KBS Real Estate Investment Trust II, Inc. - Quarter Report: 2011 March (Form 10-Q)

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

¨	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 000-53649

KBS REAL ESTATE INVESTMENT TRUST II, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland

26-0658752

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

620 Newport Center Drive, Suite 1300

Newport Beach, California

92660

(Address of Principal Executive Offices)

(Zip Code)

(949) 417-6500

(Registrant’s Telephone Number, Including Area Code)

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. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 3, 2011, there were 188,895,487 outstanding shares of common stock of KBS Real Estate Investment Trust II, Inc.

KBS REAL ESTATE INVESTMENT TRUST II, INC.

FORM 10-Q

March 31, 2011

INDEX


PART I.	FINANCIAL INFORMATION		2

	Item 1.	Financial Statements	2

		Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010	2

		Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2011 and 2010	3

		Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2010 and the Three Months Ended March 31, 2011 (unaudited)	4

		Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2011 and 2010	5

		Condensed Notes to Consolidated Financial Statements as of March 31, 2011 (unaudited)	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46

	Item 4.	Controls and Procedures	47

PART II.	OTHER INFORMATION		48

	Item 1.	Legal Proceedings	48

	Item 1A.	Risk Factors	48

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48

	Item 3.	Defaults upon Senior Securities	50

	Item 4.	(Removed and Reserved)	50

	Item 5.	Other Information	50

	Item 6.	Exhibits	51

SIGNATURES			55

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)


	March 31, 2011			December 31, 2010
	(unaudited)
Assets
Real estate:
Land	$	215,487		$	190,507
Buildings and improvements		1,718,044			1,511,105
Tenant origination and absorption costs		290,107			252,264

Total real estate, cost		2,223,638			1,953,876
Less accumulated depreciation and amortization		(107,864	)		(80,473	)

Total real estate, net		2,115,774			1,873,403
Real estate loans receivable, net		338,266			336,759

Total real estate and real estate-related investments, net		2,454,040			2,210,162
Cash and cash equivalents		104,671			82,413
Restricted cash		53			937
Rents and other receivables, net		27,283			20,582
Above-market leases, net		56,705			48,456
Deferred financing costs, prepaid expenses and other assets		24,226			17,104

Total assets	$	2,666,978		$	2,379,654

Liabilities and stockholders’ equity
Notes payable	$	1,039,950		$	828,157
Accounts payable and accrued liabilities		20,506			20,287
Due to affiliates		11			373
Distributions payable		10,397			9,179
Below-market leases, net		39,486			35,487
Other liabilities		8,466			18,536

Total liabilities		1,118,816			912,019

Commitments and contingencies (Note 13)
Redeemable common stock		54,804			43,306
Stockholders’ equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $.01 par value; 1,000,000,000 shares authorized, 188,448,271 and 176,739,865 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively		1,884			1,767
Additional paid-in capital		1,631,581			1,537,403
Cumulative distributions in excess of net income		(140,488	)		(112,711	)
Accumulated other comprehensive income (loss)		381			(2,130	)

Total stockholders’ equity		1,493,358			1,424,329

Total liabilities and stockholders’ equity	$	2,666,978		$	2,379,654

See accompanying condensed notes to consolidated financial statements.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share amounts)


	Three Months Ended March 31,
	2011		2010
Revenues:
Rental income	$	51,324	$	18,496
Tenant reimbursements		10,880		2,757
Interest income from real estate loans receivable		8,799		5,815
Other operating income		2,382		268

Total revenues		73,385		27,336

Expenses:
Operating, maintenance, and management		14,166		4,954
Real estate taxes and insurance		8,235		1,833
Asset management fees to affiliate		4,553		1,519
Real estate acquisition fees to affiliates		2,049		1,106
Real estate acquisition fees and expenses		1,963		464
General and administrative expenses		862		1,079
Depreciation and amortization		28,208		10,737
Interest expense		11,244		1,882

Total expenses		71,280		23,574

Other income:
Other interest income		52		66

Net income	$	2,157	$	3,828

Net income per common share, basic and diluted	$	0.01	$	0.04

Weighted-average number of common shares outstanding, basic and diluted		186,726,498		98,590,592

Distributions declared per common share	$	0.160	$	0.160

See accompanying condensed notes to consolidated financial statements.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Year Ended December 31, 2010 and the Three Months Ended March 31, 2011 (unaudited)

(dollars in thousands)


							Additional Paid-in Capital			Cumulative Distributions and Net) Income (Loss)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Common Stock
	Shares			Amounts
Balance, December 31, 2009		93,167,161		$	932		$	810,006		$	(36,376	)	$	—		$	774,562
Comprehensive income:
Net income		—			—			—			5,508			—			5,508
Unrealized losses on derivative instruments		—			—			—			—			(2,130	)		(2,130	)

Total comprehensive income																	3,378
Issuance of common stock		85,838,625			858			852,417			—			—			853,275
Redemptions of common stock		(2,265,921	)		(23	)		(21,237	)		—			—			(21,260	)
Transfers to redeemable common stock		—			—			(22,046	)		—			—			(22,046	)
Distributions declared		—			—			—			(81,843	)		—			(81,843	)
Commissions on stock sales and related dealer manager fees to affiliate		—			—			(74,346	)		—			—			(74,346	)
Other offering costs		—			—			(7,391	)		—			—			(7,391	)

Balance, December 31, 2010		176,739,865		$	1,767		$	1,537,403		$	(112,711	)	$	(2,130	)	$	1,424,329
Comprehensive income:
Net income		—			—			—			2,157			—			2,157
Unrealized gains on derivative instruments		—			—			—			—			2,511			2,511

Total comprehensive income																	4,668
Issuance of common stock		12,191,232			122			119,862			—			—			119,984
Redemptions of common stock		(482,826	)		(5	)		(4,569	)		—			—			(4,574	)
Transfers to redeemable common stock		—			—			(11,498	)		—			—			(11,498	)
Distributions declared		—			—			—			(29,934	)		—			(29,934	)
Commissions on stock sales and related dealer manager fees to affiliate		—			—			(8,868	)		—			—			(8,868	)
Other offering costs		—			—			(749	)		—			—			(749	)

Balance, March 31, 2011		188,448,271		$	1,884		$	1,631,581		$	(140,488	)	$	381		$	1,493,358

See accompanying condensed notes to consolidated financial statements.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Three Months Ended March 31,
	2011			2010
Cash Flows from Operating Activities:
Net income	$	2,157		$	3,828
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		28,208			10,737
Noncash interest income on real estate-related investments		(1,652	)		(1,491	)
Deferred rent		(5,129	)		(876	)
Bad debt expense (recovery)		14			(11	)
Amortization of above- and below-market leases, net		(404	)		(1,767	)
Amortization of deferred financing costs		985			74
Increase in fair value of contingent consideration		(158	)		—
Changes in operating assets and liabilities:
Restricted cash for operational expenditures		670			—
Rents and other receivables		(1,586	)		(1,687	)
Prepaid expenses and other assets		(5,749	)		(1,377	)
Accounts payable and accrued liabilities		(401	)		2,485
Other liabilities		(7,559	)		(1,700	)

Net cash provided by operating activities		9,396			8,215

Cash Flows from Investing Activities:
Acquisitions of real estate		(270,755	)		(145,225	)
Additions to real estate		(3,106	)		(986	)
Investment in real estate loans receivable		—			(79,216	)
Change in origination fees		145			—
Decrease in restricted cash for capital expenditures		214			—

Net cash used in investing activities		(273,502	)		(225,427)

Cash Flows from Financing Activities:
Proceeds from notes payable		238,678			20,000
Principal payments on notes payable		(26,885	)		(5,000	)
Payments of deferred financing costs		(2,671	)		(1,187	)
Return of contingent consideration related to acquisition of real estate		529			—
Proceeds from issuance of common stock		103,912			114,349
Payments to redeem common stock		(4,574	)		(5,768	)
Payments of commissions on stock sales and related dealer manager fees		(8,868	)		(10,448	)
Payments of other offering costs		(1,113	)		(1,631	)
Distributions paid to common stockholders		(12,644	)		(6,790	)

Net cash provided by financing activities		286,364			103,525

Net increase (decrease) in cash and cash equivalents		22,258			(113,687	)
Cash and cash equivalents, beginning of period		82,413			273,821

Cash and cash equivalents, end of period	$	104,671		$	160,134

Supplemental Disclosure of Cash Flow Information:
Interest paid	$	9,595		$	1,726

Supplemental Disclosure of Noncash Transactions:
Increase in distributions payable	$	1,218		$	644

Increase in capital expenses payable	$	321		$	—

Increase in lease commissions payable	$	301		$	—

Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	16,072		$	8,369

See accompanying condensed notes to consolidated financial statements.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(unaudited)

1. ORGANIZATION

KBS Real Estate Investment Trust II, Inc. (the “Company”) was formed on July 12, 2007 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2008. The Company conducts its business primarily through KBS Limited Partnership II, a Delaware limited partnership formed on August 23, 2007 (the “Operating Partnership”), and its subsidiaries. The Company is the sole general partner of and directly owns a 0.1% partnership interest in the Operating Partnership. The Company’s wholly-owned subsidiary, KBS REIT Holdings II LLC, a Delaware limited liability company formed on August 23, 2007 (“KBS REIT Holdings II”), owns the remaining 99.9% partnership interest in the Operating Partnership and is its sole limited partner.

The Company owns a diverse portfolio of real estate and real estate-related investments. As of March 31, 2011, the Company owned 24 real estate properties (consisting of 17 office properties, one office/flex property, a portfolio of four industrial properties and two individual industrial properties), a leasehold interest in one industrial property and six real estate loans.

Subject to certain restrictions and limitations, the business of the Company is managed by KBS Capital Advisors LLC (the “Advisor”), an affiliate of the Company, pursuant to an advisory agreement the Company renewed with the Advisor on May 21, 2010 (the “Advisory Agreement”). The Advisory Agreement may be renewed for an unlimited number of one-year periods upon the mutual consent of the Advisor and the Company. Either party may terminate the Advisory Agreement upon 60 days’ written notice. The Advisor owns 20,000 shares of the Company’s common stock.

Upon commencing its initial public offering (the “Offering”), the Company retained KBS Capital Markets Group LLC (the “Dealer Manager”), an affiliate of the Advisor, to serve as the dealer manager of the Offering pursuant to a dealer manager agreement, as amended and restated on April 30, 2010 (the “Dealer Manager Agreement”). The Company ceased offering shares of common stock in its primary offering on December 31, 2010 and terminated its primary offering on March 22, 2011 upon the completion of review of subscriptions submitted in accordance with its processing procedures. The Company continues to offer shares of common stock under its dividend reinvestment plan.

The Company sold 182,686,033 shares of common stock in its primary offering for gross offering proceeds of $1.8 billion. As of March 31, 2011, the Company had sold 8,690,868 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $82.6 million. Also as of March 31, 2011, the Company had redeemed 2,948,630 shares sold in the Offering for $27.8 million.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company, KBS REIT Holdings II, the Operating Partnership, and their direct and indirect wholly owned subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information as contained within the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”), including the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. In the opinion of management, the financial statements for the unaudited interim periods presented include all adjustments, which are of a normal and recurring nature, necessary for a fair and consistent presentation of the results for such periods. Operating results for the three months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. For further information, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K filed with the SEC. Any reference to the number of properties and square footage are unaudited and outside the scope of the Company’s independent registered public accounting firm’s review of the financial statements in accordance with the Standards of United States Public Company Accounting Oversight Board.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could materially differ from those estimates.

Reclassifications

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.

Revenue Recognition

Real Estate

The Company recognizes minimum rent, including rental abatements, lease incentives and contractual fixed increases attributable to operating leases, on a straight-line basis over the term of the related leases when collectibility is reasonably assured and records amounts expected to be received in later years as deferred rent receivable. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or by the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:

•

whether the lease stipulates how a tenant improvement allowance may be spent;

•

whether the amount of a tenant improvement allowance is in excess of market rates;

•

whether the tenant or landlord retains legal title to the improvements at the end of the lease term;

•

whether the tenant improvements are unique to the tenant or general-purpose in nature; and

•

whether the tenant improvements are expected to have any residual value at the end of the lease.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

During the three months ended March 31, 2011 and 2010, the Company recognized deferred rent from tenants of $5.1 million and $0.9 million, respectively, net of lease incentive amortization. As of March 31, 2011 and December 31, 2010, the cumulative deferred rent balance was $21.3 million and $15.5 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $4.5 million and $3.9 million of unamortized lease incentives as of March 31, 2011 and December 31, 2010, respectively. The Company records property operating expense reimbursements due from tenants for common area maintenance, real estate taxes, and other recoverable costs in the period the related expenses are incurred.

The Company makes estimates of the collectibility of its tenant receivables related to base rents, including deferred rent receivable, expense reimbursements and other revenue or income. Management specifically analyzes accounts receivable, deferred rent receivable, historical bad debts, customer creditworthiness, current economic trends and changes in customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. In addition, with respect to tenants in bankruptcy, management makes estimates of the expected recovery of pre-petition and post-petition claims in assessing the estimated collectibility of the related receivable. In some cases, the ultimate resolution of these claims can exceed one year. When a tenant is in bankruptcy, the Company will record a bad debt reserve for the tenant’s receivable balance and generally will not recognize subsequent rental revenue until cash is received or until the tenant is no longer in bankruptcy and has the ability to make rental payments. During the three months ended March 31, 2011, the Company recorded bad debt expense related to its tenant receivables of $14,000. During the three months ended March 31, 2010, the Company reduced its bad debt reserve and recorded a net recovery of bad debt related to its tenant receivables of $11,000.

Real Estate Loans Receivable

Interest income on the Company’s real estate loans receivable is recognized on an accrual basis over the life of the investment using the interest method. Direct loan origination fees and origination or acquisition costs, as well as acquisition premiums or discounts, are amortized over the term of the loan as an adjustment to interest income. The Company will place loans on nonaccrual status when any portion of principal or interest is 90 days past due, or earlier when concern exists as to the ultimate collection of principal or interest. When a loan is placed on nonaccrual status, the Company will reverse the accrual for unpaid interest and generally will not recognize subsequent interest income until the cash is received, or the loan returns to accrual status. The Company will resume the accrual of interest if it determines the collection of interest according to the contractual terms of the loan is probable.

Cash and Cash Equivalents

The Company recognizes interest income on its cash and cash equivalents as it is earned and classifies such amounts as other interest income.

Real Estate

Real Estate Acquisition Valuation

The Company records the acquisition of income-producing real estate or real estate that will be used for the production of income as a business combination. All assets acquired and liabilities assumed in a business combination are measured at their acquisition-date fair values. Acquisition costs are expensed as incurred and restructuring costs that do not meet the definition of a liability at the acquisition date are expensed in periods subsequent to the acquisition date. During the three months ended March 31, 2011, the Company acquired three individual office properties and a portfolio of four industrial properties, recorded each acquisition as a business combination and expensed $4.0 million of acquisition costs. During the three months ended March 31, 2010, the Company acquired three real estate properties, recorded each acquisition as a business combination and expensed $1.6 million of acquisition costs.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

Estimates of the fair values of the tangible assets, identifiable intangibles and assumed liabilities require the Company to make significant assumptions to estimate market lease rates, property-operating expenses, carrying costs during lease-up periods, discount rates, market absorption periods, and the number of years the property will be held for investment. The use of inappropriate assumptions would result in an incorrect valuation of the Company’s acquired tangible assets, identifiable intangibles and assumed liabilities, which would impact the amount of the Company’s net income.

