~2019 and the one property disposed of in the ~~second~~fourth quarter of 2019.

The following table sets forth certain information regarding the property groups within our stabilized office portfolio as of June 30, ~~2019:~~2020:


Group	# of Buildings	Rentable Square Feet	# of Buildings	Rentable Square Feet
Same Store Properties	89	12,896,695	92	12,935,383
Development Properties - Stabilized⁽¹⁾	1	394,340
Stabilized Development Properties			3	1,240,581
Acquisition Properties	4	255,580	19	151,908
Total Stabilized Office Portfolio	94	13,546,615
Total Stabilized Portfolio			114	14,327,872

~~_______________________~~


~~(1)~~	~~Excludes development projects in the tenant improvement phase, our in-process development projects and future development projects.~~

Comparison of the Three Months Ended June 30, ~~2019~~2020 to the Three Months Ended June 30, ~~2018~~2019

The following table summarizes our Net Operating Income, as defined, for our total portfolio for the three months ended June 30, ~~2019~~2020 and ~~2018~~2019.


	Three Months Ended June 30,						Dollar Change			Percentage Change		Three Months Ended June 30,						Dollar Change			Percentage Change
	2019			2018			Dollar Change			Percentage Change		2020			2019			Dollar Change			Percentage Change
	($ in thousands)											($ in thousands)
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined:
Net Income Available to Common Stockholders	$	42,194		$	27,549		$	14,645		53.2	%	$	19,618		$	42,194		$	(22,576	)	(53.5	)%
Net income attributable to noncontrolling common units of the Operating Partnership	871			566			305			53.9	%	367			871			(504		)	(57.9	)%
Net income attributable to noncontrolling interests in consolidated property partnerships	4,150			3,640			510			14.0	%	4,367			4,150			217			5.2	%
Net income	$	47,215		$	31,755		$	15,460		48.7	%	$	24,352		$	47,215		$	(22,863	)	(48.4	)%
Unallocated expense (income):
General and administrative expenses	19,857			21,763			(1,906		)	(8.8	)%	38,597			19,857			18,740			94.4	%
Leasing costs	2,650			—			2,650			100.0	%	1,330			2,650			(1,320		)	(49.8	)%
Depreciation and amortization	68,252			64,006			4,246			6.6	%	80,085			68,252			11,833			17.3	%
Interest income and other net investment gain	(616		)	(771		)	155			(20.1	)%	(2,838		)	(616		)	(2,222		)	360.7	%
Interest expense	11,727			12,712			(985		)	(7.7	)%	15,884			11,727			4,157			35.4	%
Gains on sales of depreciable operating properties	(7,169		)	—			(7,169		)	(100.0	)%	—			(7,169		)	7,169			(100.0	)%
Net Operating Income, as defined	$	141,916		$	129,465		$	12,451		9.6	%	$	157,410		$	141,916		$	15,494		10.9	%

The following tables summarize our Net Operating Income, as defined, for our total portfolio for the three months ended June 30, ~~2019~~2020 and ~~2018~~2019.


	Three Months Ended June 30,																					Three Months Ended June 30,
	2019										2018											2020											2019
	Same Store		Develop-ment		Acquisi-tion		Disposi-tion		Total		Same Store		Develop-ment			Acquisi-tion		Disposi-tion		Total		Same Store		Develop-ment		Acquisi-tion			Disposi-tion		Total		Same Store		Develop-ment		Acquisi-tion		Disposi-tion		Total
	(in thousands)																					(in thousands)
Operating revenues:
Rental income	$	180,662	$	9,169	$	7,369	$	429	$	197,629	$	156,202	$	—		$	1,679	$	6,634	$	164,515	$	182,323	$	32,962	$	3,071		$	—	$	218,356	$	185,711	$	9,169	$	—	$	2,749	$	197,629
Tenant reimbursements	—		—		—		—		—		17,670		—			345		1,552		19,567
Other property income	2,610		252		—		1		2,863		2,921		—			—		69		2,990		922		149		(4		)	—		1,067		2,291		253		—		319		2,863
Total	183,272		9,421		7,369		430		200,492		176,793		—			2,024		8,255		187,072		183,245		33,111		3,067			—		219,423		188,002		9,422		—		3,068		200,492
Property and related expenses:
Property expenses	36,005		1,609		817		105		38,536		30,683		29			136		1,719		32,567		32,936		4,649		244			—		37,829		36,154		1,609		—		773		38,536
Real estate taxes	16,607		554		739		26		17,926		16,395		299			267		852		17,813		17,214		4,120		520			—		21,854		17,067		554		—		305		17,926
Provision for bad debts	—		—		—		—		—		5,388		—			—		253		5,641
Ground leases	2,114		—		—		—		2,114		1,586		—			—		—		1,586		2,121		—		209			—		2,330		2,114		—		—		—		2,114
Total	54,726		2,163		1,556		131		58,576		54,052		328			403		2,824		57,607		52,271		8,769		973			—		62,013		55,335		2,163		—		1,078		58,576
Net Operating Income, as defined	$	128,546	$	7,258	$	5,813	$	299	$	141,916	$	122,741	$	(328	)	$	1,621	$	5,431	$	129,465	$	130,974	$	24,342	$	2,094		$	—	$	157,410	$	132,667	$	7,259	$	—	$	1,990	$	141,916

Three Months Ended June 30, 2019 as compared to the Three Months Ended June 30, 2018
Same Store Development Acquisition Disposition Total
Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change
($ in thousands)
Operating revenues:
Rental income $ 24,460
15.7 % $ 9,169
100.0 % $ 5,690
338.9 % $ (6,205 ) (93.5 )% $ 33,114
20.1 %
Tenant reimbursements (17,670 ) (100.0 )% —
— % (345 ) (100.0 )% (1,552 ) (100.0 )% (19,567 ) (100.0 )%
Other property income (311 ) (10.6 )% 252
100.0 % —
— % (68 ) (98.6 )% (127 ) (4.2 )%
Total 6,479
3.7 % 9,421
100.0 % 5,345
264.1 % (7,825 ) (94.8 )% 13,420
7.2 %
Property and related expenses:
Property expenses 5,322
17.3 % 1,580
NM*
681
500.7 % (1,614 ) (93.9 )% 5,969
18.3 %
Real estate taxes 212
1.3 % 255
85.3 % 472
176.8 % (826 ) (96.9 )% 113
0.6 %
Provision for bad debts (5,388 ) (100.0 )% —
— % —
— % (253 ) (100.0 )% (5,641 ) (100.0 )%
Ground leases 528
33.3 % —
— % —
— % —
— % 528
33.3 %
Total 674
1.2 % 1,835
559.5 % 1,153
286.1 % (2,693 ) (95.4 )% 969
1.7 %
Net Operating Income,
as defined
$ 5,805
4.7 % $ 7,586
NM*
$ 4,192
258.6 % $ (5,132 ) (94.5 )% $ 12,451
9.6 %

~~________________________~~


*	~~Percentage not meaningful.~~

The Company adopted Topic 842 on January 1, 2019 which resulted in rental revenues, tenant reimbursements, provision for/recoveries of bad debts, and lease termination fees being presented as one single component in rental income. The presentation changes required by Topic 842 were adopted prospectively with no restatement of previously reported periods required.



	Three Months Ended June 30, 2020 as compared to the Three Months Ended June 30, 2019
	Same Store					Development					Acquisition					Disposition					Total
	Dollar Change			Percent Change		Dollar Change			Percent Change		Dollar Change			Percent Change		Dollar Change			Percent Change		Dollar Change			Percent Change
	($ in thousands)
Operating revenues:
Rental income	$	(3,388	)	(1.8	)%	$	23,793		259.5	%	$	3,071		100.0	%	$	(2,749	)	(100.0	)%	$	20,727		10.5	%
Other property income	(1,369		)	(59.8	)%	(104		)	(41.1	)%	(4		)	(100.0	)%	(319		)	(100.0	)%	(1,796		)	(62.7	)%
Total	(4,757		)	(2.5	)%	23,689			251.4	%	3,067			100.0	%	(3,068		)	(100.0	)%	18,931			9.4	%
Property and related expenses:
Property expenses	(3,218		)	(8.9	)%	3,040			188.9	%	244			100.0	%	(773		)	(100.0	)%	(707		)	(1.8	)%
Real estate taxes	147			0.9	%	3,566			643.7	%	520			100.0	%	(305		)	(100.0	)%	3,928			21.9	%
Ground leases	7			0.3	%	—			—	%	209			100.0	%	—			—	%	216			10.2	%
Total	(3,064		)	(5.5	)%	6,606			305.4	%	973			100.0	%	(1,078		)	(100.0	)%	3,437			5.9	%
Net Operating Income, as defined	$	(1,693	)	(1.3	)%	$	17,083		235.3	%	$	2,094		100.0	%	$	(1,990	)	(100.0	)%	$	15,494		10.9	%

Net Operating Income increased ~~$12.5~~$15.5 million, or ~~9.6%~~10.9%, for the three months ended June 30, ~~2019~~2020 as compared to the three months ended June 30, ~~2018~~2019 resulting from:

~~An increase~~A decrease in Net Operating Income of ~~$5.8~~$1.7 million attributable to the Same Store Properties was driven by the following activity:

~~An increase~~A decrease in ~~total operating revenues~~rental income of ~~$6.5~~$3.4 million primarily due to:

$~~2.4~~3.7 million of reversals of revenue related to the creditworthiness of certain tenants primarily as a result of the COVID-19 pandemic;

$3.0 million decrease due to an early lease termination fee received in 2019 for a tenant in the San Francisco Bay Area;

$2.0 million decrease due to lower occupancy primarily in the Greater Los Angeles, San Francisco Bay Area, and San Diego County regions;

$1.6 million decrease in recoveries of recurring expenses related to property taxes, repairs and maintenance, security, janitorial, utilities, parking and various other recurring expenses primarily due to the following:

$0.8 million decrease due to tenants on a cash basis of revenue recognition and abatements given due to the COVID-19 pandemic;

$0.5 million decrease due to lower operating expenses resulting from COVID-19 stay-at-home orders; and

$0.6 million decrease primarily due to new tenants with 2020 base years;

$1.1 million decrease due to lower parking income resulting from a reduction in the number of monthly parking spaces rented as a result of COVID-19 stay-at-home orders; partially offset by

$8.1 million increase from new leases and renewals at higher rates primarily in the San Francisco Bay Area, ~~Greater Los Angeles,~~San Diego County, and Greater Seattle regions;