Impairment of Real Estate and Related Intangible Assets and Liabilities

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets and liabilities may not be recoverable or realized. When indicators of potential impairment suggest that the carrying value of real estate and related intangible assets and liabilities may not be recoverable, the Company assesses the recoverability by estimating whether the Company will recover the carrying value of the real estate and related intangible assets and liabilities through its undiscounted future cash flows and its eventual disposition. If, based on this analysis, the Company does not believe that it will be able to recover the carrying value of the real estate and related intangible assets and liabilities, the Company would record an impairment loss to the extent that the carrying value exceeds the estimated fair value of the real estate and related intangible assets and liabilities. The Company did not record any impairment loss on its real estate and related intangible assets and liabilities during the three months ended March 31, 2011 and 2010.

Real Estate Loans Receivable

The Company’s real estate loans receivable are recorded at amortized cost, net of loan loss reserves (if any), and evaluated for impairment at each balance sheet date. The amortized cost of a real estate loan receivable is the outstanding unpaid principal balance, net of unamortized acquisition premiums or discounts and unamortized costs and fees directly associated with the origination or acquisition of the loan.

As of March 31, 2011, there was no loan loss reserve and the Company did not record any impairment losses related to the real estate loans receivable during the three months ended March 31, 2011 and 2010. However, in the future, the Company may experience losses from its investments in loans receivable requiring the Company to record loan loss reserves. Realized losses on individual loans could be material and significantly exceed any recorded reserves.

The reserve for loan losses is a valuation allowance that reflects management’s estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The reserve is adjusted through “Provision for loan losses” on the Company’s consolidated statements of operations and is decreased by charge-offs to specific loans when losses are confirmed. The reserve for loan losses may include a portfolio-based component and an asset-specific component.

The asset-specific reserve component relates to reserves for losses on loans considered impaired. The Company considers a loan to be impaired when, based upon current information and events, it believes that it is probable that the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. The Company also considers a loan to be impaired if it grants the borrower a concession through a modification of the loan terms or if it expects to receive assets (including equity interests in the borrower) with fair values that are less than the carrying value of the loan in satisfaction of the loan. A reserve is established when the present value of payments expected to be received, observable market prices, the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) or amounts expected to be received in satisfaction of a loan are lower than the carrying value of that loan.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The portfolio-based reserve component covers the pool of loans that do not have asset-specific reserves. A provision for loan losses is recorded when available information as of each balance sheet date indicates that it is probable that the pool of loans will incur a loss and the amount of the loss can be reasonably estimated. Required reserve balances for this pool of loans are derived from estimated probabilities of default and estimated loss severities assuming a default occurs. On a quarterly basis, the Company’s management assigns estimated probabilities of default and loss severities to each loan in the portfolio based on factors such as the debt service coverage of the underlying collateral, the estimated fair value of the collateral, the significance of the borrower’s investment in the collateral, the financial condition of the borrower and/or its sponsors, the likelihood that the borrower and/or its sponsors would allow the loan to default, the Company’s willingness and ability to step in as owner in the event of default, and other pertinent factors.

Failure to recognize impairments would result in the overstatement of earnings and the carrying value of the Company’s real estate loans held for investment. Actual losses, if any, could differ significantly from estimated amounts.

Derivative Instruments

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates on its variable rate notes payable. The Company records these derivative instruments at fair value on the accompanying consolidated balance sheets. Derivative instruments designated and qualifying as a hedge of the exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) in the accompanying consolidated statements of equity. The changes in fair value for derivative instruments that are not designated as a hedge or that do not meet the hedge accounting criteria are recorded as gain or loss on derivative instruments in the accompanying consolidated statements of operations.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivative instruments that are part of a hedging relationship to specific forecasted transactions or recognized obligations on the consolidated balance sheets. The Company also assesses and documents, both at the hedging instrument’s inception and on a quarterly basis thereafter, whether the derivative instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the respective hedged items. When it is determined that a derivative instrument ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, the Company discontinues hedge accounting prospectively and reclassifies amounts recorded to accumulated other comprehensive income (loss) to earnings.

For further information regarding the Company’s derivative instruments, see Note 8, “Derivative Instruments.”

Deferred Financing Costs

Deferred financing costs represent commitment fees, loan fees, legal fees and other third-party costs associated with obtaining financing. These costs are amortized over the terms of the respective financing agreements using the interest method. Unamortized deferred financing costs are generally expensed when the associated debt is refinanced or repaid before maturity unless specific rules are met that would allow for the carryover of such costs to the refinanced debt. Costs incurred in seeking financing transactions that do not close are expensed in the period in which it is determined that the financing will not close. As of March 31, 2011 and December 31, 2010, the Company’s deferred financing costs were $7.9 million and $6.2 million, respectively, net of amortization.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

Fair Value Measurements

Under GAAP, the Company is required to measure certain financial instruments at fair value on a recurring basis. In addition, the Company is required to measure other financial instruments and balances at fair value on a non-recurring basis (e.g., carrying value of impaired real estate loans receivable and long-lived assets). Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:

•

Level 1: unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

•

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

•

Level 3: prices or valuation techniques where little or no market data is available that requires inputs that are both significant to the fair value measurement and unobservable.

When available, the Company utilizes quoted market prices from independent third-party sources to determine fair value and classifies such items in Level 1 or Level 2. In instances where the market for a financial instrument is not active, regardless of the availability of a nonbinding quoted market price, observable inputs might not be relevant and could require the Company to make a significant adjustment to derive a fair value measurement. Additionally, in an inactive market, a market price quoted from an independent third party may rely more on models with inputs based on information available only to that independent third party. When the Company determines the market for a financial instrument owned by the Company to be illiquid or when market transactions for similar instruments do not appear orderly, the Company uses several valuation sources (including internal valuations, discounted cash flow analysis and quoted market prices) and establishes a fair value by assigning weights to the various valuation sources. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach.

Changes in assumptions or estimation methodologies can have a material effect on these estimated fair values. In this regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, may not be realized in an immediate settlement of the instrument.

The Company considers the following factors to be indicators of an inactive market: (i) there are few recent transactions, (ii) price quotations are not based on current information, (iii) price quotations vary substantially either over time or among market makers (for example, some brokered markets), (iv) indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability, (v) there is a significant increase in implied liquidity risk premiums, yields, or performance indicators (such as delinquency rates or loss severities) for observed transactions or quoted prices when compared with the Company’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risk for the asset or liability, (vi) there is a wide bid-ask spread or significant increase in the bid-ask spread, (vii) there is a significant decline or absence of a market for new issuances (that is, a primary market) for the asset or liability or similar assets or liabilities, and (viii) little information is released publicly (for example, a principal-to-principal market).

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The Company considers the following factors to be indicators of non-orderly transactions: (i) there was not adequate exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions, (ii) there was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant, (iii) the seller is in or near bankruptcy or receivership (that is, distressed), or the seller was required to sell to meet regulatory or legal requirements (that is, forced), and (iv) the transaction price is an outlier when compared with other recent transactions for the same or similar assets or liabilities.

Redeemable Common Stock

The Company has adopted a share redemption program that may enable stockholders to sell their shares to the Company in limited circumstances.

There are several limitations on the Company’s ability to redeem shares under the share redemption program:

•

Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), the Company may not redeem the shares until the stockholder has held the shares for one year.

•

During each calendar year, the share redemption program limits the number of shares the Company may redeem to those that the Company could purchase with the amount of the net proceeds from the issuance of shares under the dividend reinvestment plan during the prior calendar year.

•

During any calendar year, the Company may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.

•

The Company has no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

Pursuant to the program, the Company will initially redeem shares at prices determined as follows:

•

The lower of $9.25 or 92.5% of the price paid to acquire the shares from the Company for stockholders who have held their shares for at least one year;

•

The lower of $9.50 or 95.0% of the price paid to acquire the shares from the Company for stockholders who have held their shares for at least two years;

•

The lower of $9.75 or 97.5% of the price paid to acquire the shares from the Company for stockholders who have held their shares for at least three years; and

•

The lower of $10.00 or 100% of the price paid to acquire the shares from the Company for stockholders who have held their shares for at least four years.

Notwithstanding the above, the redemption price for redemptions sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” will initially be the amount paid to acquire the shares from the Company. Furthermore, once the Company establishes an estimated value per share of its common stock, the redemption price per share for all stockholders will be equal to the estimated value per share, as determined by the Advisor or another firm chosen for that purpose. The Company currently expects to establish an estimated value per share no later than the completion of its offering stage. The Company will consider its offering stage complete when it is no longer publicly offering equity securities – whether through the primary offering or follow-on public offerings – and has not done so for up to 18 months. “Public equity offering” for this purpose does not include offerings on behalf of selling stockholders or offerings related to a dividend reinvestment plan, employee benefit plan or the redemption of interests in the Operating Partnership.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The Company’s board of directors may amend, suspend or terminate the share redemption program with 30 days’ notice to its stockholders. The Company may provide this notice by including such information in a Current Report on Form 8-K or in the Company’s annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to its stockholders.

The Company records amounts that are redeemable under the share redemption program as redeemable common stock in the accompanying consolidated balance sheets because the shares are mandatorily redeemable at the option of the holder and therefore their redemption is outside the control of the Company. The maximum amount redeemable under the Company’s share redemption program is limited to the number of shares the Company could redeem with the amount of the net proceeds from the sale of shares under the dividend reinvestment plan during the prior calendar year. However, because the amounts that can be redeemed in future periods are determinable and only contingent on an event that is likely to occur (e.g., the passage of time), the Company also presents the net proceeds from the current year dividend reinvestment plan as redeemable common stock in the accompanying consolidated balance sheets.

The Company classifies financial instruments that represent a mandatory obligation of the Company to redeem shares as liabilities. The Company’s redeemable common shares are contingently redeemable at the option of the holder. When the Company determines it has a mandatory obligation to redeem shares under the share redemption program, it will reclassify such obligations from temporary equity to a liability based upon their respective settlement values.

The Company limits the dollar value of shares that may be redeemed under the program as described above. During the three months ended March 31, 2011, the Company redeemed $4.6 million of common stock. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2010 and redemptions through March 31, 2011, the Company may redeem up to $38.7 million of shares for the remainder of 2011.

Related Party Transactions

Pursuant to the Advisory Agreement and Dealer Manager Agreement, the Company is obligated to pay the Advisor and the Dealer Manager specified fees upon the provision of certain services related to the Offering, the investment of funds in real estate and real estate-related investments, management of the Company’s investments and for other services (including, but not limited to, the disposition of investments). The Company is also obligated to reimburse the Advisor and Dealer Manager for organization and offering costs incurred by the Advisor and the Dealer Manager on behalf of the Company, and the Company is obligated to reimburse the Advisor for acquisition and origination expenses and certain operating expenses incurred on behalf of the Company or incurred in connection with providing services to the Company. In addition, the Advisor is entitled to certain other fees, including an incentive fee upon achieving certain performance goals, as detailed in the Advisory Agreement.

The Company records all related party fees as incurred, subject to any limitations described in the Advisory Agreement. The Company had not incurred any disposition fees, subordinated participation in net cash flows, or subordinated incentive listing fees during the three months ended March 31, 2011 or during any previous periods.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

Selling Commissions and Dealer Manager Fees

Through April 29, 2010, the Company paid the Dealer Manager up to 6.0% and 3.5% of the gross offering proceeds from the primary offering as selling commissions and dealer manager fees, respectively. Effective April 30, 2010, the Company paid the Dealer Manager up to 6.5% and 3.0% of the gross offering proceeds from the primary offering as selling commissions and dealer manager fees, respectively. A reduced sales commission and dealer manager fee was paid with respect to certain volume discount sales. The Company ceased offering shares of common stock in the primary offering on December 31, 2010 and terminated its primary offering on March 22, 2011 upon the completion of review of subscriptions submitted in accordance with its processing procedures. No sales commission or dealer manager fee is paid with respect to shares issued through the dividend reinvestment plan. The Dealer Manager reallowed 100% of sales commissions earned to participating broker-dealers. The Dealer Manager could reallow to any participating broker-dealer up to 1% of the gross offering proceeds attributable to that participating broker-dealer as a marketing fee and, in special cases, the Dealer Manager increased the reallowance.

Organization and Offering Costs

Organization and offering costs (other than selling commissions and dealer manager fees) of the Company may be paid by the Advisor, the Dealer Manager or their affiliates on behalf of the Company. Other offering costs include all expenses incurred by the Company in connection with the Offering. Organization costs include all expenses incurred by the Company in connection with the formation of the Company, including but not limited to legal fees and other costs to incorporate the Company.

Pursuant to the Advisory Agreement and the Dealer Manager Agreement, the Company is obligated to reimburse the Advisor, the Dealer Manager or their affiliates, as applicable, for organization and other offering costs paid by them on behalf of the Company, provided that the Advisor would be obligated to reimburse the Company to the extent selling commissions, dealer manager fees and organization and other offering costs incurred by the Company in the Offering exceed 15% of gross offering proceeds. As a result, the Company is only liable for these costs up to an amount that, when combined with selling commissions and dealer manager fees, does not exceed 15% of the gross proceeds of the Offering. As of March 31, 2011, the Company’s selling commissions, dealer manager fees, and organization and other offering costs did not exceed 15% of the gross offering proceeds. Through March 31, 2011, including shares issued through the Company’s dividend reinvestment plan, the Company had sold 191,376,901 shares in the Offering for gross offering proceeds of $1.9 billion and recorded organization and other offering costs of $20.1 million and selling commissions and dealer manager fees of $167.2 million. Organization and offering costs, which include selling commissions and dealer manager fees, are charged as incurred as a reduction to stockholders’ equity.

The Company terminated its primary offering on March 22, 2011 and continues to offer shares under its dividend reinvestment plan.

Acquisition and Origination Fees

The Company pays the Advisor an acquisition fee equal to 0.75% of the cost of investments acquired, including acquisition expenses and any debt attributable to such investments. With respect to investments in and originations of loans, the Company pays an origination fee equal to 1% of the amount funded by the Company to acquire or originate mortgage, mezzanine, bridge or other loans, including any expenses related to such investments and any debt the Company uses to fund the acquisition or origination of these loans. The Company does not pay an acquisition fee with respect to investments in loans.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

Asset Management Fee

With respect to investments in real estate, the Company pays the Advisor a monthly asset management fee equal to one-twelfth of 0.75% of the amount paid or allocated to acquire the investment. This amount includes any portion of the investment that was debt financed and is inclusive of acquisition fees and expenses related thereto. In the case of investments made through joint ventures, the asset management fee will be determined based on the Company’s proportionate share of the underlying investment.

With respect to investments in loans and any investments other than real estate, the Company pays the Advisor a monthly fee calculated, each month, as one-twelfth of 0.75% of the lesser of (i) the amount paid or allocated to acquire or fund the loan or other investment (which amount includes any portion of the investment that was debt financed and is inclusive of acquisition or origination fees and expenses related thereto) and (ii) the outstanding principal amount of such loan or other investment, plus the acquisition or origination fees and expenses related to the acquisition or funding of such investment, as of the time of calculation.

With respect to an investment that has suffered an impairment in value, reduction in cash flow or other negative circumstances, such investment may either be excluded from the calculation of the asset management fee described above or included in such calculation at a reduced value that is recommended by the Advisor and the Company’s management and then approved by a majority of the Company’s independent directors, and this change in the fee will be applicable to an investment upon the earlier to occur of the date on which (i) such investment is sold, (ii) such investment is surrendered to a person other than the Company, its direct or indirect wholly owned subsidiary or a joint venture or partnership in which the Company has an interest, (iii) the Advisor determines that it will no longer pursue collection or other remedies related to such investment, or (iv) the Advisor recommends a revised fee arrangement with respect to such investment. As of March 31, 2011, the Company has not determined to calculate the asset management fee at an adjusted value for any investments or to exclude any investments from the calculation of the asset management fee.

Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP). As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions. Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders. However, the Company believes that it is organized and operates in such a manner as to qualify for treatment as a REIT.

Per Share Data

Basic net income (loss) per share of common stock is calculated by dividing net income (loss) by the weighted-average number of shares of common stock issued and outstanding during such period. Diluted net income (loss) per share of common stock equals basic net income (loss) per share of common stock as there were no potentially dilutive securities outstanding during the three months ended March 31, 2011 and 2010, respectively.

Distributions declared per common share assumes each share was issued and outstanding each day during the three months ended March 31, 2011 and 2010. For the three months ended March 31, 2011 and 2010, distributions were based on daily record dates and calculated at a rate of $0.00178082 per share per day. Each day during the periods from January 1, 2011 through March 31, 2011 and January 1, 2010 through March 31, 2010 was a record date for distributions.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

Segments

The Company’s segments are based on the Company’s method of internal reporting which classifies its operations by investment type: real estate and real estate-related. For financial data by segment, see Note 11, “Segment Information.”

Recently Issued Accounting Standards Updates

In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring (“ASU No. 2011-02”). ASU No. 2011-02 updated accounting guidance to clarify certain determining factors, such as when a concession has been granted and when a debtor is experiencing financial difficulties, in evaluating whether or not a debt restructuring is deemed to be a “Troubled Debt Restructuring.” The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and are applied retrospectively to the beginning of the annual period of adoption. The Company is currently assessing the impact the adoption of ASU No. 2011-02 will have on its consolidated financial statements. The adoption of ASU No. 2011-02 could result in an increase of future debt restructurings, if any, recorded as “Troubled Debt Restructurings,” which could have a material impact to the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASU No. 2010-20”). ASU No. 2010-20 requires the Company to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. This ASU also requires the Company to disclose additional information related to credit quality indicators, past due information, information related to loans modified in a troubled debt restructuring and significant purchases and sales of financing receivables disaggregated by portfolio segment. ASU No. 2010-20 was initially effective for interim and annual periods ending on or after December 15, 2010. As this ASU amends only the disclosure requirements for loans and the allowance for credit losses, the adoption of ASU No. 2010-20 is not expected to have a significant impact on the Company’s financial statements. In January 2011, the FASB issued ASU No. 2011-01, Receivables (Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (“ASU No. 2011-01”). ASU No. 2011-01 announced that it was deferring the effective date of new disclosure requirements for troubled debt restructurings prescribed by ASU No. 2010-20. The effective date for those disclosures will be concurrent with the effective date for proposed ASU No. 2010-20. The proposed guidance in ASU No. 2010-20 is effective for interim and annual periods beginning after June 15, 2011, in conjunction with the effective date of ASU No. 2011-02. The adoption of ASU No. 2010-20 may require additional disclosures, but the Company does not expect the adoption to have a material impact to its consolidated financial statements.

3. RECENT ACQUISITIONS OF REAL ESTATE

During the three months ended March 31, 2011, the Company acquired the following properties (in thousands):


											Intangibles
Property Name	City		State		Acquisition Date		Land		Building and Improvements		Tenant Origination and Absorption Costs		Above-Market Lease Assets		Below-Market Lease Liabilities			Total Purchase Price
Gateway Corporate Center		Sacramento		CA		01/26/2011	$	6,380	$	31,272	$	7,674	$	2,073	$	(464	)	$	46,935
601 Tower at Carlson Center		Minnetonka		MN		02/03/2011		4,350		42,182		7,445		564		(143	)		54,398
I-81 Industrial Portfolio		Various		PA		02/16/2011		7,250		62,655		12,820		7,275		—			90,000
Two Westlake Park		Houston		TX		02/25/2011		7,000		67,590		10,291		111		(5,570	)		79,422

							$	24,980	$	203,699	$	38,230	$	10,023	$	(6,177	)	$	270,755

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The intangible assets and liabilities acquired in connection with these acquisitions have weighted-average amortization periods as of the date of acquisition as follows (in years):


	Tenant Origination and Absorption Costs	Above-Market Lease Assets	Below-Market Lease Liabilities
Gateway Corporate Center	8.7	8.8	9.2
601 Tower at Carlson Center	3.2	4.7	2.6
I-81 Industrial Portfolio	5.9	6.1	—
Two Westlake Park	3.5	2.4	4.8

For the three months ended March 31, 2011, the Company recognized $4.5 million of total revenues and $3.0 million of operating income from these properties.

4. REAL ESTATE

As of March 31, 2011, the Company’s real estate portfolio was composed of 17 office properties, one office/flex property, two industrial properties, a portfolio of four industrial properties and a leasehold interest in one industrial property, encompassing in the aggregate approximately 10.1 million rentable square feet. As of March 31, 2011, the Company’s real estate portfolio was 96% occupied. The following table provides summary information regarding the properties owned by the Company as of March 31, 2011 and December 31, 2010 (in thousands):


Property	Land		Buildings and Improvements			Tenant Origination and Absorption Costs			Total Real Estate
As of March 31, 2011:
Office	$	202,287	$	1,623,060		$	269,989		$	2,095,336
Industrial ⁽¹⁾		13,200		94,984			20,118			128,302

Cost	$	215,487	$	1,718,044		$	290,107		$	2,223,638
Accumulated depreciation/amortization		—		(61,959	)		(45,905	)		(107,864	)

Net Amount	$	215,487	$	1,656,085		$	244,202		$	2,115,774


As of December 31, 2010:
Office	$	184,557	$	1,478,777		$	244,967		$	1,908,301
Industrial ⁽¹⁾		5,950		32,328			7,297			45,575

Cost	$	190,507	$	1,511,105		$	252,264		$	1,953,876
Accumulated depreciation/amortization		—		(47,307	)		(33,166	)		(80,473	)

Net Amount	$	190,507	$	1,463,798		$	219,098		$	1,873,403

⁽¹⁾ Includes an investment in the rights to a ground lease. The ground lease expires in February 2050.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

As of March 31, 2011, the following property represented more than 10% of the Company’s total assets:


Property	Location		Rentable Square Feet		Total Real Estate, Net (in thousands)		Percentage of Total Assets			Annualized Base Rent (in thousands) ⁽¹⁾		Average Annualized Base Rent per sq. ft.		Occupancy
300 N. LaSalle Building		Chicago, IL		1,302,901	$	602,664		22.6	%	$	43,838	$	34.16		98.5	%

⁽¹⁾ Annualized base rent represents annualized contractual base rental income as of March 31, 2011, adjusted to straight-line any contractual tenant concessions, rent increases and rent decreases from the lease’s inception through the balance of the lease term.

Operating Leases

The Company’s real estate properties are leased to tenants under operating leases for which the terms and expirations vary. As of March 31, 2011, the leases had remaining terms of up to 18.0 years with a weighted-average remaining term of 6.5 years. The leases may have provisions to extend the lease agreements, options for early termination after paying a specified penalty, rights of first refusal to purchase the property at competitive market rates, and other terms and conditions as negotiated. The Company retains substantially all of the risks and benefits of ownership of the real estate assets leased to tenants. Generally, upon the execution of a lease, the Company requires security deposits from tenants in the form of a cash deposit and/or a letter of credit. Amounts required as security deposits vary depending upon the terms of the respective leases and the creditworthiness of the tenant, but generally are not significant amounts. Therefore, exposure to credit risk exists to the extent that a receivable from a tenant exceeds the amount of its security deposit. Security deposits received in cash related to tenant leases are included in other liabilities in the accompanying consolidated balance sheets and totaled $3.7 million and $2.7 million as of March 31, 2011 and December 31, 2010, respectively.

As of March 31, 2011, the future minimum rental income from the Company’s properties under non-cancelable operating leases is as follows (in thousands):


April 1, 2011 through December 31, 2011	$	148,285
2012		194,078
2013		177,363
2014		163,133
2015		138,190
Thereafter		790,000

	$	1,611,049

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

As of March 31, 2011, the Company’s highest tenant industry concentrations (greater than 10% of annualized base rent) were as follows:


Industry	Number of Tenants		Annualized Base Rent ⁽¹⁾ (in thousands)		Percentage of Annualized Base Rent
Legal Services		51	$	47,763		22	%
Finance		63		41,012		19	%
Other Professional Services		67		33,140		15	%
Manufacturing		21		21,302		10	%

			$	143,217		66	%

No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time. As of March 31, 2011, the Company had a bad debt reserve of approximately $48,000, which represents less than 1% of annualized base rent. As of March 31, 2011, the Company had one tenant with a rent balance outstanding over 90 days.

As of March 31, 2011, the Company had a concentration of credit risk related to the following tenant lease that represents more than 10% of the Company’s annualized base rent:

Net Rentable Sq. Ft.

Annualized Base Rent Statistics

Tenant

Property

Tenant Industry

Square
Feet

% of
Portfolio

Annualized
Base Rent ⁽¹⁾
(in thousands)

% of Portfolio
Annualized
Base Rent

Annualized
Base Rent per
Square Feet

Lease
Expiration ⁽²⁾

Kirkland & Ellis

300 N. LaSalle Building

Legal Services

687,857

7.1

25,351

11.8

36.86

02/28/2029

⁽²⁾ Represents the expiration date of the lease at March 31, 2011 and does not take into account any tenant renewal options.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

5. TENANT ORIGINATION AND ABSORPTION COSTS, ABOVE-MARKET LEASE ASSETS AND BELOW-MARKET LEASE LIABILITIES

As of March 31, 2011 and December 31, 2010, the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities (excluding fully amortized assets and liabilities and accumulated amortization) are as follows (in thousands):


	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	March 31, 2011			December 31, 2010			March 31, 2011			December 31, 2010			March 31, 2011			December 31, 2010
Cost	$	290,107		$	252,264		$	61,029		$	51,024		$	(50,232	)	$	(44,100	)
Accumulated Amortization		(45,905	)		(33,166	)		(4,324	)		(2,568	)		10,746			8,613

Net Amount	$	244,202		$	219,098		$	56,705		$	48,456		$	(39,486	)	$	(35,487	)

Increases (decreases) in net income as a result of amortization of the Company’s tenant origination and absorption costs, above-market lease assets and below-market lease liabilities for the three months ended March 31, 2011 and 2010 are as follows (in thousands):


	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	For the Three Months Ended March 31,						For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2011			2010			2011			2010			2011		2010
Amortization	$	(13,126	)	$	(5,580	)	$	(1,774	)	$	(126	)	$	2,178	$	1,893

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

6. REAL ESTATE LOANS RECEIVABLE

As of March 31, 2011 and December 31, 2010, the Company, through wholly owned subsidiaries, had invested in real estate loans receivable as follows (dollars in thousands):


Loan Name Location of Related Property or Collateral	Date Acquired/ Originated		Property Type		Loan Type		Outstanding Principal Balance as of March 31, 2011 ⁽¹⁾		Book Value as of March 31, 2011 ⁽²⁾		Book Value as of December 31, 2010 ⁽²⁾		Contractual Interest Rate ⁽³⁾		Annualized Effective Interest Rate ⁽³⁾		Maturity Date⁽⁴⁾
Northern Trust Building A-Note
San Diego, California		12/31/2008		Office		A-Note	$	94,500	$	63,968	$	63,244		5.6%		13.0%		10/01/2017
One Liberty Plaza Notes ⁽⁵⁾
New York, New York		02/11/2009		Office		Mortgage		115,000		74,901		73,914		6.1%		15.0%		08/06/2017
Tuscan Inn First Mortgage Origination
San Francisco, California		01/21/2010		Hotel		Mortgage		20,200		19,846		20,027		8.3%		8.8%		01/21/2015
Chase Tower First Mortgage Origination ⁽⁶⁾
Austin, Texas		01/25/2010		Office		Mortgage		59,200		59,217		59,218		8.4%		8.5%		02/01/2015
Pappas Commerce First Mortgage Origination ⁽⁷⁾
Boston, Massachusetts		04/05/2010		Industrial		Mortgage		31,900		31,900		31,900		9.5%		9.6%		07/01/2014
One Kendall Square First Mortgage Origination ⁽⁸⁾⁽⁹⁾				Mixed-use
Cambridge, Massachusetts		11/22/2010		Facility		Mortgage		87,500		88,434		88,456		⁽⁸⁾		7.2%		12/01/2013

							$	408,300	$	338,266	$	336,759

⁽¹⁾ Outstanding principal balance as of March 31, 2011 represents original principal balance outstanding under the loan, increased for any subsequent fundings and reduced for any principal paydowns.

⁽²⁾ Book value of real estate loans receivable represents outstanding principal balance adjusted for unamortized acquisition discounts, origination fees, and direct origination and acquisition costs.

⁽³⁾ Contractual interest rates are the stated interest rates on the face of the loans. Annualized effective interest rates are calculated as the actual interest income recognized in 2011, using the interest method, divided by the average amortized cost basis of the investment. The annualized effective interest rates and contractual interest rates presented are as of March 31, 2011.

⁽⁴⁾ Maturity dates are as of March 31, 2011.

⁽⁵⁾ Monthly installments on the One Liberty Plaza Notes are interest-only until August 2011. For the final six years on the notes, principal on the loan amortizes on a 30-year amortization schedule, with the remaining principal balance due at maturity.

⁽⁶⁾ Monthly installments on the Chase Tower First Mortgage are interest-only for the first three years, followed by principal and interest payments with principal calculated using an amortization of 30 years for the balance of the term, with the remaining principal balance due at maturity.

⁽⁷⁾As of March 31, 2011, $31.9 million had been disbursed under the Pappas Commerce First Mortgage and an additional $18.0 million remains available for future funding, subject to certain conditions set forth in the loan agreement.

⁽⁸⁾Monthly installments on One Kendall Square First Mortgage are interest-only during the initial term of the loan. The One Kendall Square First Mortgage bears interest at a floating rate of 550 basis points over one-month LIBOR, but at no point shall the interest rate be less than 7.5%.

⁽⁹⁾ On November 22, 2010, the Company originated the One Kendall Square First Mortgage in the amount of $175.0 million. On November 30, 2010, the Company sold, at par, a pari-passu participation interest with respect to 50% of the outstanding principal balance to an unaffiliated buyer. The outstanding principal and book value reflect the Company’s pari-passu participation interest in the One Kendall Square First Mortgage as of March 31, 2011. Subsequent to March 31, 2011, the $175.0 million One Kendall Square First Mortgage was split into two debt tranches with varying interest rates, a $90.0 million Promissory Note A and an $85.0 million Promissory Note B. On April 6, 2011, Promissory Note A was assigned and sold at par to an unaffiliated buyer. The Company retains a 50% participation interest in Promissory Note B. See Note 14, “Subsequent Events – Investments Subsequent to March 31, 2011 – One Kendall Square First Mortgage.”

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The following summarizes the activity related to the real estate loans receivable for the three months ended March 31, 2011 (in thousands):


Real estate loans receivable - December 31, 2010	$	336,759
Accretion of discounts on purchased real estate loans receivable		1,741
Closing costs and origination fees on origination of real estate loans receivable		(145	)
Amortization of closing costs and origination fees on real estate loans receivable		(89	)

Real estate loans receivable - March 31, 2011	$	338,266

For the three months ended March 31, 2011 and 2010, interest income from real estate loans receivable consisted of the following (in thousands):


	For the Three Months Ended March 31,
	2011			2010
Contractual interest income	$	7,147		$	4,324
Accretion of purchase discounts		1,741			1,512
Amortization of closing costs on purchases and origination fees		(89	)		(21	)

Interest income from real estate loans receivable	$	8,799		$	5,815

As of March 31, 2011 and December 31, 2010, interest receivable from real estate loans receivable was $2.4 million and $2.4 million, respectively, and was included in rents and other receivables.