~~$4.5~~A decrease in other property income of $1.4 million ~~increase in the tenant reimbursement component of rental income due to the following:~~

$2.7 million increase due to the adoption of Topic 842 on January 1, 2019, resulting in the gross-up of tenant direct billbacks, which were previously presented net in property expenses. These billbacks are also included in property expenses and have no net impact on net operating income;

~~$1.3 million increase due to tenant recoveries of the new Proposition C gross receipts tax for San Francisco effective January 1, 2019; and~~

~~$0.5 million increase due to a reimbursement adjustment related to 2018 for one tenant in the San Francisco Bay Area;~~

~~$0.4 million increase in parking revenue~~ primarily due to ~~higher monthly tenant~~lower transient and special event parking ~~revenue~~income at ~~two~~a number of properties in the San Francisco Bay Area, Greater Seattle and ~~one property~~Greater Los Angeles regions. We expect daily, special event and transient parking to be impacted while restrictions intended to prevent the spread of COVID-19 remain in ~~Greater Seattle; partially offset by~~effect;

~~$0.8 million~~A decrease ~~primarily due to a restoration fee received from one tenant in 2018;~~

~~An increase~~ in property and related expenses of ~~$0.7~~$3.1 million primarily due to the following:

~~$5.3 million increase in property expenses primarily due to the following:~~

$2.7 million increase due to the adoption of Topic 842 on January 1, 2019, resulting in the gross-up of tenant direct billbacks, which were previously presented net in property expenses. These billbacks are also included in operating revenues and have no net impact on net operating income;

$~~1.3~~2.8 million ~~increase due to the new Proposition C gross receipts tax in the San Francisco Bay Area passed through to tenants which became effective on January 1, 2019; and~~

~~$0.9 million increase~~decrease in reimbursable property expenses ~~such as~~including janitorial, utilities, ~~security, contract services, insurance, repairs and maintenance,~~engineering, parking, and various other recurring expenses ~~and a $0.4 million increase in non-reimbursable expenses primarily~~ due to ~~higher property management costs;~~

~~$5.4 million decrease in provision for bad debts~~several tenants implementing work from home policies due to the COVID-19 pandemic. We anticipate lower reimbursable property expenses and corresponding tenant recoveries as a ~~provision recorded~~result of lower usage of our buildings by tenants while restrictions intended to prevent the spread of COVID-19 are in ~~2018 related primarily to one tenant;~~effect; and

$~~0.5~~0.4 million ~~increase in ground leases primarily~~decrease due to ~~the adoption of Topic 842 on January 1, 2019, which resulted~~insurance reimbursements received in ~~property taxes related to properties where the Company is the lessee under a ground lease to be presented~~2020 for expenses incurred in ~~ground lease expense.~~2019;

An increase in Net Operating Income of ~~$7.6~~$17.1 million attributable to the Development ~~Properties;~~Properties driven by the following activity:

$23.8 million increase in rental income primarily related to one office development project that was added to the stabilized portfolio in the first quarter of 2020; partially offset by

$6.6 million increase in property and related expenses primarily due to higher property expenses and real estate taxes related to one office development project that was added to the stabilized portfolio in the first quarter of 2020 and ceased capitalization of real estate taxes;

An increase in Net Operating Income of ~~$4.2~~$2.1 million attributable to the Acquisition Properties; and

A decrease in Net Operating Income of ~~$5.1~~$2.0 million attributable to the Disposition Properties.

Other Expenses and Income

General and Administrative Expenses

General and administrative expenses ~~decreased~~increased by approximately ~~$1.9~~$18.7 million, or ~~8.8%~~94.4%, for the three months ended June 30, ~~2019~~2020 compared to the three months ended June 30, ~~2018~~2019 primarily due to:

An increase of $18.4 million in severance costs related to the ~~following:~~previously announced departure of an executive officer and the departure of certain other employees;

A increase of $1.2 million related to the mark-to-market adjustment of the Company’s deferred compensation plan and the resultant impact of reducing compensation expense, which is offset by the losses on the underlying marketable securities which are included in interest income and other net investment gain (loss) in the consolidated statements of operations; partially offset by

A decrease of ~~$2.1~~$1.0 million primarily due to lower ~~stock~~incentive compensation ~~expense;~~accruals and

~~A decrease~~ other related cost cutting measures as a result of ~~$1.7 million resulting from lower professional service costs primarily related to legal costs incurred in 2018 connection with a previously disclosed litigation matter; partially offset by~~

~~An increase of $1.9 million due to higher cash compensation costs related to the growth of the company.~~COVID-19.

Leasing Costs

~~Effective January 1,~~Leasing costs decreased by $1.3 million or 49.8%, for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 ~~the Company adopted Topic 842 and expensed $2.7 million~~primarily due to a higher level of ~~indirect~~ leasing ~~costs~~activity during the three months ended June 30, ~~2019. Amounts~~2019 and changes in ~~prior periods were capitalized under previous accounting guidance.~~personnel.

Depreciation and Amortization

Depreciation and amortization increased ~~$4.2~~$11.8 million, or ~~6.6%~~17.3%, for the three months ended June 30, ~~2019~~2020 compared to the three months ended June 30, ~~2018~~2019 primarily due to the following:

An increase of ~~$1.4~~$4.4 million attributable to the Same Store Properties;

An increase of ~~$2.3~~$6.3 million attributable to the Development Properties; and

An increase of ~~$3.4~~$2.2 million attributable to the Acquisition Properties; partially offset by

~~A decrease of $2.9 million attributable to the Disposition Properties.~~

A decrease of $1.1 million attributable to the Disposition Properties.

Interest Expense

The following table sets forth our gross interest expense, including debt ~~discounts/premiums~~discounts and deferred financing cost amortization, and capitalized interest, including capitalized debt ~~discounts/premiums~~discounts and deferred financing cost amortization, for the three months ended June 30, ~~2019~~2020 and ~~2018~~2019:


	Three Months Ended June 30,											Three Months Ended June 30,
	2019			2018			Dollar Change			Percentage Change		2020			2019			Dollar Change		Percentage Change
	(in thousands)											(in thousands)
Gross interest expense	$	32,607		$	28,523		$	4,084		14.3	%	$	36,400		$	32,607		$	3,793	11.6	%
Capitalized interest and deferred financing costs	(20,880		)	(15,811		)	(5,069		)	32.1	%	(20,516		)	(20,880		)	364		(1.7	)%
Interest expense	$	11,727		$	12,712		$	(985	)	(7.7	)%	$	15,884		$	11,727		$	4,157	35.4	%

Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased ~~$4.1~~$3.8 million, or ~~14.3%~~11.6%,for the three months ended June 30, ~~2019~~2020 as compared to the three months ended June 30, ~~2018~~2019 primarily due to an increase in ~~our~~the average outstanding debt balancefor the three months ended June 30, ~~2019.~~2020.

Capitalized interest and deferred financing costs ~~increased $5.1~~decreased $0.4 million, or ~~32.1%~~1.7%,for the three months ended June 30, ~~2019~~2020 compared to the three months ended June 30, ~~2018~~2019 primarily due to ~~an increase~~a decrease in the weighted average ~~development asset balances qualifying for~~ interest ~~capitalization~~rate during the three months ended June 30, ~~2019.~~2020. During the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately $2.1 billion and $2.0 billion, respectively. In the event of an extended cessation of development activities to get any of these projects ready for its intended use, such projects could potentially no longer qualify for capitalization of interest or other carrying costs. However, a cessation of development activities caused by events outside of our control, such as those as a result of government restrictions aimed at stopping the spread of COVID-19, would not impact our ability to capitalize interest and ~~$1.5 billion, respectively.~~other carrying costs. Refer to “Part II – Other Information, Item IA. Risk Factors” included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders.

Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships

Net income attributable to noncontrolling interests in consolidated property partnerships increased by ~~$0.5~~$0.2 million or ~~14.0%~~5.2% for the three months ended June 30, ~~2019~~2020 compared to the three months ended June 30, ~~2018~~2019 primarily due to a new lease at a higher ~~occupancy~~rate at one property held in a property partnership in ~~2019.~~ 2020.The amounts reported for the three months ended June 30, ~~2019~~2020 and ~~2018~~2019 are comprised of the noncontrolling ~~interests’~~interest's share of net income for 100 First Street Member, LLC (“100 First LLC”), and 303 Second Street Member, LLC (“303 Second LLC”) and the noncontrolling interest's share of net income for Redwood City Partners, LLC (“Redwood LLC”).

Comparison of the Six Months Ended June 30, ~~2019~~2020 to the Six Months Ended June 30, ~~2018~~2019

The following table summarizes our Net Operating Income, as defined, for our total portfolio for the six months ended June 30, ~~2019~~2020 and ~~2018~~.2019.


	Six Months Ended June 30,						Dollar Change			Percentage Change		Six Months Ended June 30,					Dollar Change			Percentage Change
	2019			2018			Dollar Change			Percentage Change		2020		2019			Dollar Change			Percentage Change
	($ in thousands)											($ in thousands)
Reconciliation of Net Income Available to Common Stockholders to Net Operating Income, as defined:
Net Income Available to Common Stockholders	$	79,097		$	63,795		$	15,302		24.0	%	$	59,435	$	79,097		$	(19,662	)	(24.9	)%
Net income attributable to noncontrolling common units of the Operating Partnership	1,571			1,317			254			19.3	%	1,072		1,571			(499		)	(31.8	)%
Net income attributable to noncontrolling interests in consolidated property partnerships	8,341			7,614			727			9.5	%	9,263		8,341			922			11.1	%
Net income	$	89,009		$	72,726		$	16,283		22.4	%	$	69,770	$	89,009		$	(19,239	)	(21.6	)%
Unallocated expense (income):
General and administrative expenses	43,198			37,322			5,876			15.7	%	57,607		43,198			14,409			33.4	%
Leasing Costs	4,407			—			4,407			100.0	%	2,786		4,407			(1,621		)	(36.8	)%
Depreciation and amortization	134,387			126,721			7,666			6.0	%	154,455		134,387			20,068			14.9	%
Interest income and other net investment gains	(2,444		)	(805		)	(1,639		)	203.6	%
Interest income and other net investment loss (gain)												290		(2,444		)	2,734			(111.9	)%
Interest expense	22,970			26,210			(3,240		)	(12.4	)%	30,328		22,970			7,358			32.0	%
Gains on sales of depreciable operating properties	(7,169		)	—			(7,169		)	(100.0	)%	—		(7,169		)	7,169			(100.0	)%
Net Operating Income, as defined	$	284,358		$	262,174		$	22,184		8.5	%	$	315,236	$	284,358		$	30,878		10.9	%

The following tables summarize our Net Operating Income, as defined, for our total portfolio for the ~~three~~six months ended June 30, ~~2019~~2020 and ~~2018~~.2019.