The following is a schedule of maturities for all real estate loans receivable outstanding as of March 31, 2011 (in thousands):


	Current Maturity				Fully Extended Maturity ⁽¹⁾
	Face Value (Funded)		Book Value		Face Value (Funded)		Book Value
April 1, 2011 through December 31, 2011	$	—	$	—	$	—	$	—
2012		—		—		—		—
2013		87,500		88,434		—		—
2014		31,900		31,900		31,900		31,900
2015		79,400		79,063		166,900		167,497
Thereafter		209,500		138,869		209,500		138,869

	$	408,300	$	338,266	$	408,300	$	338,266

⁽¹⁾ The schedule of current maturities above represents the contractual maturity dates and outstanding balances as of March 31, 2011. Certain of the real estate loans receivable have extension options available to the borrowers, subject to certain conditions, that have been reflected in the schedule of fully extended maturities.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

7. NOTES PAYABLE

As of March 31, 2011 and December 31, 2010, the Company’s notes payable consisted of the following (dollars in thousands):


	Principal as of March 31, 2011		Principal as of December 31, 2010		Contractual Interest Rate as of March 31, 2011⁽¹⁾		Effective Interest Rate at March 31, 2011⁽¹⁾		Payment Type		Maturity Date ⁽²⁾
100 & 200 Campus Drive Mortgage Loan ⁽³⁾	$	55,000	$	55,000		One - month LIBOR + 3.25%		5.1%		Interest Only		02/26/2014
300-600 Campus Drive Mortgage Loan		93,850		93,850		5.90%		5.9%		Interest Only		04/10/2014
Portfolio Revolving Loan Facility ^(4) (5)		55,000		65,000		One - month LIBOR + 3.00% ⁽⁵⁾		5.2%		Interest Only		04/30/2014
Willow Oaks Revolving Loan ⁽⁶⁾		13,000		13,000		⁽⁶⁾		4.3%		Interest Only		08/01/2013
300 N. LaSalle Building Mortgage Loan		350,000		350,000		4.25%		4.3%		Interest Only		08/01/2015
Torrey Reserve West Mortgage Loan⁽⁷⁾		—		16,885		⁽⁷⁾		⁽⁷⁾		⁽⁷⁾		⁽⁷⁾
Union Bank Plaza Mortgage Loan ⁽⁸⁾		105,000		105,000		One - month LIBOR + 1.75%		3.4%		Interest Only		09/15/2015
Portfolio Bridge Loan ⁽⁹⁾		—		40,622		⁽⁹⁾		⁽⁹⁾		⁽⁹⁾		⁽⁹⁾
Emerald View at Vista Center Mortgage Loan		19,800		19,800		One - month LIBOR + 2.25%		4.6%		Interest Only		01/01/2016
National City Tower Mortgage Loan ⁽¹⁰⁾		—		69,000		⁽¹⁰⁾		⁽¹⁰⁾		⁽¹⁰⁾		⁽¹⁰⁾
Portfolio Loan ⁽¹¹⁾		348,300		—		One - month LIBOR + 2.15%		3.7%		Interest Only		01/27/2016

	$	1,039,950	$	828,157

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of March 31, 2011. Effective interest rate is calculated as the actual interest rate in effect at March 31, 2011 (consisting of the contractual interest rate and the effect of interest rate swaps and contractual floor rates), using interest rate indices at March 31, 2011, where applicable. For further information regarding the Company’s derivative instruments, see Note 8, “Derivative Instruments.”

⁽²⁾ Represents the initial maturity date or the maturity date as extended as of March 31, 2011; subject to certain conditions, the maturity dates of certain loans may be extended beyond the date shown.

⁽³⁾ As of March 31, 2011, $55.0 million had been disbursed to the Company and $9.6 million remains available for future disbursements, subject to certain conditions set forth in the loan agreement.

⁽⁴⁾ On April 30, 2010, the Company entered into a four-year revolving loan facility for an amount up to $100.0 million. As of March 31, 2011, $55.0 million had been disbursed to the Company and $45.0 million remains available for future disbursements, subject to certain conditions set forth in the loan agreement. Subsequent to March 31, 2011, the Company borrowed an additional $15.0 million related to this loan.

⁽⁵⁾ The interest rate under this loan is calculated at a variable rate of 300 basis points over one-month LIBOR, but at no point shall the interest rate be less than 4.25%; however, there shall be no minimum floor rate for any portion of the loan that is subject to a swap contract with a minimum initial term of two years or any shorter term expiring on the maturity date.

⁽⁶⁾ On July 26, 2010, the Company entered into a three-year $65.0 million revolving loan. As of March 31, 2011, $13.0 million had been disbursed to the Company and $52.0 million remains available for future disbursements, subject to certain conditions set forth in the loan agreement. The interest rate under this loan is calculated at a variable rate of 300 basis points over one-month, three-month or six-month LIBOR, but at no point may the interest rate be less than 4.5% for portions of the loan that are not subject to a swap contract.

⁽⁷⁾ On March 10, 2011, the Company used proceeds from the Portfolio Loan to repay this loan in full. See “– Recent Financing Transactions – Portfolio Loan” below.

⁽⁸⁾ On September 15, 2010, in connection with the acquisition of the Union Bank Plaza, the Company entered into a five-year mortgage loan for borrowings of up to $119.3 million secured by the Union Bank Plaza. As of March 31, 2011, $105.0 million had been disbursed to the Company with the remaining loan balance of $14.3 million available for future disbursements, subject to certain conditions set forth in the loan agreement.

⁽⁹⁾ In connection with the closing of the Portfolio Loan, the Company consolidated this loan into the Portfolio Loan. See “– Recent Financing Transactions – Portfolio Loan” below.

⁽¹⁰⁾ In connection with the closing of the Portfolio Loan, the Company consolidated this loan into the Portfolio Loan. See “– Recent Financing Transactions – Portfolio Loan” below.

⁽¹¹⁾ See “– Recent Financing Transactions – Portfolio Loan” below.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

During the three months ended March 31, 2011 and 2010, the Company incurred $11.2 million and $1.9 million of interest expense, respectively. As of March 31, 2011 and December 31, 2010, $3.6 million and $2.9 million, respectively, of interest expense was payable. Included in interest expense for the three months ended March 31, 2011 and 2010 were $1.0 million and $0.1 million of amortization of deferred financing costs, respectively. Interest expense incurred as a result of the Company’s interest rate swap agreements was $1.7 million for the three months ended March 31, 2011.

The following is a schedule of maturities for all notes payable outstanding as of March 31, 2011 (in thousands):


	Current Maturity		Fully Extended Maturity ⁽¹⁾
April 1, 2011 through December 31, 2011	$	—	$	—
2012		—		—
2013		13,000		—
2014		203,850		93,850
2015		455,000		473,000
Thereafter		368,100		473,100

	$	1,039,950	$	1,039,950

⁽¹⁾Represents the maturities of all notes payable outstanding as of March 31, 2011 assuming the Company exercises all extension options available per the terms of the loan agreements. The Company can give no assurance that it will be able to satisfy the conditions to extend the terms of the loan agreements.

Certain of our notes payable contain financial and non-financial debt covenants. As of March 31, 2011, the Company was in compliance with all debt covenants.

Recent Financing Transactions

Portfolio Loan

On January 28, 2011, the Company, through indirect wholly owned subsidiaries (the “Borrowers”), entered into a five-year portfolio loan with Wells Fargo Bank, N.A. (the “Lender”) dated January 27, 2011 for an amount up to $360.0 million (the “Portfolio Loan “). As of March 31, 2011, $348.3 million had been disbursed to the Borrowers with the remaining loan balance of $11.7 million (the “Holdback”) available for future disbursements, subject to certain conditions set forth in the loan agreement. In addition, in the event of certain tenant expansions meeting requirements as defined in the loan agreement, the principal amount of the Portfolio Loan may be increased to $372.0 million. The Company incurred approximately $1.5 million in net loan costs in conjunction with the initial funding of the Portfolio Loan. The initial maturity date of the Portfolio Loan is January 27, 2016, with two one-year extension options, subject to the satisfaction of certain conditions by the Borrowers. The Portfolio Loan bears interest at a floating rate of 215 basis points over one-month LIBOR during the initial term of the loan, 240 basis points over one-month LIBOR during the first extension period of the loan and 265 basis points over one-month LIBOR during the second extension period of the loan. As of March 31, 2011, the Company had entered into various interest rate swap agreements, which effectively fixed the interest rate on $313.4 million of the $348.3 million outstanding at an average interest rate of 3.8%. Monthly payments are interest only with the entire principal amount due at maturity, assuming no prior prepayment. The Borrowers may, upon no less than three business days’ notice to the Lender, prepay all or a portion of the Portfolio Loan, subject to possible exit fees. Any prepayment made on or after October 27, 2015 will not be subject to a prepayment fee.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

In connection with the closing of the Portfolio Loan, the Company consolidated into the Portfolio Loan, a portfolio bridge loan with an outstanding balance of $40.6 million and a mortgage loan secured by National City Tower with an outstanding principal balance of $69.0 million. On March 10, 2011, the Company used proceeds from the Portfolio Loan to repay in full a $16.8 million mortgage loan secured by Torrey Reserve West.

The Portfolio Loan is secured by Hartman II Business Center, Plano Business Park, Horizon Tech Center, Dallas Cowboys Distribution Center, Crescent VIII, National City Tower, Granite Tower, Gateway Corporate Center, I-81 Industrial Portfolio, Two Westlake Park, Torrey Reserve West and in the future, the Portfolio Loan may be secured by additional real estate properties that may be acquired by the Company, subject to certain terms of the loan agreement.

8. DERIVATIVE INSTRUMENTS

The Company enters into derivative instruments for risk management purposes to hedge its exposure to cash flow variability caused by changing interest rates. The primary goal of the Company’s risk management practices related to interest rate risk is to prevent changes in interest rates from adversely impacting the Company’s ability to achieve its investment return objectives. The Company does not enter into the derivatives for speculative purposes.

The Company enters into interest rate swaps as a fixed rate payer to mitigate its exposure to rising interest rates on its variable rate notes payable. The value of interest rate swaps is primarily impacted by interest rates, market expectations about interest rates, and the remaining life of the instrument. In general, increases in interest rates, or anticipated increases in interest rates, will increase the value of the fixed rate payer position and decrease the value of the variable rate payer position. As the remaining life of the interest rate swap decreases, the value of both positions will generally move towards zero. All of the Company’s interest rate swaps are designated as cash flow hedges.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The following table summarizes the notional and fair value of the Company’s interest rate swaps designated as cash flow hedges as of March 31, 2011 and December 31, 2010. The notional value is an indication of the extent of the Company’s involvement in each instrument at that time, but does not represent exposure to credit, interest rate or market risks (dollars in thousands):


									Fair Value of Asset (Liability)			Fair Value of Asset (Liability)
Derivative Instruments	Effective Date		Maturity Date		Notional Value			Reference Rate	March 31, 2011			December 31, 2010
Interest Rate Swap		02/26/2010		02/26/2014	$	10,000		One-month LIBOR/ Fixed at 2.30%	$	(256	)	$	(322	)
Interest Rate Swap		02/26/2010		02/26/2014		10,000		One-month LIBOR/ Fixed at 2.30%		(255	)		(322	)
Interest Rate Swap		04/30/2010		04/30/2014		55,000	⁽¹⁾	One-month LIBOR/ Fixed at 2.17%		(1,169	)		(1,520	)
Interest Rate Swap		07/26/2010		08/01/2013		6,500		One-month LIBOR/ Fixed at 1.33%		(37	)		(57	)
Interest Rate Swap		07/26/2010		08/01/2013		6,500		One-month LIBOR/ Fixed at 1.33%		(37	)		(56	)
Interest Rate Swap		09/15/2010		09/15/2015		105,000		One-month LIBOR/ Fixed at 1.70%		1,909			1,092
Interest Rate Swap		12/15/2010		02/26/2014		17,500		One-month LIBOR/ Fixed at 1.53%		(63	)		(149	)
Interest Rate Swap		12/15/2010		02/26/2014		17,500		One-month LIBOR/ Fixed at 1.53%		(63	)		(149	)
Interest Rate Swap		12/16/2010		01/01/2016		19,800		One-month LIBOR/ Fixed at 2.39%		(134	)		(329	)
Interest Rate Swap		12/20/2010		06/16/2015		69,000		One-month LIBOR/ Fixed at 1.94%		239			(318	)
Interest Rate Swap		02/01/2011		01/01/2016		56,150		One-month LIBOR/ Fixed at 2.16%		224			—
Interest Rate Swap		02/01/2011		02/01/2015		8,400		One-month LIBOR/ Fixed at 1.75%		34			—
Interest Rate Swap		02/01/2011		02/01/2014		80,150		One-month LIBOR/ Fixed at 1.29%		176			—
Interest Rate Swap		03/08/2011		02/01/2014		85,900		One-month LIBOR/ Fixed at 1.45%		(205	)		—
Interest Rate Swap		03/10/2011		02/01/2014		13,750		One-month LIBOR/ Fixed at 1.32%		18			—

Total derivatives designated as hedging instruments					$	561,150			$	381		$	(2,130	)

⁽¹⁾ In connection with entering into the Portfolio Revolving Loan Facility, the Company entered into an interest rate swap agreement with Wells Fargo Bank, N.A. which effectively fixes the interest rate on the initial $55.0 million drawn under the loan at approximately 5.17% for the first three years of the loan and fixes the interest rate on $45.0 million of this amount at approximately 5.17% for the last year of the initial loan term.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

Asset derivatives are recorded as deferred financing costs, prepaid expenses and other assets on the accompanying consolidated balance sheets, and liability derivatives are recorded as other liabilities on the accompanying consolidated balance sheets. The change in fair value of the effective portion of a derivative instrument that is designated as a cash flow hedge is recorded as other comprehensive income (loss) in the accompanying consolidated statements of stockholders’ equity. The Company recorded unrealized gains of $2.5 million on derivative instruments designated as cash flow hedges in accumulated other comprehensive income (loss) for the three months ended March 31, 2011. Amounts in other comprehensive income (loss) will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. As a result of utilizing derivative instruments designated as cash flow hedges to hedge our variable rate notes payable, the Company recognized an additional $1.7 million of interest expense related to the effective portion of cash flow hedges during the three months ended March 31, 2011. The change in fair value of the ineffective portion is recognized directly in earnings. During the three months ended March 31, 2011, there was no ineffective portion related to the change in fair value of the cash flow hedges. During the next 12 months, the Company expects to recognize additional interest expense related to derivative instruments designated as cash flow hedges. The present value of this additional interest expense totaled $7.6 million as of March 31, 2011 and was included in accumulated other comprehensive income (loss).

9. FAIR VALUE DISCLOSURES

The fair value for certain financial instruments is derived using a combination of market quotes, pricing models and other valuation techniques that involve significant management judgment. The price transparency of financial instruments is a key determinant of the degree of judgment involved in determining the fair value of the Company’s financial instruments. Financial instruments for which actively quoted prices or pricing parameters are available and for which markets contain orderly transactions will generally have a higher degree of price transparency than financial instruments for which markets are inactive or consist of non-orderly trades. The Company evaluates several factors when determining if a market is inactive or when market transactions are not orderly. See Note 2, “Summary of Significant Accounting Policies.” The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of financial instruments for which it is practicable to estimate the fair value:

Cash and cash equivalents, restricted cash, rent and other receivables, and accounts payable and accrued liabilities: These balances approximate their fair values due to the short maturities of these items.

Real estate loans receivable: These instruments are presented in the accompanying consolidated balance sheets at their amortized cost net of recorded loan loss reserves and not at fair value. The fair values of real estate loans receivable were estimated using an internal valuation model that considered the expected cash flows for the loans, underlying collateral values (for collateral-dependent loans) and estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements.