	Six Months Ended June 30,																					Six Months Ended June 30,
	2019										2018											2020										2019
	Same Store		Develop-ment		Acquisi-tion		Disposi-tion		Total		Same Store		Develop-ment			Acquisi-tion		Disposi-tion		Total		Same Store		Develop-ment		Acquisi-tion		Disposi-tion		Total		Same Store		Develop-ment		Acquisi-tion		Disposi-tion		Total
	(in thousands)																					(in thousands)
Operating revenues:
Rental income	$	364,639	$	17,194	$	14,455	$	723	$	397,011	$	311,498	$	—		$	2,836	$	13,052	$	327,386	$	368,737	$	61,390	$	6,862	$	—	$	436,989	$	374,153	$	17,194	$	—	$	5,664	$	397,011
Tenant reimbursements	—		—		—		—		—		35,250		—			584		2,883		38,717
Other property income	4,361		320		—		2		4,683		3,688		—			—		103		3,791		3,102		581		79		—		3,762		4,002		320		—		361		4,683
Total	369,000		17,514		14,455		725		401,694		350,436		—			3,420		16,038		369,894		371,839		61,971		6,941		—		440,751		378,155		17,514		—		6,025		401,694
Property and related expenses:
Property expenses	72,358		2,671		1,434		222		76,685		60,647		71			251		3,269		64,238		67,693		8,492		627		—		76,812		72,449		2,671		—		1,565		76,685
Real estate taxes	33,196		1,766		1,536		67		36,565		32,344		469			443		1,703		34,959		34,460		8,538		1,058		—		44,056		34,177		1,766		—		622		36,565
Provision for bad debts	—		—		—		—		—		5,097		—			—		279		5,376
Ground leases	4,086		—		—		—		4,086		3,147		—			—		—		3,147		4,230		—		417		—		4,647		4,086		—		—		—		4,086
Total	109,640		4,437		2,970		289		117,336		101,235		540			694		5,251		107,720		106,383		17,030		2,102		—		125,515		110,712		4,437		—		2,187		117,336
Net Operating Income, as defined	$	259,360	$	13,077	$	11,485	$	436	$	284,358	$	249,201	$	(540	)	$	2,726	$	10,787	$	262,174	$	265,456	$	44,941	$	4,839	$	—	$	315,236	$	267,443	$	13,077	$	—	$	3,838	$	284,358

Six Months Ended June 30, 2019 as compared to the Six Months Ended June 30, 2018
Same Store Development Acquisition Disposition Total
Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change Dollar Change Percent Change
($ in thousands)
Operating revenues:
Rental income $ 53,141
17.1 % $ 17,194
100.0 % $ 11,619
409.7 % $ (12,329 ) (94.5 )% $ 69,625
21.3 %
Tenant reimbursements (35,250 ) (100.0 )% —
— % (584 ) (100.0 )% (2,883 ) (100.0 )% (38,717 ) (100.0 )%
Other property income 673
18.2 % 320
100.0 % —
— % (101 ) (98.1 )% 892
23.5 %
Total 18,564
5.3 % 17,514
100.0 % 11,035
322.7 % (15,313 ) (95.5 )% 31,800
8.6 %
Property and related expenses:
Property expenses 11,711
19.3 % 2,600
NM*
1,183
471.3 % (3,047 ) (93.2 )% 12,447
19.4 %
Real estate taxes 852
2.6 % 1,297
276.5 % 1,093
246.7 % (1,636 ) (96.1 )% 1,606
4.6 %
Provision for bad debts (5,097 ) (100.0 )% —
— % —
— % (279 ) (100.0 )% (5,376 ) (100.0 )%
Ground leases 939
29.8 % —
— % —
— % —
— % 939
29.8 %
Total 8,405
8.3 % 3,897
721.7 % 2,276
328.0 % (4,962 ) (94.5 )% 9,616
8.9 %
Net Operating Income,
as defined
$ 10,159
4.1 % $ 13,617
NM*
$ 8,759
321.3 % $ (10,351 ) (96.0 )% $ 22,184
8.5 %



	Six Months Ended June 30, 2020 as compared to the Six Months Ended June 30, 2019
	Same Store					Development				Acquisition				Disposition					Total
	Dollar Change			Percent Change		Dollar Change		Percent Change		Dollar Change		Percent Change		Dollar Change			Percent Change		Dollar Change			Percent Change
	($ in thousands)
Operating revenues:
Rental income	$	(5,416	)	(1.4	)%	$	44,196	257.0	%	$	6,862	100.0	%	$	(5,664	)	(100.0	)%	$	39,978		10.1	%
Other property income	(900		)	(22.5	)%	261		81.6	%	79		100.0	%	(361		)	(100.0	)%	(921		)	(19.7	)%
Total	(6,316		)	(1.7	)%	44,457		253.8	%	6,941		100.0	%	(6,025		)	(100.0	)%	39,057			9.7	%
Property and related expenses:
Property expenses	(4,756		)	(6.6	)%	5,821		217.9	%	627		100.0	%	(1,565		)	(100.0	)%	127			0.2	%
Real estate taxes	283			0.8	%	6,772		383.5	%	1,058		100.0	%	(622		)	(100.0	)%	7,491			20.5	%
Ground leases	144			3.5	%	—		—	%	417		100.0	%	—			—	%	561			13.7	%
Total	(4,329		)	(3.9	)%	12,593		283.8	%	2,102		100.0	%	(2,187		)	(100.0	)%	8,179			7.0	%
Net Operating Income, as defined	$	(1,987	)	(0.7	)%	$	31,864	243.7	%	$	4,839	100.0	%	$	(3,838	)	(100.0	)%	$	30,878		10.9	%

Net Operating Income increased ~~$22.2~~$30.9 million, or ~~8.5%~~10.9%, for the six months ended June 30, ~~2019~~2020 as compared to the six months ended June 30, ~~2018~~2019 primarily resulting from:

~~An increase~~A decrease of ~~$10.2~~$2.0 million attributable to the Same Store Properties primarily resulting from:

~~An increase~~A decrease in ~~total operating revenues~~rental income of ~~$18.6~~$5.4 million primarily due to:

$~~3.7~~8.6 million ~~increase from new leases and renewals at higher rates~~of reversals of revenue related to the creditworthiness of certain tenants primarily as a result of the COVID-19 pandemic;

$4.2 million net decrease primarily related to the improved credit quality of a tenant in 2019 for which the Company recorded a bad debt reserve in 2018;

$6.2 million decrease primarily due to an early lease termination fee received in 2019 for a tenant in the San Francisco Bay ~~Area and Greater Los Angeles regions;~~Area;

$~~10.9~~0.9 million ~~increase~~decrease due to lower parking income resulting from a reduction in the number of monthly parking spaces rented as a result of COVID-19 stay-at-home orders;

$3.1 million decrease in the tenant reimbursement component of rental income due to the following:

$~~5.5~~2.5 million increase due to the adoption of Topic 842 on January 1, 2019, resulting in the gross-up of tenant direct billbacks, which were previously presented net in property expenses. These billbacks are also included in property expenses and have no net impact on net operating income;

~~$2.6 million increase due to tenant recoveries of the new Proposition C gross receipts tax for San Francisco effective January 1, 2019;~~

~~$1.5 million increase due to higher recoveries of recurring expenses related to property taxes, security, repairs and maintenance, and various other recurring expenses at certain properties;~~

~~$0.8 million increase due to lower abated tenant reimbursements and various other adjustments; and~~

~~$0.5 million increase due to new triple net tenants in the Greater Seattle region which replaced prior year base year tenants, offset by a~~ decrease due to ~~one~~a tenant in the San Francisco Bay ~~Area paying for~~Area’s change from a triple net lease to a modified net lease, resulting in payment of expenses ~~directly;~~directly to vendors, and new tenants with 2020 base years; and

$~~3.0~~0.6 million ~~net~~decrease due to abatements provided to tenants and lower operating expenses as a result of the COVID-19 pandemic; partially offset by

$17.6 million increase from new leases and renewals at higher rates at various properties across the portfolio;

A decrease in other property income of $0.9 million primarily due to lower transient and special event parking income at a ~~$4.2~~number of properties in the San Francisco Bay Area, Greater Seattle and Greater Los Angeles regions. We expect daily, special event and transient parking to be impacted while restrictions intended to prevent the spread of COVID-19 are in effect;

A decrease in property and related expenses of $4.3 million ~~reversal of provision for bad debts related~~primarily due to the ~~improved credit quality of a tenant for which~~following:

$4.8 million decrease in property expenses primarily due to the Company recorded a bad debt reserve in 2018, partially offset by $1.2 million of provision for bad debts recorded for other tenants during the six months ended June 30, 2019. The provision for bad debts is included in rental income beginning January 1, 2019 in connection with the adoption of ASC 842; andfollowing:

$~~0.8~~4.4 million ~~increase due to early lease termination fees primarily for one tenant in the San Francisco Bay Area;~~

~~An increase in property and related expenses of $8.4 million primarily due to the following:~~

~~$11.7 million increase in property expenses primarily due to the following:~~

$5.5 million increase due to the adoption of Topic 842 on January 1, 2019, resulting in the gross-up of tenant direct billbacks, which were previously presented net in property expenses. These billbacks are also included in operating revenues and have no net impact on net operating income;

~~$2.7 million increase due to the new Proposition C gross receipts tax in San Francisco passed through to tenants which became effective on January 1, 2019; and~~

~~$2.8 million increase~~decrease in reimbursable expenses such as utilities, ~~security, contract services,~~parking, janitorial, ~~repairs and maintenance,~~security, and various other recurring expenses ~~and a $0.6 million increase in non-reimbursable expenses primarily~~ due to ~~higher property management costs;~~

~~$0.9 million increase in real estate taxes primarily comprised of:~~

~~$1.1 million increase~~several tenants implementing work from home policies due to ~~higher supplemental taxes assessed~~the COVID-19 pandemic. We anticipate lower reimbursable property expenses and corresponding tenant recoveries as a result of lower usage of our buildings by tenants in ~~2019 for~~while restrictions intended to prevent the ~~2016 to 2019 tax years at one property~~spread of COVID-19 are in ~~the Greater Los Angeles region and lower estimated supplemental taxes in 2018 for the 2016 tax year for another property also in the Greater Los Angeles region;~~effect;

$0.4 million ~~increase due to regular annual increases at various properties across the portfolio; partially offset by~~

~~$0.9 million~~ decrease ~~due to the adoption of Topic 842 on January 1, 2019, which resulted in property taxes related to our four ground leases where the Company is the lessee to be presented in ground lease expense;~~

$5.1 million decrease in provision for bad debts due to 2018 reserves primarily related to one tenant. The provision for bad debts was included in operating expenses prior to the adoption of ASC 842 on January 1, 2019; and

~~$0.9 million increase in ground leases~~ primarily due to ~~the adoption of Topic 842 on January 1, 2019, which resulted~~insurance reimbursements received in ~~property taxes related to properties where the Company is the lessee under a ground lease to be presented~~2020 for expenses incurred in ~~ground lease expense.~~2019;

An increase of ~~$13.6~~$31.9 million attributable to the Development Properties; and

An increase of ~~$8.8~~$4.8 million attributable to the Acquisition Properties; partially offset by

A decrease of ~~$10.4~~$3.8 million attributable to the Disposition Properties.

Other Expenses and Income

General and Administrative Expenses

General and administrative expenses increased ~~$5.9~~$14.4 million, or ~~15.7%~~33.4%, for the six months ended June 30, ~~2019~~2020 compared to the six months ended June 30, ~~2018~~2019 primarily due to the following:

An increase of ~~approximately $6.0~~$18.9 million in severance costs related to the previously announced departure of an executive officer and the departure of certain other employees; partially offset by

A decrease of $3.4 million due to lower compensation accruals and other related ~~to the growth~~cost-cutting measures as a result of ~~the Company;~~COVID-19; and

~~An increase~~A decrease of ~~$1.6~~$1.4 million ~~attributable to compensation expense~~ related to the mark-to-market adjustment ~~for~~of the Company’s deferred compensation ~~plan. The~~plan and the resultant impact of reducing compensation expense, ~~was~~which is offset by ~~gains~~the losses on the underlying marketable securities which are included in interest income and other net investment gain ~~on our~~(loss) in the consolidated statements of ~~operations; partially offset by~~

~~A decrease of approximately $1.7 million resulting from lower legal costs incurred in connection with a previously disclosed litigation matter.~~operations.

Leasing Costs

~~Effective January 1,~~Leasing costs decreased by $1.6 million or 36.8%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 ~~the Company adopted Topic 842 and expensed$4.4 million~~primarily due to a higher level of ~~indirect~~ leasing ~~costs~~activity during the six months ended June 30, ~~2019. Amounts~~2019 and changes in ~~prior periods were capitalized under previous accounting guidance.~~personnel.

Depreciation and Amortization

Depreciation and amortization increased ~~$7.7~~$20.1 million, or ~~6.0%~~14.9%, for the six months ended June 30, ~~2019~~2020 compared to the ~~three~~six months ended June 30, ~~2018~~2019 primarily due to the following:

An increase of ~~$3.0~~$0.6 million attributable to the Same Store Properties;

An increase of ~~$3.7~~$16.8 million attributable to the Development Properties; and

An increase of ~~$6.5~~$4.9 million attributable to the Acquisition Properties; partially offset by

A decrease of ~~$5.5~~$2.2 million attributable to the Disposition Properties.

Interest Expense

The following table sets forth our gross interest expense, including debt discounts/premiums and deferred financing cost amortization, and capitalized interest, including capitalized debt discounts/premiums and deferred financing cost amortization for the six months ended June 30, ~~2019~~2020 and ~~2018:~~2019:


	Six Months Ended June 30,											Six Months Ended June 30,
	2019			2018			Dollar Change			Percentage Change		2020			2019			Dollar Change			Percentage Change
	(in thousands)											(in thousands)
Gross interest expense	$	63,287		$	55,603		$	7,684		13.8	%	$	72,262		$	63,287		$	8,975		14.2	%
Capitalized interest and deferred financing costs	(40,317		)	(29,393		)	(10,924		)	37.2	%	(41,934		)	(40,317		)	(1,617		)	4.0	%
Interest expense	$	22,970		$	26,210		$	(3,240	)	(12.4	)%	$	30,328		$	22,970		$	7,358		32.0	%

Gross interest expense, before the effect of capitalized interest and deferred financing costs, increased ~~$7.7~~$9.0 million or ~~13.8%~~ 14.2%for the six months ended June 30, ~~2019~~2020 as compared to the six months ended June 30, ~~2018~~2019 primarily due to an increase in our average debt balance for the six months ended June 30, ~~2019.~~2020.

Capitalized interest and deferred financing costs increased ~~$10.9~~$1.6 million or ~~37.2%~~4.0%, for the six months ended June 30, ~~2019~~2020 compared to the six months ended June 30, ~~2018~~2019 primarily due to an increase in the average development asset balances qualifying for interest capitalization for the six months ended June 30, ~~2019.~~2020. During the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, we capitalized interest on in-process development projects and future development pipeline projects with an average aggregate cost basis of approximately ~~$1.9~~$2.2 billionand ~~$1.4~~$1.9 billion, respectively.

Net Income Attributable to Noncontrolling Interests in Consolidated Property Partnerships

Net income attributable to noncontrolling interests in consolidated property partnerships increased ~~$0.7~~$0.9 million or ~~9.5%~~11.1% for the six months ended June 30, ~~2019~~2020 compared to the six months ended June 30, ~~2018~~2019 primarily due to a new lease at a higher ~~occupancy~~rate at one property held in a property partnership in ~~2019.~~2020. The amounts reported for the six months ended June 30, ~~2019~~2020 and ~~2018~~2019 are comprised of the noncontrolling interests’ share of net income for 100 First Street Member, LLC (“100 First LLC”), 303 Second Street Member (“303 Second LLC”) and Redwood City Partners, LLC (“Redwood LLC”).

Liquidity and Capital Resources of the Company

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

The Company’s business is operated primarily through the Operating Partnership. Distributions from the Operating Partnership are the Company’s primary source of capital. The Company believes the Operating Partnership’s sources of working capital, specifically its cash flow from operations and borrowings available under its unsecured revolving credit facility and funds from its capital recycling program, including strategic ventures, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make its dividend payments to its common stockholders for the next twelve months. Cash flows from operating activities generated by the Operating Partnership for the six months ended June 30, ~~2019~~2020 were sufficient to cover the Company’s payment of cash dividends to its stockholders. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distributions to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to make distributions to the Company, which would in turn, adversely affect the Company’s ability to pay cash dividends to its stockholders.

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

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

COVID-19 Liquidity Highlights

As of the date of this report, we have no material debt maturities prior to July 2022, at which time our revolving credit facility and term loan mature. As of July 28, 2020, we had approximately $560.0 million in cash and cash equivalents, with an additional $750.0 million available under our unsecured revolving credit facility, as a result of settling various forward equity sale agreements and the completion of a private placement of $350.0 million in unsecured senior notes during the six months ended June 30, 2020. We believe that this available liquidity makes us well positioned to navigate uncertainty resulting from the COVID-19 pandemic. In addition, as discussed above, the Company is a well-known seasoned issuer and has historically been able to raise capital on a timely basis in the public markets, as well as the private markets, as demonstrated by the completion of a private placement in April 2020. Any future financings, however, will depend on market conditions for capital raises and for the investment of any proceeds and there can be no assurances that we will successfully obtain such financings.

Distribution Requirements

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

The Company intends to continue to make, but has not committed to make, regular quarterly cash distributions to common stockholders, and through the Operating Partnership, to common unitholders from the Operating Partnership’s cash flow from operating activities. All such distributions are at the discretion of the Board of Directors. As the Company intends to maintain distributions at a level sufficient to meet the REIT distribution requirements and minimize its obligation to pay income and excise taxes, it will continue to evaluate whether the current levels of distribution are ~~sufficient~~appropriate to do so throughout ~~2019.~~2020. In addition, in the event the Company is unable to identify and complete the acquisition of suitable replacement properties to effect Section 1031 Exchanges or is unable to successfully complete Section 1031 Exchanges to defer some or all of the taxable gains related to property dispositions as a result of the COVID-19 pandemic or any other reason, the Company may elect to distribute a special dividend to its common stockholders and common unitholders in order to minimize or eliminate income taxes on such gains. The Company considers market factors and its performance in addition to REIT requirements in determining its distribution levels. Amounts accumulated for distribution to stockholders are invested primarily in interest-bearing accounts and short-term interest-bearing securities, which is consistent with the Company’s

intention to maintain its qualification as a REIT. Such investments may include, for example, obligations of the Government National Mortgage Association, other governmental agency securities, certificates of deposit, and interest-bearing bank deposits.

On May ~~16, 2019,~~19, 2020, the Board of Directors declared a regular quarterly cash dividend of ~~$0.485 per share of common stock, an increase of 6.6% from the prior regular quarterly cash dividend of $0.455 per share of common stock.~~$0.485. The regular quarterly cash dividend is payable to stockholders of record on June ~~28, 2019~~30, 2020 and a corresponding cash distribution of $0.485 per Operating Partnership unit is payable to holders of the Operating Partnership’s common limited partnership interests of record on June ~~28, 2019,~~30, 2020, including those owned by the Company. The total cash quarterly dividends and distributions paid on July ~~17, 2019~~15, 2020 were ~~$50.0~~$56.8 million.

Debt Covenants

The covenants contained within certain of our unsecured debt obligations generally prohibit 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.