Derivative instruments: These instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined by a third-party expert using a proprietary model that utilizes observable inputs. As such, the Company classifies these inputs as Level 2 inputs. The proprietary model uses the contractual terms of the derivatives, including the period to maturity, as well as observable market-based inputs, including interest rate curves and volatility. The fair values of interest rate swaps are estimated using the market standard methodology of netting the discounted fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of interest rates (forward curves) derived from observable market interest rate curves. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, are incorporated in the fair values to account for potential nonperformance risk.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

Notes payable: The fair value of the Company’s notes payable is estimated using a discounted cash flow analysis based on management’s estimates of current market interest rates for instruments with similar characteristics, including remaining loan term, loan-to-value ratio, type of collateral and other credit enhancements. Additionally, when determining the fair value of liabilities in circumstances in which a quoted price in an active market for an identical liability is not available, the Company measures fair value using (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as assets or (ii) another valuation technique that is consistent with the principles of fair value measurement, such as the income approach or the market approach.

Contingent consideration: The fair value of the Company’s contingent consideration is estimated using a probability-weighted discounted cash flow analysis. The discounted cash flow analysis is based on management’s estimates of current market interest rates for instruments with similar characteristics and expected cash flows under this arrangement.

The following are the carrying amounts and fair values of the Company’s financial instruments as of March 31, 2011 and December 31, 2010, which carrying amounts do not approximate the fair value (in thousands):


	March 31, 2011						December 31, 2010
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial assets:
Real estate loans receivable	$	408,300	$	338,266	$	413,087	$	408,300	$	336,759	$	413,423
Financial liabilities:
Notes payable		1,039,950		1,039,950		1,042,634		828,157		828,157		829,914

Disclosure of the fair value of financial instruments is based on pertinent information available to the Company as of March 31, 2011 and requires a significant amount of judgment. The actual results and the Company’s estimate of value at a future date could be materially different.

During the three months ended March 31, 2011, the Company measured the following assets and liabilities at fair value (in thousands):


				Fair Value Measurements Using
	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Nonrecurring Basis:
Investments in real estate ⁽¹⁾	$	270,755		$	—	$	—		$	270,755
Recurring Basis:
Asset derivatives	$	2,600		$	—	$	2,600		$	—
Liability derivatives	$	(2,219	)	$	—	$	(2,219	)	$	—

⁽¹⁾ Amount reflects acquisition date fair value of real estate acquired in 2011.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

10. RELATED PARTY TRANSACTIONS

The Company has entered into the Advisory Agreement with the Advisor and the Dealer Manager Agreement with the Dealer Manager. These agreements entitle the Advisor and/or the Dealer Manager to specified fees upon the provision of certain services with regard to the Offering, the investment of funds in real estate and real estate-related investments and the management of those investments, among other services, as well as reimbursement of organization and offering costs incurred by the Advisor and the Dealer Manager on behalf of the Company (as discussed in Note 2, “Summary of Significant Accounting Policies”) and certain costs incurred by the Advisor in providing services to the Company. The Advisor and Dealer Manager also serve as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust I, Inc., KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc. and KBS Legacy Partners Apartment REIT, Inc. During the three months ended March 31, 2011 and 2010, no transactions occurred between the Company and these other KBS-sponsored programs.

Pursuant to the terms of these agreements, summarized below are the related-party costs incurred by the Company for the three months ended March 31, 2011 and 2010, respectively, and any related amounts payable as of March 31, 2011 and December 31, 2010 (in thousands):


	Incurred				Payable as of
	Three Months Ended March 31,				March 31,		December 31,
	2011		2010		2011		2010
*Expensed*
Asset management fees ⁽¹⁾	$	4,553	$	1,519	$	—	$	—
Reimbursement of operating expenses ⁽²⁾		11		6		11		9
Acquisition fees ⁽¹⁾		2,049		1,106		—		—

*Additional Paid-in Capital*
Selling commissions ⁽¹⁾		5,750		6,443		—		—
Dealer manager fees ⁽¹⁾		3,118		4,003		—		—
Reimbursable other offering costs ⁽¹⁾		308		564		—		364

*Capitalized*
Acquisition and origination fees ⁽¹⁾		—		794		—		—

	$	15,789	$	14,435	$	11	$	373

⁽¹⁾ See Note 2, “Summary of Significant Accounting Policies — Related Party Transactions.”

⁽²⁾ The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. Commencing July 1, 2010, the Company has reimbursed the Advisor for the Company’s allocable portion of the salaries, benefits and overhead of internal audit department personnel providing services to the Company. These were the only employee costs reimbursed under the Advisory Agreement through March 31, 2011. The Company will not reimburse for employee costs in connection with services for which the Advisor earns acquisition, origination or disposition fees (other than reimbursement of travel and communication expenses) or for the salaries or benefits the Advisor or its affiliates may pay to the Company’s executive officers.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

11. SEGMENT INFORMATION

The Company presently operates in two business segments based on its investment types: real estate and real estate-related. Under the real estate segment, the Company has invested in office, office/flex and industrial properties. Under the real estate-related segment, the Company has invested in mortgage loans and an A-Note. All revenues earned from the Company’s two operating segments were from external customers and there were no intersegment sales or transfers. The Company does not allocate corporate-level accounts to its operating segments. Corporate-level accounts include corporate general and administrative expenses, non-operating interest income, non-operating interest expense and other corporate-level expenses. The accounting policies of the segments are consistent with those described in Note 2, “Summary of Significant Accounting Policies.”

The Company evaluates the performance of its segments based upon net operating income (“NOI”), which is a non-GAAP supplemental financial measure. The Company defines NOI for its real estate segment as operating revenues (rental income, tenant reimbursements and other operating income) less property and related expenses (property operating expenses, real estate taxes, insurance, asset management fees and provision for bad debt) less interest expense. The Company defines NOI for its real estate-related segment as interest income less loan servicing costs and asset management fees. NOI excludes certain items that are not considered to be controllable in connection with the management of an asset such as non-property income and expenses, depreciation and amortization, and corporate general and administrative expenses. The Company uses NOI to evaluate the operating performance of the Company’s real estate and real estate-related investments and to make decisions about resource allocations. The Company believes that net income is the GAAP measure that is most directly comparable to NOI; however, NOI should not be considered as an alternative to net income as the primary indicator of operating performance as it excludes the items described above. Additionally, NOI as defined above may not be comparable to other REITs or companies as their definitions of NOI may differ from the Company’s definition.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The following tables summarize total revenues and NOI for each reportable segment for the three months ended March 31, 2011 and 2010 and total assets and total liabilities for each reportable segment as of March 31, 2011 and December 31, 2010 (in thousands):


	For the Three Months Ended March 31,
	2011		2010
Revenues:
Real estate segment	$	64,586	$	21,521
Real estate-related segment		8,799		5,815

Total segment revenues	$	73,385	$	27,336

Interest Expense:
Real estate segment	$	10,884	$	1,563
Real estate-related segment		—		—

Total segment interest expense		10,884		1,563
Corporate-level		360		319

Total interest expense	$	11,244	$	1,882

NOI:
Real estate segment	$	27,362	$	11,998
Real estate-related segment		8,185		5,469

Total NOI	$	35,547	$	17,467


	As of March 31, 2011		As of December 31, 2010
Assets:
Real estate segment	$	2,229,704	$	1,981,974
Real estate-related segment		340,673		339,146

Total segment assets		2,570,377		2,321,120
Corporate-level ⁽¹⁾		96,601		58,534

Total assets	$	2,666,978	$	2,379,654

Liabilities:
Real estate segment	$	1,107,477	$	901,270
Real estate-related segment		131		61

Total segment liabilities		1,107,608		901,331
Corporate-level ⁽²⁾		11,208		10,688

Total liabilities	$	1,118,816	$	912,019

⁽¹⁾ Total corporate-level assets consisted primarily of proceeds from the Offering being held in the form of cash and cash equivalents of approximately $96.2 million and $58.5 million as of March 31, 2011 and December 31, 2010, respectively.

⁽²⁾ As of March 31, 2011 and December 31, 2010, corporate-level liabilities consisted primarily of distributions payable.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

The following table reconciles the Company’s net income to its NOI for the three months ended March 31, 2011 and 2010 (in thousands):


	For the Three Months Ended March 31,
	2011			2010
Net income	$	2,157		$	3,828
Other interest income		(52	)		(66	)
Real estate acquisition fees to affiliates		2,049			1,106
Real estate acquisition fees and expenses		1,963			464
General and administrative expenses		862			1,079
Depreciation and amortization		28,208			10,737
Corporate-level interest expense		360			319

NOI	$	35,547		$	17,467

12. PRO FORMA FINANCIAL INFORMATION

The following table summarizes, on an unaudited pro forma basis, the combined results of operations of the Company for the three months ended March 31, 2011 and 2010. The Company acquired three individual office properties and a portfolio of four industrial properties during the three months ended March 31, 2011, all of which were accounted for as business combinations. The following unaudited pro forma information for the three months ended March 31, 2011 and 2010 has been prepared to give effect to the acquisition of I-81 Industrial Portfolio as if the acquisition occurred on January 1, 2010. This pro forma information does not purport to represent what the actual results of operations of the Company would have been had this acquisition occurred on this date, nor does it purport to predict the results of operations for future periods (in thousands, except share and per share amounts).


	For the Three Months Ended March 31,
	2011		2010
Revenues	$	74,424	$	29,339

Depreciation and amortization	$	28,599	$	11,651

Net income	$	4,401	$	1,967

Net income per common share, basic and diluted	$	0.02	$	0.02

Weighted-average number of common shares outstanding, basic and diluted		188,448,271		102,906,966

The pro forma information for the three months ended March 31, 2011 was adjusted to exclude $2.0 million of acquisition costs related to the above property incurred in 2011. These costs were recognized in the pro forma information for the three months ended March 31, 2010.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

13. COMMITMENTS AND CONTINGENCIES

Economic Dependency

The Company is dependent on the Advisor for certain services that are essential to the Company, including the identification, evaluation, negotiation, purchase, and disposition of real estate and real estate-related investments; management of the daily operations of the Company’s real estate and real estate-related investment portfolio; and other general and administrative responsibilities. In the event the Advisor is unable to provide the respective services, the Company will be required to obtain such services from other sources.

Geographic Concentration

The 300 N. LaSalle Building represented approximately 23% of the Company’s total assets as of March 31, 2011. As a result of this investment, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the Chicago real estate market. Any adverse economic or real estate developments in this market, such as business layoffs or downsizing, industry slowdowns, relocations of businesses, changing demographics and other factors, or any decrease in demand for office space resulting from the local business climate, could adversely affect the Company’s operating results.

Environmental

As an owner of real estate, the Company is subject to various environmental laws of federal, state and local governments. Compliance with existing environmental laws is not expected to have a material adverse effect on the Company’s financial condition and results of operations as of March 31, 2011.

Legal Matters

From time to time, the Company is party to legal proceedings that arise in the ordinary course of its business. Management is not aware of any legal proceedings of which the outcome is probable or reasonably possible to have a material adverse effect on its results of operations or financial condition, which would require accrual or disclosure of the contingency and possible range of loss. Additionally, the Company has not recorded any loss contingencies related to legal proceedings in which the potential loss is deemed to be remote.

14. SUBSEQUENT EVENTS

The Company evaluates subsequent events up until the date the consolidated financial statements are issued.

Distributions Paid

On April 15, 2011, the Company paid distributions of $10.4 million, which related to distributions declared for each day in the period from March 1, 2011 through March 31, 2011.

Distributions Declared

On May 4, 2011, the Company’s board of directors declared distributions based on daily record dates for the period from June 1, 2011 through June 30, 2011, which the Company expects to pay in July 2011, and distributions based on daily record dates for the period from July 1, 2011 through July 31, 2011, which the Company expects to pay in August 2011. Investors may choose to receive cash distributions or purchase additional shares through the Company’s dividend reinvestment plan.

Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of $0.00178082 per share per day and if paid each day for a 365-day period, would equal a 6.5% annualized rate based on a purchase price of $10.00 per share.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1.

Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

March 31, 2011

(unaudited)

Investments Subsequent to March 31, 2011

One Kendall Square First Mortgage

On November 22, 2010, the Company, through an indirect wholly owned subsidiary, originated the One Kendall Square First Mortgage in the amount of $175.0 million (the “One Kendall Square First Mortgage”). The One Kendall Square First Mortgage note bears interest at a floating rate of 550 basis points over one-month LIBOR, but at no point shall the interest rate be less than 7.5% (“Loan Rate”). On November 30, 2010, the Company, through an indirect wholly owned subsidiary, sold, at par, a pari-passu participation interest with respect to 50% of the outstanding principal balance to an unaffiliated buyer (“Participation Holder”).

On April 5, 2011, the Company, through an indirect wholly owned subsidiary, entered into a note splitter agreement with the borrower under the One Kendall Square First Mortgage and restructured the One Kendall Square First Mortgage to provide for two debt tranches with varying interest rates. These tranches consist of Promissory Note A (“Note A”) with an original principal amount of $90.0 million and Promissory Note B (“Note B”) with an original principal amount of $85.0 million. Also on April 5, 2011, the Company, through an indirect wholly owned subsidiary, amended and restated Note A and amended and restated Note B. Note A, as amended, bears interest at a floating rate of 250 basis points over one-month LIBOR, but at no point shall the interest rate be less than 4.0%. Note B, as amended, bears interest at an amount that when combined with the interest related to Note A, would equal the Loan Rate calculated on the $175.0 million One Kendall Square First Mortgage. On April 6, 2011, the Company, through an indirect wholly owned subsidiary, and Participation Holder assigned and transferred Note A, at par, to an unaffiliated assignee. The Company and Participation Holder will each retain a 50% participation interest in Note B.

Acquisition of CityPlace Tower

On April 6, 2011, the Company, through an indirect wholly owned subsidiary, acquired an 18-story office building totaling 295,933 rentable square feet located on approximately 1.25 acres of land in West Palm Beach, Florida (“CityPlace Tower”). The seller is not affiliated with the Company or the Advisor. The total contractual purchase price of CityPlace Tower was $126.5 million plus closing costs. The Company funded the purchase of CityPlace Tower with proceeds from existing credit facilities and proceeds from the Offering.

At acquisition, CityPlace Tower was 87% leased to 22 tenants.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the accompanying financial statements of KBS Real Estate Investment Trust II, Inc. and the notes thereto. As used herein, the terms “we,” “our” and “us” refer to KBS Real Estate Investment Trust II, Inc., a Maryland corporation, and, as required by context, KBS Limited Partnership II, a Delaware limited partnership, which we refer to as the “Operating Partnership,” and to their subsidiaries.

Forward-Looking Statements

Certain statements included in this Quarterly Report on Form 10-Q are forward-looking statements. Those statements include statements regarding the intent, belief or current expectations of KBS Real Estate Investment Trust II, Inc. and members of our management team, as well as the assumptions on which such statements are based, and generally are identified by the use of words such as “may,” “will,” “seeks,” “anticipates,” “believes,” “estimates,” “expects,” “plans,” “intends,” “should” or similar expressions. Actual results may differ materially from those contemplated by such forward-looking statements. Further, forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time, unless required by law.

The following are some of the risks and uncertainties, although not all of the risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:

•

We have a limited operating history. This inexperience makes our future performance difficult to predict.

•

All of our executive officers, some of our directors and other key real estate and debt finance professionals are also officers, directors, managers, key professionals and/or holders of a direct or indirect controlling interest in our advisor, the entity that acted as our dealer manager and other KBS-affiliated entities. As a result, they face conflicts of interest, including significant conflicts created by our advisor’s compensation arrangements with us and other KBS-advised programs and investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions. Fees paid to our advisor in connection with transactions involving the origination, acquisition and management of our investments are based on the cost of the investment, not on the quality of the investment or services rendered to us. This arrangement could influence our advisor to recommend riskier transactions to us.