Capitalization

As of June 30, ~~2019,~~2020, our total debt as a percentage of total market capitalization was ~~29.7%~~34.9%, which was calculated based on the closing price per share of the Company’s common stock of ~~$73.81~~$58.70 on June 30, ~~2019~~2020 as shown in the following table:


	Shares/Units at June 30, 2019	Aggregate Principal Amount or $ Value Equivalent		% of Total Market Capitalization		Shares/Units at June 30, 2020	Aggregate Principal Amount or $ Value Equivalent		% of Total Market Capitalization
	($ in thousands)					($ in thousands)
Debt:⁽¹⁾⁽²⁾
Unsecured Line of Credit		$	375,000	3.5	%
Unsecured Term Loan Facility		150,000		1.4	%		$	150,000	1.4	%
Unsecured Senior Notes due 2023		300,000		2.8	%		300,000		2.8	%
Unsecured Senior Notes due 2024		425,000		3.9	%		425,000		4.0	%
Unsecured Senior Notes due 2025		400,000		3.7	%		400,000		3.8	%
Unsecured Senior Notes Series A & B due 2026		250,000		2.3	%		250,000		2.4	%
Unsecured Senior Notes due 2028		400,000		3.7	%		400,000		3.8	%
Unsecured Senior Notes due 2029		400,000		3.7	%		400,000		3.8	%
Unsecured Senior Notes Series A & B due 2027 & 2029		250,000		2.3	%		250,000		2.4	%
Unsecured Senior Notes due 2030							500,000		4.8	%
Unsecured Senior Notes due 2031							350,000		3.3	%
Secured debt		260,427		2.4	%		256,958		2.4	%
Total debt		$	3,210,427	29.7	%		$	3,681,958	34.9	%
Equity and Noncontrolling Interest in the Operating Partnership: ⁽²⁾
Common limited partnership units outstanding ⁽³⁾	2,023,287	$	149,339	1.4	%
Common shares outstanding ⁽⁴⁾	100,972,035	7,452,746		68.9	%
Total equity and noncontrolling interest in the Operating Partnership		$	7,602,085	70.3	%
Equity and Noncontrolling Interests in the Operating Partnership: ⁽³⁾
Common limited partnership units outstanding ⁽⁴⁾						1,934,586	$	113,560	1.1	%
Shares of common stock outstanding						115,176,538	6,760,863		64.0	%
Total Equity and Noncontrolling Interests in the Operating Partnership							$	6,874,423	65.1	%
Total Market Capitalization		$	10,812,512	100.0	%		$	10,556,381	100.0	%

________________________


(1)	Represents gross aggregate principal amount due at maturity before the effect of the following at June 30, ~~2019~~2020: ~~$16.1~~$20.7 million of unamortized deferred financing costs on the unsecured term loan facility, unsecured senior notes, and secured debt and ~~$6.2~~$6.0 million of unamortized discounts for the unsecured senior notes.


(2)	As of June 30, 2020, there was no outstanding balance on the unsecured revolving credit facility.


(3)	Value based on closing price per share of our common stock of ~~$73.81~~$58.70 as of June 30, ~~2019.~~2020.


~~(3)~~(4)	Includes common units of the Operating Partnership not owned by the Company; does not include noncontrolling interests in consolidated property partnerships.


~~(4)~~	~~Shares of common stock outstanding exclude 6,201,204 shares of common stock sold under forward equity sale agreements that remain to be settled as of~~ ~~June 30, 2019~~. On July 22, 2019, the Company physically settled the forward equity sale agreements entered into on August 8, 2018. Upon settlement, the Company issued 5,000,000 shares of common stock for net proceeds of $354.3 million.

4849

Liquidity and Capital Resources of the Operating Partnership

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

General

Our primary liquidity sources and uses are as follows:

Liquidity Sources

Net cash flow from operations;

Borrowings under the Operating Partnership’s unsecured revolving credit facility and term loan facility;

Proceeds from our capital recycling program, including the disposition of ~~less strategic or core~~ assets and the formation of strategic ventures;

Proceeds from additional secured or unsecured debt financings; and

Proceeds from public or private issuance of debt, equity or preferred equity securities.

Liquidity Uses

Development and redevelopment costs;

Operating property or undeveloped land acquisitions;

Property operating and corporate expenses;

Capital expenditures, tenant improvement and leasing costs;

Debt service and principal payments, including debt maturities;

Distributions to common ~~and preferred~~ security holders;

Repurchases and redemptions of outstanding common ~~or preferred~~ stock of the Company; and

Outstanding debt repurchases, redemptions and repayments.

General Strategy

Our general strategy is to maintain a conservative balance sheet with a strong credit profile and to maintain a capital structure that allows for financial flexibility and diversification of capital resources. We manage our capital structure to reflect a long-term investment approach and utilize multiple sources of capital to meet our long-term capital requirements. We believe that our current projected liquidity requirements for the next twelve-month period, as set forth above under the caption “—Liquidity Uses,” will be satisfied using a combination of the liquidity sources listed above, although there can be no assurance in this regard. We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities.

4950

Liquidity Sources

Unsecured Revolving Credit Facility and Term Loan Facility

The following table summarizes the balance and terms of our unsecured revolving credit facility as of June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
	(in thousands)						(in thousands)
Outstanding borrowings	$	375,000		$	45,000		$	—		$	245,000
Remaining borrowing capacity	375,000			705,000			750,000			505,000
Total borrowing capacity ⁽¹⁾	$	750,000		$	750,000		$	750,000		$	750,000
Interest rate ⁽²⁾	3.41		%	3.48		%	1.16		%	2.76		%
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 the contractual rate of LIBOR plus 1.000% as of June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

(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 June 30, ~~2019~~2020 and December 31, ~~2018, $4.0~~2019, $2.7 millionand ~~$4.7~~$3.4 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.

We intend to borrow under the unsecured revolving credit facility as necessary for general corporate purposes, to finance development and redevelopment expenditures, to fund potential acquisitions and to potentially repay long-term ~~debt.~~debt to supplement cash balances given uncertainties and volatility in market conditions.

The following table summarizes the balance and terms of our unsecured term loan facility as of June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:


	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
	(in thousands)						(in thousands)
Outstanding borrowings	$	150,000		$	150,000		$	150,000		$	150,000
Remaining borrowing capacity	—			—			—			—
Total borrowing capacity ⁽¹⁾	$	150,000		$	150,000		$	150,000		$	150,000
Interest rate ⁽²⁾	3.52		%	3.49		%	1.28		%	2.85		%
Undrawn facility fee-annual rate ⁽³⁾	0.200%						0.200%
Maturity date	July 2022						July 2022

________________________


(1)	As of June 30, ~~2019~~2020 and December 31, ~~2018, $0.8~~2019, $0.5 million and ~~$0.9~~$0.7 million of unamortized deferred financing costs, respectively, remained to be amortized through the maturity date of our unsecured term loan facility.


(2)	Our unsecured term loan facility interest rate was calculated based on the contractual rate of LIBOR plus 1.100% as of June 30, ~~2019~~2020 and December 31, ~~2018.~~


~~(3)~~	~~Prior to borrowing the full capacity of our unsecured term loan facility, the undrawn facility fee was calculated based on any unused borrowing capacity and was paid on a quarterly basis.~~2019.

Capital Recycling Program

As discussed in the section “Factors That May Influence Future Results of Operations - Capital Recycling Program,” we continuously evaluate opportunities for the potential disposition of properties and undeveloped land in our portfolio or the formation of strategic ventures with the intent of recycling the proceeds generated from the disposition of less strategic or core assets into capital used to finance development expenditures, to fund new acquisitions, to repay long-term debt and for other general corporate purposes. As part of this strategy, we attempt to enter into Section 1031 Exchanges, when possible, to defer some or all of the taxable gains on the sales, if any, for federal and state income tax purposes.

5051

In connection with our capital recycling strategy, during the three and six months ended June 30, 2019, we completed the sale of one operating property to an unaffiliated third party for gross proceeds of $18.3 million.~~We currently anticipate that, for the remainder of 2019, we could raise additional capital through our dispositions program of approximately $150 million. However, any~~Any potential future disposition transactions and the timing of any potential future capital recycling transactions will depend on market conditions and other factors, including but not limited to our capital needs, the availability of financing for potential buyers (which has been and may continue to be constrained for some potential buyers due to the ongoing COVID-19 pandemic’s impact on economic and market conditions, including the financial markets), and our ability to defer some or all of the taxable gains on the sales. In addition, we cannot assure you that we will dispose of any additional properties, or that we will be able to identify and complete the acquisitions of suitable replacement properties to effect Section 1031 Exchanges to defer some or all of the taxable gains related to our capital recycling program. In the event we are unable to complete dispositions as planned, we may raise capital through other sources of liquidity including our available unsecured revolving credit facility or the public or private issuance of unsecured debt.

Forward Equity Offering and Settlement

At-The-Market Stock Offering Program

Under our current at-the-market stock offering program, which commenced in June 2018, we may offer and sell shares of our common stock ~~having~~with an aggregate gross sales price of up to $500.0 million from time to time in “at-the-market” offerings. In connection with the at-the-market program, the Company may enter into forward equity sale agreements with certain financial institutions acting as forward purchasers whereby, at our discretion, the forward purchasers may borrow and sell shares of our common stock under our at-the-market program. The use of a forward equity sale agreement allows the Company to lock in a share price on the sale of shares of our common stock at the time the agreement is executed but defer settling the forward equity sale agreements and receiving the proceeds from the sale of shares until a later date.

During the ~~six months~~year ended ~~June 30,~~December 31, 2019, we executed various 12-month forward equity sale agreements under our at-the-market program with financial institutions acting as forward purchasers ~~under our at-the-market stock offering program~~ to sell ~~1,201,204~~an aggregate of 3,147,110 shares of common stock at a weighted average sales price of ~~$75.92~~$80.08 per share before underwriting discounts, commissions and offering expenses. ~~The Company did not receive any proceeds from the sale of its common shares by the forward purchasers. The Company currently expects to fully~~

In March 2020, we physically ~~settle the~~settled all forward equity sale agreements ~~and receive cash proceeds upon one or more settlement dates, at the Company’s discretion, prior to the final settlement dates under the forward equity sale agreements~~entered into in March and April 2020, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward equity sale agreement multiplied by the relevant forward price per share. The weighted average forward sale price that we expect to receive upon physical settlement of the agreements will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers’ stock borrowing costs and (iii) scheduled dividends during the term of the agreements. We have not settled any portion of these forward equity sale agreements as of the date of this filing.2019. Upon ~~physical~~ settlement, the Company ~~will contribute~~issued 3,147,110 shares of common stock for net proceeds of $247.3 million and contributed the net proceeds ~~from the issuance of shares of our common stock~~ to the Operating Partnership in exchange for an equal number of units in the Operating Partnership.

Since commencement of our current at-the-market program, we have completed sales of 3,594,576 shares of common stock through June 30, 2020. As of June 30, ~~2019~~2020, we may offer and sell shares of our common stock having an aggregate gross sales price up to approximately~~$375.0~~ $214.2 million ~~remains available~~under our current at-the-market program.