•

Because investment opportunities that are suitable for us may also be suitable for other KBS-advised programs or investors, our advisor and its affiliates face conflicts of interest relating to the purchase of properties and other investments and such conflicts may not be resolved in our favor, meaning that we could invest in less attractive assets, which could reduce the investment return to our stockholders.

•

We pay substantial fees to and expenses of our advisor and its affiliates and, in connection with our public offering, we paid substantial fees to participating broker-dealers. These payments increase the risk that our stockholders will not earn a profit on their investment in us and increase the risk of loss to our stockholders.

•

We have used and expect to continue to use proceeds from financings to fund a portion of our distributions until the proceeds from our initial public offering are fully invested and from time to time during our operational stage in anticipation of cash flow to be received in later periods. We may also fund such distributions from advances from our advisor or sponsors, from our advisor’s deferral of its asset management fee, from the net proceeds from the sale of real estate and from the receipt of principal payments on our real estate-related investments.

•

If we are unable to locate investments with attractive yields while we are investing the proceeds of our initial public offering, our distributions and the long-term returns of our investors may be lower than they otherwise would.

•

We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in tenants (caused by factors including, but not limited to, tenant defaults, tenant insolvency, early termination of tenant leases and non-renewal of existing tenant leases) and/or lower rental rates, making it more difficult for us to meet our debt service obligations and limiting our ability to pay distributions to our stockholders.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

•

Our current and future investments in real estate, mortgage loans, mezzanine loans, bridge loans, mortgage-backed securities, collateralized debt obligations and other debt may be affected by unfavorable real estate market and general economic conditions, which could decrease the value of those assets and reduce the investment return to our stockholders. Revenues from our properties and the properties and other assets directly securing our loan investments could decrease. Such events would make it more difficult for the borrowers under our loan investments to meet their payment obligations to us. It could also make it more difficult for us to meet our debt service obligations and limit our ability to pay distributions to our stockholders.

•

Continued disruptions in the financial markets and uncertain economic conditions could adversely affect the value of our investments.

•

We cannot predict with any certainty how much, if any, of our dividend reinvestment plan proceeds will be available for general corporate purposes, including, but not limited to, the redemption of shares under our share redemption program, the funding of capital expenditures on our real estate investments, or the repayment of debt. If such funds are not available from the dividend reinvestment plan offering, then we may have to use a greater proportion of our cash flow from operations to meet these cash requirements, which would reduce cash available for distributions and could limit our ability to redeem shares under our share redemption program.

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the Securities and Exchange Commission (the “SEC”) and the risks identified in Post-Effective Amendment No. 14 to our Registration Statement (file no. 333-146341), filed with the SEC on April 5, 2011.

Overview

We were formed on July 12, 2007 as a Maryland corporation that elected to be taxed as a real estate investment trust (“REIT”) beginning with the taxable year ended December 31, 2008 and intend to operate in such a manner. We have invested in a diverse portfolio of real estate and real estate-related investments. We conduct our business primarily through our Operating Partnership, of which we are the sole general partner. Subject to certain restrictions and limitations, our business is managed by KBS Capital Advisors LLC (“KBS Capital Advisors”), our external advisor, pursuant to an advisory agreement. KBS Capital Advisors conducts our operations and manages our portfolio of real estate investments. Our advisor owns 20,000 shares of our common stock. We have no paid employees.

We own a diverse portfolio of real estate and real estate-related investments. As of March 31, 2011, we owned 24 real estate properties (consisting of 17 office properties, one office/flex property, a portfolio of four industrial properties and two individual industrial properties), a leasehold interest in one industrial property and six real estate loans receivable.

On September 27, 2007, we filed a registration statement on Form S-11 with the Securities and Exchange Commission (the “SEC”) to offer a maximum of 280,000,000 shares of common stock for sale to the public, of which 200,000,000 shares were registered in our primary offering and 80,000,000 shares were registered under our dividend reinvestment plan. We ceased offering shares of common stock in our primary offering on December 31, 2010. We had sold 182,686,033 shares of common stock in the primary offering for gross offering proceeds of $1.8 billion. We continue to offer shares of common stock under our dividend reinvestment plan. As of March 31, 2011, we had sold 8,690,868 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $82.6 million. Also as of March 31, 2011, we had redeemed 2,948,630 shares sold in the offering for $27.8 million.

Market Outlook – Real Estate and Real Estate Finance Markets

During the past three years, significant and widespread concerns about credit risk and access to capital have been present in the U.S. and global financial markets. Economies throughout the world have experienced increased unemployment and sagging consumer confidence due to a downturn in economic activity. Despite improved stock market performance and some positive economic indicators, a lack of job creation, low consumer confidence and a growing federal budget deficit temper the positive indicators. Amid signs of recovery in the economic and financial markets, concerns remain regarding job growth, wage stagnation, credit restrictions and increased taxation.

Bank earnings and liquidity have rebounded, particularly among larger financial institutions. Smaller financial institutions have continued to work with borrowers to amend and extend existing loans; however, as these loans reach maturity, there is the potential for future credit losses. The FDIC’s list of troubled financial institutions is still quite large and the threat of more bank closings will weigh heavily on the financial markets.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Over the past several months, the U.S. commercial real estate industry has experienced some improvement in fundamental benchmarks, such as occupancy, rental rates and pricing. Continued improvement in these fundamentals remains contingent upon sustainable economic growth. In general, borrower defaults may rise, and occupancy and rental rate stabilization will vary by market and by property type. Looking forward, it is widely assumed that mortgage delinquencies have not yet peaked.

Currently, benchmark interest rates, such as LIBOR, remain near historic lows. This has allowed borrowers with floating rate debt to continue to make debt service payments even as the properties securing these loans experience decreased occupancy and lower rental rates. Low short-term rates have allowed these borrowers to meet their debt obligations; however, they would not meet the current underwriting requirements needed to refinance this debt today. As these loans near maturity, borrowers may have to find new sources of funds in order to recapitalize their properties.

Throughout the financial crisis and economic downturn, commercial real estate transactions experienced a sharp decline in volume. Recent trends indicate a modest rebound in transaction activity. High-quality assets in top-tier markets experienced the largest increase in transaction volume. One of the significant barriers to deal flow is the spread between buyer/seller pricing expectations. It is expected that more commercial properties will come into the market as loans mature, marginally performing properties default and banks increase their foreclosure activity. From a financing perspective, new lending is expected to remain subdued in the near term. The commercial mortgage-backed securities (“CMBS”) market, formerly a significant source of liquidity and debt capital, was inactive in 2008 and 2009, and left a void in the market for long-term, affordable, fixed rate debt. During that time, the void was partially filled by portfolio lenders such as insurance companies, but at very different terms than were available in the past. These remaining lenders generally increased credit spreads, lowered the amount of available proceeds, required recourse security and credit enhancements, and otherwise tightened underwriting standards, while simultaneously limiting lending to existing relationships with borrowers that invest in high quality assets in top-tier markets. In addition, lenders have limited the amount of financing available to existing relationships in an effort to manage capital allocations and credit risk.

Recently, there have been signs that the credit markets have begun to thaw as the global economy has shown signs of recovery and growth. New CMBS issuances and the increased access to the capital markets for publicly-traded REITs has led many to believe that commercial real estate lending will be revived as the market’s appetite for risk returns. Similarly, many lending institutions have increased their lending on commercial real estate, which, coupled with historically low interest rates and slightly-relaxed underwriting standards, has helped increase commercial real estate transaction volume. It is important to remember that these trends have only recently begun and an improvement in one aspect of the market does not provide an indication of a general market recovery or provide any indication of the duration of the existing downturn, or the speed of any expected recovery.

Despite improved access to capital for some companies, the aforementioned economic conditions have continued to impact the capital markets. Global government interventions in the banking system and the persistence of a highly expansionary monetary policy by the U.S. Treasury have introduced additional complexity and uncertainty to the markets. The U.S. government’s recent introduction of additional regulation to the financial markets, including the banking, insurance and brokerage sectors, has resulted in general uncertainty as to the long-term impact on these markets and on the economy as a whole. Adding to this uncertainty are increased disclosure requirements and changes to accounting principles involving the valuation of investments. These conditions are expected to continue, and combined with a challenging macro-economic environment, may interfere with the implementation of our business strategy and/or force us to modify it.

Impact on Our Real Estate Investments

These market conditions have and will likely continue to have a significant impact on our real estate investments and create a highly competitive leasing environment. In addition, these market conditions have impacted our tenants’ businesses, which makes it more difficult for them to meet current lease obligations and places pressure on them to negotiate favorable lease terms upon renewal in order for their businesses to remain viable. Projected future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to retain tenants who are up for renewal or to sign new tenants, are expected to result in decreases in cash flow. Historically low interest rates could help offset some of the impact of decreases in operating cash flow for properties financed with variable rate mortgages; however, interest rates may not remain at these historically low levels for the life of many of our investments.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Impact on Our Real Estate-Related Investments

Our real estate-related investments are directly secured by commercial real estate. As a result, our real estate-related investments have been impacted to some degree by the same factors impacting our real estate investments.

As of March 31, 2011, we had fixed rate real estate loans receivable with a principal value of $320.8 million and a carrying value of $249.9 million that mature between 2014 and 2017 and a variable rate real estate loan receivable with a principal balance of $87.5 million and a carrying value (including origination and closing costs) of $88.4 million that matures in 2013.

Impact on Our Financing Activities

In light of the risks associated with projected declines of operating cash flows from our real estate properties and the current underwriting environment for commercial real estate mortgages, we may have difficulty refinancing some of our mortgage notes at maturity or may not be able to refinance our obligations at terms as favorable as the terms of our existing indebtedness. As of March 31, 2011, we had debt obligations in the aggregate principal amount of $1.0 billion, all of which mature between 2013 and 2016. We have a total of $443.9 million of fixed rate notes payable and $596.1 million of variable rate notes payable. As of March 31, 2011, we had no mortgage debt outstanding scheduled to mature within 12 months of that date. The interest rates on $561.2 million of our variable rate notes payable are effectively fixed through interest rate swap agreements.

Liquidity and Capital Resources

Our principal demand for funds during the short- and long-term is and will be for: the acquisition of real estate properties; the acquisition or origination of real estate loans; the acquisition or origination of other real estate-related investments; the payment of operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock; and payments of distributions to stockholders. To date, we have had four primary sources of capital for meeting our cash requirements:

•

Proceeds from our primary offering;

•

Proceeds from common stock issued under our dividend reinvestment plan;

•

Debt financings; and

•

Cash flow generated by our real estate operations and real estate-related investments.

We ceased offering shares of common stock in our primary offering on December 31, 2010 and continue to offer shares under our dividend reinvestment plan. To date, we have invested a significant amount of the proceeds from our initial public offering and anticipate making several more investments in the future. We intend to use our cash on hand, cash flow generated by our real estate operations and real estate-related investments, proceeds from our dividend reinvestment plan and principal repayments on our real estate loans receivable as our primary sources of immediate and long-term liquidity. As of March 31, 2011, we have an aggregate of $106.6 million available for future disbursements under three credit facilities, subject to certain conditions set forth in the respective loan agreements.

Our investments in real estate generate cash flow in the form of rental revenues and tenant reimbursements, which are reduced by operating expenditures, debt service payments and corporate general and administrative expenses. Cash flow from operations from real estate investments is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates on our leases, the collectibility of rent and operating recoveries from our tenants and how well we manage our expenditures. As of March 31, 2011, our real estate portfolio was 96% occupied and our bad debt reserve was less than 1% of annualized base rent. As of March 31, 2011, we had one tenant with a rent balance outstanding for over 90 days.

Our real estate-related investments generate cash flow in the form of interest income, which is reduced by loan servicing fees. Cash flows from operations from our real estate-related investments are primarily dependent on the operating performance of the underlying collateral and the borrower’s ability to make their debt service payments. As of March 31, 2011, the borrowers under our real estate loans receivable were all current.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

For the three months ended March 31, 2011, our cash needs for acquisitions, capital expenditures and payment of debt obligations were met with the proceeds from debt financing and proceeds from our initial public offering, including our dividend reinvestment plan. Operating cash needs during the same period were met through cash flow generated by our real estate and real estate-related investments. We made distributions to our stockholders during the three months ended March 31, 2011 using a combination of cumulative cash flows from operations and debt financing. We believe that our cash on hand, proceeds from our dividend reinvestment plan, cash flow from operations, availability under our credit facilities and anticipated financing activities are sufficient to meet our liquidity needs for the foreseeable future.

Cash Flows from Operating Activities

We commenced real estate operations with the acquisition of our first real estate investment on July 30, 2008. As of March 31, 2011, we owned 24 real estate properties (consisting of 17 office properties, one office/flex property, a portfolio consisting of four industrial properties and two individual industrial properties), a leasehold interest in one industrial property and six real estate loans receivable. During the three months ended March 31, 2011, net cash provided by operating activities was $9.4 million, compared to $8.2 million during the three months ended March 31, 2010. Net cash from operations increased in 2011 primarily due to increases in rental revenue from our real estate and increases in contractual interest income from our real estate-related investments as a result of our investment activities during 2010 and 2011, partially offset by increases in operating expenses and asset management fees. We expect that our cash flows from operating activities will increase in future periods as a result of owning investments acquired in 2011 for an entire period and as a result of anticipated future acquisitions of real estate and real estate-related investments.

Cash Flows from Investing Activities

Net cash used in investing activities was $273.5 million for the three months ended March 31, 2011, and primarily consisted of the following:

•

Acquisitions of three individual office properties and a portfolio of three industrial properties for an aggregate purchase price of $270.8 million; and

•

$3.1 million of additions to real estate.

Cash Flows from Financing Activities

Our cash flows from financing activities consist primarily of proceeds from our initial public offering, debt financings and distributions paid to our stockholders. During the three months ended March 31, 2011, net cash provided by financing activities was $286.4 million and consisted primarily of the following:

•

$209.1 million of net cash provided by debt and other financings as a result of proceeds from notes payable of $238.7 million, partially offset by principal payments on notes payable of $26.9 million and payments of deferred financing costs of $2.7 million;

•

$93.9 million of cash provided by offering proceeds related to our initial public offering, net of payments of commissions, dealer manager fees and other organization and offering expenses of $10.0 million;

•

$12.6 million of net cash distributions, after giving effect to dividends reinvested by stockholders of $16.1 million; and

•

$4.6 million of cash used for redemptions of common stock.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Contractual Commitments and Contingencies

In order to execute our investment strategy, we primarily utilize secured debt, and, to the extent available, may in the future utilize unsecured debt, to finance a portion of our investment portfolio. Management remains vigilant in monitoring the risks inherent with the use of debt in our portfolio and is taking actions to ensure that these risks, including refinance and interest rate risks, are properly balanced with the benefit of using leverage. We may elect to obtain financing subsequent to the acquisition date on future real estate acquisitions and initially acquire investments without debt financing. Once we have fully invested the proceeds of our initial public offering, we expect our debt financing to be between 50% and 65% of the cost of our tangible assets (before deducting depreciation or other noncash reserves). Our charter limits our borrowings to 75% of the cost (before deducting depreciation or other noncash reserves) of our tangible assets; however, we may exceed that limit if the majority of the conflicts committee approves each borrowing in excess of our charter limitation and we disclose such borrowings to our stockholders in our next quarterly report with an explanation from the conflicts committee of the justification for the excess borrowing. From time to time, our debt financing may be below 50% of the cost of our tangible assets due to the lack of availability of debt financing or repayment of debt. As of March 31, 2011, our borrowings were approximately 41% of both the cost (before depreciation or other noncash reserves) and book value (before depreciation) of our tangible assets.