	Six Months Ended June 30, 2020
	(in millions, except share and per share data)
Shares of common stock settled during the period	3,147,110
Weighted average price per share of common stock	$	80.08
Aggregate gross proceeds	$	252.0
Aggregate net proceeds after selling commissions	$	247.3

~~2018 Common Stock Forward Equity Sale Agreements~~

5152

Shelf Registration Statement

The Company is a well-known seasoned issuer and the Company and the Operating Partnership have an effective shelf registration statement that provides for the public offering and sale from time to time by the Company of its preferred stock, common stock, depository shares and guarantees of debt securities and by the Operating Partnership of its debt securities, in each case in unlimited amounts. The Company evaluates the capital markets on an ongoing basis for opportunities to raise capital, and, as circumstances warrant, the Company and the Operating Partnership may issue securities of all of these types in one or more offerings at any time and from time to time on an opportunistic basis, depending upon, among other things, market conditions, available pricing and capital needs. During the six months ended June 30, 2020, the Company’s stock price ranged from $49.01 to $88.28, an 80% swing, as a result of COVID-19 and the resultant impact on the capital markets and economy. If current conditions continue for an extended period of time, capital raising could be more challenging than under conditions prior to COVID-19. When the Company receives proceeds from the sales of its preferred or common stock, it generally contributes the net proceeds from those sales to the Operating Partnership in exchange for corresponding preferred or common partnership units of the Operating Partnership. The Operating Partnership may use these proceeds and proceeds from the sale of its debt securities to repay debt, including borrowings under its unsecured revolving credit facility, to develop new or existing properties, to make acquisitions of properties or portfolios of properties, or for general corporate purposes.

Unsecured and Secured Debt

The aggregate principal amount of the unsecured ~~debt~~ and secured debt of the Operating Partnership outstanding as of June 30, ~~2019~~2020 was as follows:


	Aggregate Principal Amount Outstanding			Aggregate Principal Amount Outstanding
	(in thousands)			(in thousands)
Unsecured Line of Credit	$	375,000
Unsecured Term Loan Facility	150,000
Unsecured Term Loan Facility⁽¹⁾				$	150,000
Unsecured Senior Notes due 2023	300,000			300,000
Unsecured Senior Notes due 2024	425,000			425,000
Unsecured Senior Notes due 2025	400,000			400,000
Unsecured Senior Notes Series A & B due 2026	250,000			250,000
Unsecured Senior Notes due 2028	400,000			400,000
Unsecured Senior Notes due 2029	400,000			400,000
Unsecured Senior Notes Series A & B due 2027 & 2029	250,000			250,000
Unsecured Senior Notes due 2030				500,000
Unsecured Senior Notes due 2031				350,000
Secured Debt	260,427			256,958
Total Unsecured and Secured Debt	$	3,210,427		3,681,958
Less: Unamortized Net Discounts and Deferred Financing Costs ⁽¹⁾	(22,321		)
Less: Unamortized Net Discounts and Deferred Financing Costs ⁽²⁾				(26,740		)
Total Debt, Net	$	3,188,106		$	3,655,218

________________________


(1)	As of June 30, 2020, there was no outstanding balance on the unsecured revolving credit facility.

(2)

Includes ~~$16.1~~$20.7 million of unamortized deferred financing costs on the unsecured term loan facility, unsecured senior notes, and secured debt and ~~$6.2~~$6.0 million of unamortized discounts for the unsecured senior notes. Excludes unamortized deferred financing costs on the unsecured revolving credit ~~facility.~~facility, which are included in prepaid expenses and other assets, net on our consolidated balance sheets.

Unsecured Senior Notes - Private Placement

On April 28, 2020, the Operating Partnership entered into a Note Purchase Agreement in connection with the issuance and sale of $350.0 million principal amount of the Operating Partnership's 4.27% Senior Notes due January 31, 2031 (the “Notes”), pursuant to a private placement. The Notes mature on their due date, unless earlier redeemed or prepaid pursuant to the terms of the Note Purchase Agreement. Interest on the Notes is payable semi-annually in arrears on April 18 and October 18 of each year beginning October 18, 2020.

Debt Composition

The composition of the Operating Partnership’s aggregate debt balances between secured and unsecured and fixed-rate and variable-rate debt as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 was as follows:


	Percentage of Total Debt ⁽¹⁾				Weighted Average Interest Rate⁽¹⁾				Percentage of Total Debt ⁽¹⁾				Weighted Average Interest Rate ⁽¹⁾
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Secured vs. unsecured:
Unsecured ⁽²⁾	91.9	%	88.6	%	4.0	%	4.0	%	93.0	%	92.8	%	3.8	%	3.8	%
Secured	8.1	%	11.4	%	3.9	%	4.4	%	7.0	%	7.2	%	3.9	%	3.9	%
Variable-rate vs. fixed-rate:
Variable-rate	16.4	%	6.6	%	3.4	%	3.5	%	4.1	%	11.0	%	1.3	%	2.8	%
Fixed-rate ⁽²⁾	83.6	%	93.4	%	4.1	%	4.1	%	95.9	%	89.0	%	3.9	%	3.9	%
Stated rate ⁽²⁾					4.0	%	4.1	%					3.8	%	3.8	%
GAAP effective rate ⁽³⁾					4.0	%	4.0	%					3.9	%	3.8	%
GAAP effective rate including debt issuance costs					4.2	%	4.2	%					4.0	%	4.0	%

________________________


(1)	As of the end of the period presented.


(2)	Excludes the impact of the amortization of any debt discounts/premiums and deferred financing costs.


(3)	Includes the impact of the amortization of any debt discounts/premiums, excluding deferred financing costs.

Liquidity Uses

Contractual Obligations

Refer to our ~~2018~~2019 Annual Report on Form 10-K for a discussion of our contractual obligations. There have been no material changes, outside of the ordinary course of business, to these contractual obligations during the six months ended June 30, ~~2019.~~2020.

Other Liquidity Uses

Development

As of June 30, ~~2019,~~2020, we had five development projects under construction. These projects have a total estimated investment of approximately ~~$2.2~~$1.1 billion of which we have incurred approximately ~~$1.1 billion~~$638.7 million and committed an additional ~~$903.0~~$446.0 million as of June 30, ~~2019,~~2020, of which ~~$182.0~~$162.0 million is currently expected to be spent through the end of ~~2019.~~2020. In addition, as of June 30, ~~2019,~~2020, we had ~~two~~three development projects in the tenant improvement phase. These projects have a total estimated investment of approximately ~~$685.0~~$915.0 million of which we have incurred approximately ~~$609.0~~$740.0 million, net of retention, and committed an additional ~~$76.0~~$175.0 million as of June 30, ~~2019,~~2020, of which ~~$40.0~~$144.0 million is currently expected to be spent through the end of ~~2019.~~2020. We also had two stabilized development projects and two completed phases of a residential project with a total estimated investment of $1.12 billion of which we have incurred approximately $1.11 billion, net of retention, and committed an additional $10.0 million as of June 30, 2020, which is currently expected to be spent through the end of 2020. Furthermore, we currently believe we may spend up to~~$50.0~~ $10.0 millionon future development pipeline projects that we expect we may commence construction on throughout the remainder of ~~2019.~~2020. Ultimate timing of these expenditures may fluctuate given construction progress and leasing status of the projects. Additionally, the COVID-19 pandemic, and restrictions intended to prevent its spread, could cause delays or increase costs associated with building materials or construction services necessary for construction in the future, which could adversely impact our ability to continue or complete construction as planned, on budget or at all. We expect that any material additional development activities will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, or strategic venture opportunities.

Debt Maturities

We believe our conservative leverage and staggered debt maturities provide us with financial flexibility and enhance our ability to obtain additional sources of liquidity if necessary, and, therefore, we believe we are well-positioned to refinance or repay maturing debt and to pursue our strategy of seeking attractive acquisition opportunities, which we may finance, as necessary, with future public and private issuances of debt and equity securities. However, we can provide no assurance that we will have access to the public or private debt or equity markets in the future on favorable terms or at all. Refer to “Part II – Other Information, Item IA. Risk Factors” included in this report for additional information about the potential impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders. Our next debt maturities occur in July 2022 and relate to our unsecured revolving credit facility and term loan facility.

Potential Future Acquisitions

As discussed in the section “Factors That May Influence Future Results of Operations - Acquisitions,” we continue to evaluate strategic opportunities and remain a disciplined buyer of development and redevelopment opportunities as well as value-add operating properties, dependent on market conditions and business cycles, among other factors. 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. Any material acquisitions will be funded with borrowings under the unsecured revolving credit facility, the public or private issuance of debt or equity securities, the disposition of assets under our capital recycling program, the formation of strategic ventures or through the assumption of existing debt.

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.

~~Debt Maturities~~

Share Repurchases

On February 23, 2016, the Company’s Board of Directors approved a 4,000,000 share increase to the Company’s existing share repurchase program bringing the total current repurchase authorization to 4,988,025 shares. As of June 30, ~~2019,~~2020, 4,935,826 shares ~~remain~~remained eligible for repurchase under ~~the Company’s~~a share repurchase ~~program.~~program approved by the Company's board of directors in 2016. Under this program, repurchases may be made in open market transactions at prevailing prices or through privately negotiated transactions. We may elect to repurchase shares of our common stock under this program in the future depending upon various factors, including market conditions, the trading price of our common stock and our other uses of capital. This program does not have a termination date and repurchases may be discontinued at any time. We intend to fund repurchases, if any, primarily with the proceeds from property dispositions.

Other Potential Future Liquidity Uses

The amounts we incur for tenant improvements and leasing costs depend on ~~actual~~ leasing ~~activity.~~activity in each period. Tenant improvements and leasing costs generally fluctuate in any given period depending on factors such as the type and condition of the property, the term of the lease, the type of the lease, the involvement of external leasing agents, and overall market conditions. Capital expenditures may fluctuate in any given period subject to the nature, extent and timing of improvements required to maintain our properties. As a result of the COVID-19 pandemic, we believe that for the remainder of 2020, we will likely reduce capital spending as a result of deferring non-essential capital projects at either our or our tenant’s election, and that there may be a reduction in leasing activity when compared to the full year of 2019.