In addition to using our capital resources for investing purposes and meeting our debt obligations, we use our capital resources to make certain payments to our advisor and the dealer manager. During our offering stage, these payments included payments to the dealer manager for selling commissions and dealer manager fees related to sales in our primary offering and payments to the dealer manager and our advisor for reimbursement of certain organization and other offering expenses related both to the primary offering and the dividend reinvestment plan. However, our advisor has agreed to reimburse us to the extent that selling commissions, dealer manager fees and organization and other offering expenses incurred by us exceed 15% of our gross offering proceeds. During our acquisition and development stage, we expect to make payments to our advisor in connection with the selection and origination or purchase of real estate and real estate-related investments, the management of our assets and costs incurred by our advisor in providing services to us. The advisory agreement is in effect through May 21, 2011 and has a one-year term but may be renewed for an unlimited number of successive one-year periods upon the mutual consent our advisor and our conflicts committee.

The following is a summary of our contractual obligations as of March 31, 2011 (in thousands):


			Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2011		2012-2013		2014-2015		Thereafter
Outstanding debt obligations ⁽¹⁾	$	1,039,950	$	—	$	13,000	$	658,850	$	368,100
Interest payments on outstanding debt obligations⁽²⁾		181,383		33,047		87,490		59,902		944
Outstanding funding obligations under real estate loans receivable		18,000		⁽³⁾		⁽³⁾		⁽³⁾		—

⁽¹⁾ Amounts include principal payments only.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts and interest rates in effect at March 31, 2011 (consisting of the contractual interest rate and the effect of interest rate floors and swaps). We incurred interest expense of $10.2 million, excluding amortization of deferred financing costs totaling $1.0 million, during the three months ended March 31, 2011.

⁽³⁾As of March 31, 2011, $31.9 million had been disbursed under the Pappas Commerce First Mortgage Origination and another $18.0 million remains available for future funding, subject to certain conditions set forth in the loan agreement. This amount does not have a fixed funding date, but may be funded in any future year, subject to certain conditions set forth in the loan agreement. The Pappas Commerce First Mortgage matures on July 1, 2014.

Results of Operations

Overview

As of March 31, 2010, we owned six office properties, one office/flex property, one industrial property and four real estate loans receivable. As of March 31, 2011, we owned 17 office properties, one office/flex property, two industrial properties, a portfolio of four industrial properties, a leasehold interest in one industrial property and six real estate loans receivable. In general, we expect that our income and expenses related to our portfolio will increase in future periods as a result of owning investments acquired in 2010 and 2011 for an entire period and anticipated future acquisitions of real estate and real estate-related investments. The results of operations presented for the three months ended March 31, 2011 and 2010 are not directly comparable because we were still investing the proceeds from our initial public offering in 2011.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Comparison of the three months ended March 31, 2011 versus the three months ended March 31, 2010

The following table provides summary information about our results of operations for the three months ended March 31, 2011 and 2010 (dollar amounts in thousands):


	Three Months Ended March 31,				Increase			Percentage			$ Change Due to Acquisitions/		$ Change Due to Properties Held Throughout
	2011		2010		(Decrease)			Change			Originations ⁽¹⁾		Both Periods ⁽²⁾
Rental income	$	51,324	$	18,496	$	32,828			177	%	$	33,733	$	(905	)
Tenant reimbursements		10,880		2,757		8,123			295	%		8,794		(671	)
Interest income from real estate loans receivable		8,799		5,815		2,984			51	%		2,758		226
Other operating income		2,382		268		2,114			789	%		2,100		14
Operating, maintenance, and management		14,166		4,954		9,212			186	%		9,105		107
Real estate taxes and insurance		8,235		1,833		6,402			349	%		6,423		(21	)
Asset management fees to affiliate		4,553		1,519		3,034			200	%		3,020		14
Real estate acquisition fees to affiliates		2,049		1,106		943			85	%		942		1
Real estate acquisition fees and expenses		1,963		464		1,499			323	%		1,507		(8	)
General and administrative expenses		862		1,079		(217	)		(20	%)		n/a		n/a
Depreciation and amortization		28,208		10,737		17,471			163	%		19,395		(1,924	)
Interest expense		11,244		1,882		9,362			497	%		8,587		775
Other interest income		52		66		(14	)		(21	%)		n/a		n/a

⁽¹⁾ Represents the dollar amount increase for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 related to real estate and real estate-related investments acquired or originated on or after January 1, 2010.

⁽²⁾ Represents dollar amount increase (decrease) for the three months ended March 31, 2011 compared to the three months ended March 31, 2010 with respect to real estate and real estate-related investments owned by us during both periods.

Rental income and tenant reimbursements increased from $21.3 million for the three months ended March 31, 2010 to $62.2 million for the three months ended March 31, 2011, primarily as a result of the growth in our real estate portfolio. The increase was partially offset by a $1.6 million net decrease in rental income and tenant reimbursements from properties held throughout both periods, which is primarily due to lease expirations subsequent to March 31, 2010. We expect rental income and tenant reimbursements to increase in future periods as a result of owning the assets acquired during 2011 for an entire period and as a result of anticipated future acquisitions of real estate.

Interest income from our real estate loans receivable, recognized using the interest method, increased from $5.8 million for the three months ended March 31, 2010 to $8.8 million for the three months ended March 31, 2011, primarily as a result of the growth in our real estate loans receivable portfolio. Interest income included $1.7 million and $1.5 million in accretion of purchase price discounts, net of amortization of closing costs, for the three months ended March 31, 2011 and 2010, respectively. We expect interest income to increase in future periods as a result of anticipated future acquisitions of real estate-related investments.

Other operating income increased from $0.3 million for the three months ended March 31, 2010 to $2.4 million for the three months ended March 31, 2011, primarily as a result of the growth in our real estate portfolio. Other operating income consisted primarily of parking revenues related to properties acquired during the three months ended March 31, 2011. We expect other operating income to increase in future periods as a result of owning the assets acquired during 2011 for an entire period and as a result of anticipated future acquisitions of real estate.

Operating, maintenance and management costs increased from $5.0 million for the three months ended March 31, 2010 to $14.2 million for the three months ended March 31, 2011, primarily as a result of the growth in our real estate portfolio. We expect operating, maintenance and management costs to increase in future periods as a result of owning the assets acquired during 2010 and 2011 for an entire period and as a result of anticipated future acquisitions of real estate.

Real estate taxes and insurance increased from $1.8 million for the three months ended March 31, 2010 to $8.2 million for the three months ended March 31, 2011, primarily as a result of the growth in our real estate portfolio. We expect real estate taxes and insurance to increase in future periods as a result of owning the assets acquired during 2011 for an entire period and as a result of anticipated future acquisitions of real estate.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Asset management fees with respect to our real estate and real estate-related investments increased from $1.5 million for the three months ended March 31, 2010 to $4.6 million for the three months ended March 31, 2011, as a result of the growth in our real estate and real estate-related investment portfolio. All asset management fees incurred as of March 31, 2011 have been paid. We expect asset management fees to increase in future periods as a result of owning the assets acquired during 2011 for an entire period and as a result of anticipated future acquisitions of real estate and real estate-related investments.

Real estate acquisition fees and expenses to affiliates and non-affiliates increased from $1.6 million for the three months ended March 31, 2010 to $4.0 million for the three months ended March 31, 2011 due to the growth in our real estate portfolio. We expect real estate acquisition fees and expenses to decrease in future periods as we have invested the majority of the proceeds from our public offering.

General and administrative expenses decreased from $1.1 million for the three months ended March 31, 2010 to $0.9 million for the three months ended March 31, 2011. These general and administrative costs consisted primarily of legal fees, audit fees, transfer agent fees and other professional fees. We expect general and administrative costs to vary in future periods.

Depreciation and amortization increased from $10.7 million for the three months ended March 31, 2010 to $28.2 million for the three months ended March 31, 2011, primarily due to the growth in our real estate portfolio. This increase was partially offset by a $1.9 million decrease from properties held throughout both periods primarily due to lease expirations subsequent to March 31, 2010. We expect these amounts to increase in future periods as a result of owning the assets acquired during 2011 for an entire period and as a result of anticipated future acquisitions of real estate.

Interest expense increased from $1.9 million for the three months ended March 31, 2010 to $11.2 million for the three months ended March 31, 2011. Included in interest expense is the amortization of deferred financing costs of $0.1 million and $1.0 million for the three months ended March 31, 2010 and March 31, 2011, respectively. The increase in interest expense is primarily a result of our use of debt in acquiring real property investments subsequent to April 1, 2010 and an increase in our average loan balance and the average interest rate on financings of properties held throughout both periods. Our interest expense in future periods will vary based on our level of future borrowings, which will depend on the availability and cost of debt financing, draws on our credit facilities and the opportunity to acquire real estate and real estate-related investments meeting our investment objectives.

Organization and Offering Costs

Organization and offering costs (other than selling commissions and dealer manager fees) of the primary offering were paid in part by our advisor, the dealer manager or their affiliates on our behalf and they may continue to pay these costs on our behalf with respect to the offering under our dividend reinvestment plan. Other offering costs include all expenses to be incurred by us in connection with our public offering. Organization costs include all expenses incurred by us in connection with our formation, including but not limited to legal fees and other costs to incorporate. Organization and offering costs, which include selling commissions and dealer manager fees, are charged as incurred as a reduction to stockholders’ equity.

Pursuant to the advisory agreement and the dealer manager agreement, we are obligated to reimburse our advisor, the dealer manager or their affiliates, as applicable, for organization and other offering costs paid by them on our behalf; however, our advisor is obligated to reimburse us to the extent selling commissions, dealer manager fees and organization and other offering costs incurred by us exceed 15% of the gross proceeds from our initial public offering. As of March 31, 2011, selling commissions, dealer manager fees, and organization and other offering costs did not exceed 15% of the gross offering proceeds. Through March 31, 2011, including shares issued through our dividend reinvestment plan, we had sold 191,376,901 shares in the offering for gross offering proceeds of $1.9 billion and recorded organization and other offering costs of $20.1 million and selling commissions and dealer manager fees of $167.2 million.

We ceased offering shares of common stock in our primary offering on December 31, 2010 and terminated our primary offering on March 22, 2011 upon the completion of review of subscriptions submitted in accordance with our processing procedures. We may sell shares under the dividend reinvestment plan until we have sold all the shares under the plan.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. Because FFO calculations exclude such items as depreciation and amortization of real estate assets and gains and losses from sales of operating real estate assets (which can vary among owners of identical assets in similar conditions based on historical cost accounting and useful-life estimates), they facilitate comparisons of operating performance between periods and among other REITs. Our management believes that historical cost accounting for real estate assets in accordance with U.S. generally accepted accounting principles (“GAAP”) implicitly assumes 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 the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. As a result, we believe that the use of FFO, together with the required GAAP presentations, provides a more complete understanding of our performance relative to our competitors and a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts’ (“NAREIT”) definition. Our computation of FFO may not be comparable to other REITs that do not define FFO in accordance with the NAREIT definition or that interpret the current NAREIT definition differently than we do.

FFO is a non-GAAP financial measure and does not represent net income as defined by GAAP. Net income as defined by GAAP is the most relevant measure in determining our operating performance because FFO includes adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization. Accordingly, FFO should not be considered as an alternative to net income as an indicator of our operating performance.

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table for the three months ended March 31, 2011 and 2010, respectively (in thousands):


	For the Three Months Ended March 31,
	2011		2010
Net income	$	2,157	$	3,828
Add:
Depreciation of real estate assets		10,107		2,985
Amortization of lease-related costs		18,101		7,752

FFO	$	30,365	$	14,565

Set forth below is additional information related to certain items included in net income above, which may be helpful in assessing our operating results. Please see the accompanying consolidated statements of cash flows for details of our operating, investing, and financing cash activities.

Significant Items Included in Net Income:

•

Revenues in excess of actual cash received as a result of straight-line rent of $5.2 million for the three months ended March 31, 2011 and $0.9 million for the three months ended March 31, 2010;

•

Revenues in excess of actual cash received as a result of amortization of above-market/below-market in-place leases of $0.4 million for the three months ended March 31, 2011 and $1.8 million for the three months ended March 31, 2010;

•

Interest income from the accretion of discounts on real estate loans receivable, net of amortization of closing costs, of $1.7 million for the three months ended March 31, 2011 and $1.5 million for the three months ended March 31, 2010;

•

Interest expense from the amortization of deferred financing costs related to notes payable of approximately $1.0 million for the three months ended March 31, 2011 and approximately $0.1 million for the three months ended March 31, 2010; and

•

Acquisition fees and expenses related to the purchase of real estate of approximately $4.0 million for the three months ended March 31, 2011 and approximately $1.6 million for the three months ended March 31, 2010.

Operating cash flow and FFO may also be used to fund all or a portion of certain capitalizable items that are excluded from FFO, such as tenant improvements, building improvements and deferred leasing costs.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Distributions

Until we have fully invested the proceeds of our primary offering, and for some period after our offering stage, we may not be able to pay distributions solely from our cash flow from operations or FFO, in which case distributions may be paid in part from debt financing. Distributions declared, distributions paid and cash flows from operations were as follows for the first quarter of 2011 (in thousands, except per share amounts):


	Distributions Declared ⁽¹⁾		Distributions Declared Per Share ^{(1) (2)}								Cash Flows From Operations
					Distributions Paid ⁽³⁾
Period					Cash		Reinvested		Total
First Quarter 2011	$	29,934	$	0.160	$	12,644	$	16,072	$	28,716	$	9,396

⁽¹⁾ Distributions for the period from January 1, 2011 through March 31, 2011 are based on daily record dates and are calculated at a rate of $0.00178082 per share per day.

⁽²⁾ Assumes share was issued and outstanding each day during the periods presented.

⁽³⁾ Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately 15 days following month end.

For the three months ended March 31, 2011, we paid aggregate distributions of $28.7 million, including $12.6 million of distributions paid in cash and $16.1 million of distributions reinvested through our dividend reinvestment plan. FFO for the three months ended March 31, 2011 was $30.4 million and cash flow from operations was $9.4 million. We funded our total distributions paid, which includes net cash distributions and dividends reinvested by stockholders, with $9.4 million of current period operating cash flows and $19.3 million of debt financing. See the reconciliation of FFO to net income above.

Over the long-term, we expect that a greater percentage of our distributions will be paid from cash flow from operations and FFO (except with respect to distributions related to sales of our assets and distributions related to the repayment of principal under investments we make in mortgage, mezzanine and other loans). However, our operating performance cannot be accurately predicted and may deteriorate in the future due to numerous factors, including those discussed under “Forward-Looking Statements,” “Market Outlook – Real Estate and Real Estate Finance Markets” and “Results of Operations” herein, and the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC. Those factors include: the future operating performance of our investments in the existing real estate and financial environment; our ability to identify investments that are suitable to execute our investment objectives; the success and economic viability of our tenants; the ability of our borrowers and their sponsors to continue to make their debt service payments and/or to repay their loans upon maturity; changes in interest rates on our variable rate debt obligations; and the level of participation in our dividend reinvestment plan. In the event our FFO and/or cash flow from operations decrease in the future, the level of our distributions may also decrease. In addition, future distributions declared and paid may exceed FFO and/or cash flow from operations.

Critical Accounting Policies

Our consolidated interim financial statements have been prepared in accordance with GAAP and in conjunction with the rules and regulations of the SEC. The preparation of our financial statements requires significant management judgments, assumptions and estimates about matters that are inherently uncertain. These judgments affect the reported amounts of assets and liabilities and our disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. With different estimates or assumptions, materially different amounts could be reported in our financial statements. Additionally, other companies may utilize different estimates that may impact the comparability of our results of operations to those of companies in similar businesses. A discussion of the accounting policies that management considers critical in that they involve significant management judgments, assumptions and estimates is included in our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC. There have been no significant changes to our policies during 2011.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Subsequent Events

We evaluate subsequent events up until the date the consolidated financial statements are issued.

Distributions Paid

On April 15, 2011, we paid distributions of $10.4 million, which related to distributions declared for each day in the period from March 1, 2011 through March 31, 2011.