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

We continue to evaluate sources of financing for our business activities, including borrowings under the unsecured revolving credit facility, issuance of public and private equity securities, unsecured debt and fixed-rate secured mortgage financing, proceeds from the disposition of selective assets through our capital recycling program, and the formation of strategic ventures. However, our ability to obtain new financing or refinance existing borrowings on favorable terms could be impacted by various factors, including the state of the macro economy, the state of the credit and equity markets, significant tenant defaults, a decline in the demand for office properties, a decrease in market rental rates or market values of real estate assets in our submarkets, ~~and~~ the amount of our future ~~borrowings.~~borrowings and the impact of the COVID-19 pandemic, and restrictions intended to prevents its spread, on capital and credit markets and our tenants (refer to “Part II – Other Information, Item IA. Risk Factors” of this report for additional information). These events could result in the following:

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

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

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

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

Debt Covenants

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



Unsecured Credit and Term Loan Facility and Private Placement Notes (as defined in the applicable Credit Agreements):	Covenant Level	Actual Performance as of June 30, ~~2019~~2020
Total debt to total asset value	less than 60%	~~30%~~28%
Fixed charge coverage ratio	greater than 1.5x	~~3.3x~~3.4x
Unsecured debt ratio	greater than 1.67x	~~2.93x~~3.32x
Unencumbered asset pool debt service coverage	greater than 1.75x	~~4.03x~~4.14x

Unsecured Senior Notes due 2023, 2024, 2025, 2028, 2029 and ~~2029~~2030 (as defined in the applicable Indentures):
Total debt to total asset value	less than 60%	~~35%~~34%
Interest coverage	greater than 1.5x	~~10.6x~~9.8x
Secured debt to total asset value	less than 40%	3%2%
Unencumbered asset pool value to unsecured debt	greater than 150%	~~282%~~307%

The Operating Partnership was in compliance with all of its debt covenants as of June 30, ~~2019.~~2020. Our current expectation is that the Operating Partnership will continue to meet the requirements of its debt covenants in both the short and long term. In response to the COVID-19 pandemic, we have completed stress testing of our various financial covenants assuming decreases in rental income and determined that the Operating Partnership has adequate cushion between actual performance and debt covenant levels. However, in the event of an economic slowdown or continued volatility in the credit markets, there is no certainty that the Operating Partnership will be able to continue to satisfy all of the covenant requirements.

Consolidated Historical Cash Flow Summary

The following summary discussion of our consolidated historical cash flow is based on the consolidated statements of cash flows in Item 1. “Financial Statements” and is not meant to be an all-inclusive discussion of the changes in our cash flow for the periods presented below. Changes in our cash flow include changes in cash and cash equivalents and restricted cash. Our historical cash flow activity for the six months ended June 30, ~~2019~~2020 as compared to the six months ended June 30, ~~2018~~2019 is as follows:


	Six Months Ended June 30,											Six Months Ended June 30,
	2019			2018			Dollar Change			Percentage Change		2020			2019			Dollar Change		Percentage Change
	($ in thousands)											($ in thousands)
Net cash provided by operating activities	$	165,660		$	188,843		$	(23,183	)	(12.3	)%	$	224,022		$	165,660		$	58,362	35.2	%
Net cash used in investing activities	$	(417,036	)	$	(664,346	)	$	247,310		37.2	%	(374,341		)	(417,036		)	42,695		10.2	%
Net cash provided by financing activities	$	139,057		$	459,522		$	(320,465	)	(69.7	)%	695,287			139,057			556,230		400.0	%
Net increase (decrease) in cash and cash equivalents												$	544,968		$	(112,319	)	$	657,287	585.2	%

Operating Activities

Our cash flows from operating activities depends on numerous factors including the occupancy level of our portfolio, the rental rates achieved on our leases, the collectability of rent and recoveries from our tenants, the level of operating expenses, the impact of property acquisitions, completed development projects and related financing activities, and other general and administrative costs. Our net cash provided by operating activities ~~decreased~~increased by ~~$23.2~~$58.4 million, or ~~12.3%~~35.2%, for the six months ended June 30, ~~2019~~2020 compared to the six months ended June 30, ~~2018~~2019 primarily due to cash rents received during the six months ended June 30, 2020 from several tenants who had free rent and beneficial occupancy periods ~~for several tenants~~ during the six months ended June 30, 2019. See additional information under the caption “—Results of Operations.”

Investing Activities

Our cash flows from investing activities is generally used to fund development and operating property acquisitions, expenditures for development projects, and recurring and nonrecurring capital expenditures for our operating properties, net of proceeds received from dispositions of real estate assets. Our net cash used in investing activities decreased by ~~$247.3~~$42.7 million or ~~37.2%,~~10.2% for the six months ended June 30, ~~2019~~2020 compared to the six months ended June 30, ~~2018~~2019 primarily ~~because the Company did not complete any acquisitions~~due to lower expenditures for development properties and undeveloped land during the six months ended June 30, 2019 compared to $401.3 million of expenditures for acquisitions during the six months ended June 30, 2018, partially offset by approximately $168.7 million of higher development expenditures during the six months ended June 30, 2019.2020.

Financing Activities

Our cash flows from financing activities is principally impacted by our capital raising activities, net of dividends and distributions paid to common and preferred security holders. Our net cash provided by financing activities ~~decreased~~increased by ~~$320.5~~$556.2 million, ~~or 69.7%,~~ for the six months ended June 30, ~~2019~~2020 compared to the six months ended June 30, ~~2018~~2019 primarily due to ~~$120.0~~the net proceeds received upon physical settlement of our February 2020 forward equity sale agreements pursuant to which we issued 5,750,000 shares of common stock and the forward equity sale agreements entered into during the year ended December 31, 2019 under our at-the-market program pursuant to which we issued 3,147,110 shares of common stock, as well as the issuance of $350.0 million of ~~borrowings on unsecured debt and $124.1 million of net proceeds from issuance of common stock~~4.27% Senior Notes due January 31, 2031 during the six months ended June 30, ~~2018 compared to the repayment of a $75.4 million mortgage note and no issuances of common stock~~2020, partially offset by higher repayments on our unsecured revolving credit facility during the six months ended June 30, ~~2019.~~2020.

Off-Balance Sheet Arrangements

As of June 30, ~~2019~~2020 and as of the date this report was filed, we did not have any off-balance sheet transactions, arrangements or obligations, including contingent obligations.

5557

Non-GAAP Supplemental Financial Measure: Funds From Operations (“FFO”)

We calculate FFO in accordance with the 2018 Restated White Paper on FFO approved by the Board of Governors of NAREIT. The White Paper defines FFO as net income or loss calculated in accordance with GAAP, excluding extraordinary items, as defined by GAAP, gains and losses from sales of depreciable real estate and impairment write-downs associated with depreciable real estate, plus real estate-related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets) and after adjustment for unconsolidated partnerships and joint ventures. Our calculation of FFO includes the amortization of deferred revenue related to tenant-funded tenant improvements and excludes the depreciation of the related tenant improvement assets. We also add back net income attributable to noncontrolling common units of the Operating Partnership because we report FFO attributable to common stockholders and common unitholders.

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

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

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

The following table presents our FFO for the three and six months ended June 30, ~~2019~~2020 and ~~2018~~2019:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
	(in thousands)												(in thousands)
Net income available to common stockholders	$	42,194		$	27,549		$	79,097		$	63,795		$	19,618		$	42,194		$	59,435		$	79,097
Adjustments:
Net income attributable to noncontrolling common units of the Operating Partnership	871			566			1,571			1,317			367			871			1,072			1,571
Net income attributable to noncontrolling interests in consolidated property partnerships	4,150			3,640			8,341			7,614			4,367			4,150			9,263			8,341
Depreciation and amortization of real estate assets	67,011			62,956			131,982			124,633			75,981			67,011			148,419			131,982
Gains on sales of depreciable real estate	(7,169		)	—			(7,169		)	—			—			(7,169		)	—			(7,169		)
Funds From Operations attributable to noncontrolling interests in consolidated property partnerships	(7,152		)	(6,082		)	(14,105		)	(12,445		)	(7,244		)	(7,152		)	(14,927		)	(14,105		)
Funds From Operations ⁽¹⁾⁽²⁾	$	99,905		$	88,629		$	199,717		$	184,914		$	93,089		$	99,905		$	203,262		$	199,717

________________________


(1)	Reported amounts are attributable to common stockholders, common unitholders and restricted stock unitholders.


(2)	FFO available to common stockholders and unitholders includes amortization of deferred revenue related to tenant-funded tenant improvements of ~~$4.4~~$8.0 millionand ~~$4.6~~$4.4 million for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, and ~~$8.2~~$13.0 million and ~~$8.9~~$8.2 million for the six months ended June 30, 2020 and 2019, ~~and 2018,~~ respectively.

5658


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information about our market risk is disclosed in ~~Part~~“Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018,~~2019, and is incorporated herein by reference. There have been no material changes for the ~~three~~six months ended June 30, ~~2019,~~2020, to the information provided in ~~Part~~“Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019.


ITEM 4.	CONTROLS AND PROCEDURES

Kilroy Realty Corporation

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

As required by SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as of June 30, ~~2019~~2020, 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.

There have been no changes that occurred during the ~~quarter~~period 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.

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 June 30, ~~2019~~2020, 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.

There have been no changes that occurred during the ~~quarter~~period 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.

5759

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We and our properties are subject to routine litigation incidental to our business. These matters are generally covered by insurance. As of June 30, ~~2019,~~2020, we are not a defendant in, and our properties are not subject to, any legal proceedings that we believe, if determined adversely to us, would have a material adverse effect upon our financial condition, results of operations or cash flows.


ITEM 1A.	RISK FACTORS

There have been no material changes to the risk factors included in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, ~~2018.~~2019, other than as set forth below, which supplements the risk factors included in the Company’s and the Operating Partnership’s annual report on Form 10-K for the year ended December 31, 2019.

The ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, could adversely impact our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders. The ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, have already had a significant adverse impact on economic and market conditions around the world in the first half of 2020, including the United States and the markets in which we own properties and/or have development projects. The impact of the COVID-19 pandemic continues to evolve. All the states where we own properties and/or have development projects (i.e., California and Washington) initially reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, “shelter in place” rules, stay-at-home orders, density limitations, social distancing measures, restrictions on types of business that may continue to operate and/or restrictions on types of construction projects that may continue. Although some state governments and other authorities were in varying stages of lifting or modifying some of these measures, some have already been forced to, and others may in the future, reinstitute these measures or impose new, more restrictive measures, if the risks, or the perception of the risks, related to the COVID-19 pandemic worsen at any time. Furthermore, although in certain cases, exceptions are available for essential retail, research and laboratory activities, essential building services, such as cleaning and maintenance, and certain essential construction projects, there can be no assurance that such exceptions will enable us to avoid adverse impacts on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders. For instance, some of the activities of our parking, retail space, co-working tenants and residential tenants are not covered by the exceptions listed above, and we have seen weakness and a material reduction in rent collections from these tenants that may continue for an indeterminate period pending a cessation of the adverse impacts from the COVID-19 pandemic, and restrictions intended to prevent its spread. In addition, there can be no assurance as to how long restrictions intended to prevent the spread of COVID-19 may remain in place in the states and cities where we own properties, and even if such restrictions are lifted, they may be reinstituted at a later date. If such restrictions remain in place for an extended period of time, we may experience further reductions in rents from our tenants.

Across all property types, as of June 30, 2020, we collected approximately 95% of our total gross rent billings for the three months ended June 30, 2020, including 100% from all of our top 15 tenants and as of the date of this report, we have collected 95% of our total gross rent billings for July 2020, including 100% from all of our top 15 tenants. Although we are and will continue to be actively engaged in rent collection efforts related to uncollected rent, as well as working with certain tenants who have requested rent deferrals (particularly those occupying retail space), we can provide no assurance that such efforts or our efforts in future periods will be successful. In addition, we are and will continue to be actively engaged in discussions with certain tenants regarding the adverse impacts of the COVID-19 pandemic, and restrictions intended to prevent its spread, and may afford certain additional accommodations.

In addition, we may be required to continue to comply with “social distancing” at our properties and development projects and we may be subject to certain conditions, including requiring contractors to develop COVID-19 control, mitigation, and recovery plans and satisfy certain requirements before work can continue or commence, which may increase costs, perhaps substantially. We expect to comply with any state or local requirements. Our development projects could in the future be affected by moratoriums on construction. To the extent any city issues a moratorium, we may be subject to such a moratorium unless the applicable state or city grants an exclusion for these projects because certain of our development projects may qualify as essential construction projects.

The ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, could have significant adverse impacts on our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and

to pay dividends and distributions to security holders in a variety of ways that are difficult to predict. Such adverse impacts could depend on, among other factors:

the financial condition of our tenants - many of which are in the technology, media, healthcare, life sciences, entertainment and professional services industries - and their ability or willingness to pay rent in full on a timely basis;

state, local, federal and industry-initiated efforts that may adversely affect landlords, including us, and their ability to collect rent and/or enforce remedies for the failure to pay rent;

our need to defer or forgive rent and restructure leases with our tenants and our ability to do so on favorable terms or at all;

significant job losses in the industries of our tenants, which may decrease demand for our office and retail space, causing market rental rates and property values to be negatively impacted;

our ability to stabilize our development projects, renew leases or re-lease available space in our proprieties on favorable terms or at all, including as a result of a general decrease in demand for our office and retail space, deterioration in the economic and market conditions in the markets in which we own properties or due to restrictions intended to prevent the spread of COVID-19 that frustrate our leasing activities;

a severe and prolonged disruption and instability in the global financial markets, including the debt and equity capital markets, all of which have already experienced and may continue to experience significant volatility, or deteriorations in credit and financing conditions, may affect our or our tenants’ ability to access capital necessary to fund our respective business operations or replace or renew maturing liabilities on a timely basis, on attractive terms or at all and may adversely affect the valuation of financial assets and liabilities, any of which could affect our and our tenants’ ability to meet liquidity and capital expenditure requirements;

a refusal or failure of one or more lenders under our revolving credit facility to fund their respective financing commitments to us may affect our ability to access capital necessary to fund our business operations and to meet our liquidity and capital expenditure requirements;

the ability of potential buyers of properties identified for potential future capital recycling transactions to obtain debt financing, which has been and may continue to be constrained for some potential buyers;

a reduction in the values of our properties that could result in impairments or limit our ability to dispose of them at attractive prices or obtain debt financing secured by our properties;

complete or partial shutdowns of one or more of our tenants’ manufacturing facilities or distribution centers, temporary or long-term disruptions in our tenants’ supply chains from local, national and international suppliers or delays in the delivery of products, services or other materials necessary for our tenants’ operations, which could force our tenants to reduce, delay or eliminate offerings of their products and services, reduce or eliminate their revenues and liquidity and/or result in their bankruptcy or insolvency;

our ability to avoid delays or cost increases associated with building materials or construction services necessary for construction that could adversely impact our ability to continue or complete construction as planned, on budget or at all;

our and our tenants’ ability to manage our respective businesses to the extent our and their management or personnel are impacted in significant numbers by the COVID-19 pandemic and are not willing, available or allowed to conduct work; and

our and our tenants’ ability to ensure business continuity in the event our continuity of operations plan is not effective or improperly implemented or deployed during the COVID-19 pandemic.

The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of the COVID-19 pandemic or restrictions intended to prevent its spread. Nevertheless, the ongoing COVID-19 pandemic, and restrictions intended to prevent its spread, and the current financial, economic and capital markets environment and future developments in these and other areas present material risks and uncertainties with respect to our business, financial condition, results of operations, cash flows, liquidity and ability to satisfy our debt service obligations and to pay dividends and distributions to security holders and could also have a material adverse effect on the market value of our securities. Moreover, to the extent any of these risks and uncertainties adversely impact us in the ways described above or otherwise, they may also have the effect of heightening many of the other risks set forth in this “Risk Factors” section and beginning on page 15 of the Company’s and the Operating Partnership’s Annual Report on Form 10-K for the year ended December 31, 2019.


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

(a) Recent Sales of Unregistered Securities: None.

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

The table below reflects our purchases of common stock during each of the three months in the three-month period ended

June 30, ~~2019.~~2020.

Period
Total Number of Shares of Stock Purchased ⁽¹⁾
Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) that May Yet be Purchased Under the Plans or Programs
April 1, 2019 - April 30, 2019 5,464
$ 75.34
—
—
May 1, 2019 - May 31, 2019 —
—
—
—
June 1, 2019 - June 30, 2019 1,012
75.63
—
—
Total 6,476
$ 75.38
—
—



Period	Total Number of Shares of Stock Purchased ⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) that May Yet be Purchased Under the Plans or Programs
April 1. 2020 - April 30, 2020	2,871	$	61.86	—	—
May 1, 2020 - May 31, 2020	—	—		—	—
June 1, 2020 - June 30, 2020	8,797	63.34		—	—
Total	11,668	$	62.97	—	—

_______________

(1)

Includes shares of common stock remitted to the Company to satisfy tax withholding obligations in connection with the distribution of, or the vesting and distribution of, restricted stock units or restricted stock in shares of common stock. The value of such shares of common stock remitted to the Company was based on the closing price of the Company’s common stock on the applicable withholding date.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

None.


ITEM 5.	OTHER INFORMATION

As previously disclosed in our Current Report on Form 8-K filed on August 13, 2018 and elsewhere in this report, on August 8, 2018, the Company entered into forward equity sale agreements with each of Barclays Bank PLC and Citibank N.A., acting as forward purchasers. On July 22, 2019, the Company fully physically settled the forward sale agreements by issuing an aggregate of 5,000,000 shares of our common stock to the forward purchasers in exchange for net proceeds of approximately $354.3 million and contributed the net proceeds to the Operating Partnership in exchange for an equal number of units in the Operating Partnership.None.

5862


ITEM 6.	EXHIBITS



Exhibit Number		Description

3.(i)1		Kilroy Realty Corporation Articles of Amendment and Restatement (previously filed by Kilroy Realty Corporation as an exhibit on Form ~~10-Q for~~8-K as filed with the ~~quarter ended June 30, 2012)~~Securities and Exchange Commission on May 21, 2020)

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 as of August 15, 2012, as amended (previously filed by Kilroy Realty Corporation on Form 10-Q for the quarter ended June 30, 2014)

10.1†*		Separation Agreement by and between Kilroy Realty Corporation, Kilroy Realty, L.P. and Jeffrey C. Hawken dated as of July 2, 2020

31.1*		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty Corporation

31.2*		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty Corporation

31.3*		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Kilroy Realty, L.P.

31.4*		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Kilroy Realty, L.P.

32.1*		Section 1350 Certification of Chief Executive Officer of Kilroy Realty Corporation

32.2*		Section 1350 Certification of Chief Financial Officer of Kilroy Realty Corporation

32.3*		Section 1350 Certification of Chief Executive Officer of Kilroy Realty, L.P.

32.4*		Section 1350 Certification of Chief Financial Officer of Kilroy Realty, L.P.

101.1		The following Kilroy Realty Corporation and Kilroy Realty, L.P. financial information for the quarter ended June 30, ~~2019,~~2020, formatted in inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Equity (unaudited), (iv) Consolidated Statements of Capital (unaudited), (v) Consolidated Statements of Cash Flows (unaudited) and (vi) Notes to the Consolidated Financial Statements (unaudited).⁽¹⁾

104.1*		Cover Page Interactive Data File - The cover page interactive data file does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

_______________



*	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.

5963

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on July ~~25, 2019.~~30, 2020.



KILROY REALTY CORPORATION

	By:	/s/ John Kilroy
		John Kilroy President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Tyler H. Rose
		Tyler H. Rose Executive Vice President and Chief Financial Officer (Principal Financial Officer)

	By:	/s/ Merryl E. Werber
		Merryl E. Werber Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

6064

SIGNATURES



KILROY REALTY, L.P.

BY:	KILROY REALTY CORPORATION
	Its general partner

	By:	/s/ John Kilroy
		John Kilroy President and Chief Executive Officer (Principal Executive Officer)

	By:	/s/ Tyler H. Rose
		Tyler H. Rose Executive Vice President and Chief Financial Officer (Principal Financial Officer)

	By:	/s/ Merryl E. Werber
		Merryl E. Werber Senior Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer)

6165



	Number of Buildings	Number of Units	2019 Average Occupancy
Stabilized Residential Property	1	200	73.4	%



	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
	(in thousands)
Fixed lease payments	$	173,013	$	344,827
Variable lease payments	24,616		52,184
Total rental income	$	197,629	$	397,011



Location	Month of Disposition	Number of Buildings	Rentable Square Feet	Sales Price (in millions) ⁽¹⁾
2829 Townsgate Road, Thousand Oaks, CA	May	1	84,098	$	18.3