Distributions Declared

On May 4, 2011, our board of directors declared distributions based on daily record dates for the period from June 1, 2011 through June 30, 2011, which we expect to pay in July 2011, and distributions based on daily record dates for the period from July 1, 2011 through July 31, 2011, which we expect to pay in August 2011. Investors may choose to receive cash distributions or purchase additional shares through our dividend reinvestment plan.

Distributions for these periods will be calculated based on stockholders of record each day during these periods at a rate of $0.00178082 per share per day and equal a daily amount that, if paid each day for a 365-day period, would equal a 6.5% annualized rate based on a purchase price of $10.00 per share.

Investments Subsequent to March 31, 2011

One Kendall Square

On November 22, 2010, we, through an indirect wholly owned subsidiary, originated the One Kendall Square First Mortgage in the amount of $175.0 million (the “One Kendall Square First Mortgage”). The One Kendall Square First Mortgage note bears interest at a floating rate of 550 basis points over one-month LIBOR, but at no point shall the interest rate be less than 7.5% (“Loan Rate”). On November 30, 2010, we, through an indirect wholly owned subsidiary, sold, at par, a pari-passu participation interest with respect to 50% of the outstanding principal balance to an unaffiliated buyer (“Participation Holder”).

On April 5, 2011, we, through an indirect wholly owned subsidiary, entered into a note splitter agreement with the borrower under the One Kendall Square First Mortgage and restructured the One Kendall Square First Mortgage to provide for two debt tranches with varying interest rates. These tranches consist of Promissory Note A (“Note A”) with an original principal amount of $90.0 million and Promissory Note B (“Note B”) with an original principal amount of $85.0 million. Also on April 5, 2011, we, through an indirect wholly owned subsidiary, amended and restated Note A and amended and restated Note B. Note A, as amended, bears interest at a floating rate of 250 basis points over one-month LIBOR, but at no point shall the interest rate be less than 4.0%. Note B, as amended, bears interest at an amount that when combined with the interest related to Note A, would equal the Loan Rate calculated on the $175.0 million One Kendall Square First Mortgage. On April 6, 2011, we, through an indirect wholly owned subsidiary, and Participation Holder assigned and transferred Note A, at par, to an unaffiliated assignee. We and Participation Holder will each retain a 50% participation interest in Note B.

Acquisition of CityPlace Tower

On April 6, 2011, we, through an indirect wholly owned subsidiary, acquired an 18-story office building totaling 295,933 rentable square feet located on approximately 1.25 acres of land in West Palm Beach, Florida (“CityPlace Tower”). The seller is not affiliated with us or our advisor. The total contractual purchase price of CityPlace Tower was $126.5 million plus closing costs. We initially funded the purchase of CityPlace Tower with proceeds from existing credit facilities and proceeds from our initial public offering.

At acquisition, CityPlace Tower was 87% leased to 22 tenants.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to the effects of interest rate changes as a result of borrowings used to maintain liquidity and to fund the acquisition, expansion and refinancing of our real estate investment portfolio and operations. We are also exposed to the effects of changes in interest rates as a result of the acquisition and origination of mortgage, mezzanine, bridge and other loans. Our profitability and the value of our investment portfolio may be adversely affected during any period as a result of interest rate changes. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall borrowing costs. We have managed and will continue to manage interest rate risk by maintaining a ratio of fixed rate, long-term debt such that floating rate exposure is kept at an acceptable level. In addition, we may utilize a variety of financial instruments, including interest rate caps, floors, and swap agreements, in order to limit the effects of changes in interest rates on our operations. When we use these types of derivatives to hedge the risk of interest-earning assets or interest-bearing liabilities, we may be subject to certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of our common stock and that the losses may exceed the amount we invested in the instruments.

We borrow funds and make investments at a combination of fixed and variable rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt or fixed rate real estate loans receivable unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. At March 31, 2011, the fair value and carrying value of our fixed rate real estate loans receivable were $325.5 million and $249.9 million, respectively. The fair value estimate of our real estate loans receivable is estimated using an internal valuation model that considers the expected cash flows for the loans, underlying collateral values (for collateral-dependent loans) and the estimated yield requirements of institutional investors for loans with similar characteristics, including remaining loan term, loan-to-value, type of collateral and other credit enhancements. At March 31, 2011, the fair value of our fixed rate debt was $454.8 million and the carrying value of our fixed rate debt was $443.9 million. The fair value estimate of our fixed rate debt was estimated using a discounted cash flow analysis utilizing rates we would expect to pay for debt of a similar type and remaining maturity if the loans were originated at March 31, 2011. As we expect to hold our fixed rate instruments to maturity and the amounts due under such instruments would be limited to the outstanding principal balance and any accrued and unpaid interest, we do not expect that fluctuations in interest rates, and the resulting change in fair value of our fixed rate instruments, would have a significant impact on our operations.

Conversely, movements in interest rates on our variable rate debt and loan receivable would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. However, changes in required risk premiums would result in changes in the fair value of floating rate instruments. At March 31, 2011, we were exposed to market risks related to fluctuations in interest rates on $34.9 million of variable rate debt outstanding, after giving consideration to the impact of interest rate swap agreements on approximately $561.2 million of our variable rate debt. Based on interest rates as of March 31, 2011, if interest rates were 100 basis points higher during the 12 months ending March 31, 2012, interest expense on our variable rate debt would increase by $0.3 million and if interest rates were 100 basis points lower during the 12 months ending March 31, 2012, interest expense on our variable rate debt would decrease by $0.1 million. At March 31, 2011, we were exposed to market risks related to fluctuations in interest rates on our variable rate loan receivable outstanding with an outstanding principal balance of $87.5 million. An increase or decrease of 100 basis points in interest rates would have no impact on our future earnings and cash flows due to an interest rate floor on our variable rate loan receivable.

The weighted-average annual effective interest rates of our fixed rate real estate loans receivable and variable rate real estate loan receivable at March 31, 2011 were 11.8% and 7.2%, respectively. The weighted-average annual effective interest rate represents the effective interest rate at March 31, 2011, using the interest method, that we use to recognize interest income on our real estate loans receivable. The weighted-average interest rates of our fixed rate debt and variable rate debt at March 31, 2011 were 4.6% and 3.9%, respectively. The weighted-average interest rate represents the actual interest rate in effect at March 31, 2011 (consisting of the contractual interest rate and the effect of interest rate swaps and floors), using interest rate indices as of March 31, 2011 where applicable.

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file and submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

None.

Item 1A.

Risk Factors

Please see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 filed with the SEC and identified in Post-Effective Amendment No. 14 to our Registration Statement (file no. 333-146341), filed with the SEC on April 5, 2011.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

During the period covered by this Form 10-Q, we did not sell any equity securities that were not registered under the Securities Act of 1933.

On April 22, 2008, our Registration Statement on Form S-11 (File No. 333-146341), covering a public offering of up to 200,000,000 shares of common stock in our primary offering and 80,000,000 shares of common stock under our dividend reinvestment plan, was declared effective under the Securities Act of 1933. We commenced our initial public offering on April 22, 2008 upon retaining KBS Capital Markets Group LLC, an affiliate of our advisor, as the dealer manager of our offering. We ceased offering shares of common stock in our primary offering on December 31, 2010 and terminated our primary offering on March 22, 2011 upon the completion of review of subscriptions submitted in accordance with our processing procedures. We continue to offer shares of common stock under our dividend reinvestment plan. We may sell shares under the dividend reinvestment plan until we have sold all the shares under the plan.

We offered 200,000,000 shares of common stock in our primary offering at an aggregate offering price of up to $2.0 billion, or $10.00 per share with discounts available to certain categories of purchasers. The 80,000,000 shares offered under our dividend reinvestment plan are initially being offered at an aggregate offering price of $760 million, or $9.50 per share. We sold 182,686,033 shares of common stock in the primary offering for gross offering proceeds of $1.8 billion. As of March 31, 2011, we had sold 8,690,868 shares of common stock under the dividend reinvestment plan for gross offering proceeds of $82.6 million. Also as of March 31, 2011, we had redeemed 2,948,630 shares sold in the offering for $27.8 million. As of March 31, 2011, we had incurred selling commissions, dealer manager fees, other underwriting compensation and other organization and offering costs in the amounts set forth below. We paid selling commissions and dealer manager fees to KBS Capital Markets Group in connection with our primary offering, and KBS Capital Markets Group reallowed all selling commissions and a portion of the dealer manager fees to participating broker-dealers. In addition, we reimburse KBS Capital Advisors and KBS Capital Markets Group for certain offering expenses as described in our prospectus, as amended and supplemented.


Type of Expense Amount	Amount		Estimated/Actual
	(in thousands)
Selling commissions and dealer manager fees	$	167,211		Actual
Finders’ fees		—		Actual
Other underwriting compensation		10,330		Actual
Other organization and offering costs (excluding underwriting compensation)		9,811		Actual

Total expenses	$	187,352

From the commencement of our initial public offering through March 31, 2011, the net offering proceeds to us, after deducting the total expenses incurred as described above, were approximately $1.7 billion, including net offering proceeds from our dividend reinvestment plan of $82.6 million.

PART II. OTHER INFORMATION (CONTINUED)

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds (continued)

We have used substantially all of the net proceeds from our initial public offering to invest in and manage a diverse portfolio of real estate and real estate-related investments. We may use the net proceeds from the sale of shares under our dividend reinvestment plan for general corporate purposes, including, but not limited to, the redemption of shares under our share redemption program; capital expenditures; tenant improvement costs and other funding obligations. As of March 31, 2011, we had used the net proceeds from our initial public offering and debt financing to purchase $2.6 billion in real estate and real estate-related investments, including $32.9 million of acquisition and origination fees and expenses.

We have adopted a share redemption program that may enable stockholders to sell their shares to us in limited circumstances.

Pursuant to the share redemption program, as amended to date, there are several limitations on our ability to redeem shares:

•

Unless the shares are being redeemed in connection with a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined under the share redemption program), we may not redeem shares until the stockholder has held the shares for one year.

•

During any calendar year, the share redemption program limits the number of shares we may redeem to those that we could purchase with the amount of the net proceeds from the issuance of shares under the dividend reinvestment plan during the prior calendar year.

•

During any calendar year, we may redeem no more than 5% of the weighted-average number of shares outstanding during the prior calendar year.

•

We have no obligation to redeem shares if the redemption would violate the restrictions on distributions under Maryland law, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

We may amend, suspend or terminate the program upon 30 days’ notice to our stockholders. We may provide this notice by including such information in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the SEC, or by a separate mailing to our stockholders.

PART II. OTHER INFORMATION (CONTINUED)

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds (continued)

During the three months ended March 31, 2011, we redeemed shares pursuant to our share redemption program as follows:


Month	Total Number of Shares Redeemed ⁽¹⁾		Average Price Paid Per Share ⁽²⁾		Approximate Dollar Value of Shares Available That May Yet Be Redeemed Under the Program
January 2011		153,255	$	9.46		⁽³⁾
February 2011		180,593	$	9.49		⁽³⁾
March 2011		148,978	$	9.46		⁽³⁾

Total		482,826

⁽¹⁾ We announced the adoption and commencement of the program on April 8, 2008. We announced amendments to the program on May 13, 2009 (which amendment became effective on June 12, 2009) and on March 11, 2011 (which amendment became effective on April 10, 2011).

⁽²⁾ Pursuant to the program, as amended, we currently redeem shares at prices determined as follows:

•

The lower of $9.25 or 92.5% of the price paid to acquire the shares from us for stockholders who have held their shares for at least one year;

•

The lower of $9.50 or 95.0% of the price paid to acquire the shares from us for stockholders who have held their shares for at least two years;

•

The lower of $9.75 or 97.5% of the price paid to acquire the shares from us for stockholders who have held their shares for at least three years; and

•

The lower of $10.00 or 100% of the price paid to acquire the shares from us for stockholders who have held their shares for at least four years.

Notwithstanding the above, the redemption price for redemptions sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” will initially be the amount paid to acquire the shares from us. Furthermore, once we establish an estimated value per share of common stock, the redemption price per share for all stockholders will be equal to the estimated value per share, as determined by our advisor or another firm chosen for that purpose. We currently expect to establish an estimated value per share no later than the expiration of the first 18-month period in which we do not sell shares in a public equity offering and every 12 to 18 months thereafter. “Public equity offering” for this purpose does not include offerings on behalf of selling stockholders or offerings related to a dividend reinvestment plan, employee benefit plan or the redemption of interests in the Operating Partnership. We ceased offering shares in our initial public offering on December 31, 2010, but we may conduct follow-on public equity offerings in the future.

⁽³⁾ We limit the dollar value of shares that may be redeemed under the program as described above. During the three months ended March 31, 2011, we redeemed $4.6 million of common stock, which represented all redemption requests received in good order and eligible for redemption through the March 2011 redemption date. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2010 and redemptions through March 31, 2011, we may redeem up to $38.7 million of shares for the remainder of 2011.

Item 3.

Defaults upon Senior Securities

None.

Item 4.

(Removed and Reserved)

Item 5.

Other Information

None.

PART II. OTHER INFORMATION (CONTINUED)

Item 6.

Exhibits


Ex.		Description

3.1		Second Amended and Restated Articles of Incorporation of the Company, incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2008

3.2		Second Amended and Restated Bylaws of the Company, incorporated by reference to Exhibit 3.2 to Pre-Effective Amendment No. 2 to the Company’s Registration Statement on Form S-11, Commission File No. 333-146341

4.1		Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates), incorporated by reference to Exhibit 4.2 to Pre-Effective Amendment No. 1 to the Company’s Registration Statement on Form S-11, Commission File No. 333-146341

4.2		Amended and Restated Dividend Reinvestment Plan, incorporated by reference to Appendix A to the prospectus dated April 5, 2011, Commission File No. 333-146341

4.3		Second Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.1		Amended and Restated and Consolidated Loan Agreement (relating to the Portfolio Loan) by and between KBSII HARTMAN BUSINESS CENTER, LLC, KBSII PLANO BUSINESS PARK, LLC, KBSII HORIZON TECH CENTER, LLC, KBSII 2500 REGENT BOULEVARD, LLC, KBSII CRESCENT VIII, LLC, KBSII NATIONAL CITY TOWER, LLC, KBSII GRANITE TOWER, LLC, KBSII GATEWAY CORPORATE CENTER, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.2		Amended and Restated and Consolidated Secured Promissory Note (relating to the Portfolio Loan) by and between KBSII HARTMAN BUSINESS CENTER, LLC, KBSII PLANO BUSINESS PARK, LLC, KBSII HORIZON TECH CENTER, LLC, KBSII 2500 REGENT BOULEVARD, LLC, KBSII CRESCENT VIII, LLC, KBSII NATIONAL CITY TOWER, LLC, KBSII GRANITE TOWER, LLC, KBSII GATEWAY CORPORATE CENTER, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.3		Amended and Restated Mortgage with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBSII NATIONAL CITY TOWER, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

PART II. OTHER INFORMATION (CONTINUED)

Item 6.

Exhibits (continued)


10.4		Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBS II GRANITE TOWER, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.5		First Modification of Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBSII HORIZON TECH CENTER, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.6		First Modification of Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBSII 2500 REGENT BOULEVARD, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.7		First Modification of Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBSII PLANO BUSINESS PARK, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.8		First Modification of Deed to Secure Debt, Assignment of Leases and Rents and Security Agreement (relating to the Portfolio Loan) by and between KBSII HARTMAN BUSINESS CENTER, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.9		First Modification of Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBSII CRESCENT VIII, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.10		Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBSII GATEWAY CORPORATE CENTER, LLC and WELLS FARGO BANK NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.11		Amended and Restated and Consolidated Limited Guaranty (relating to the Portfolio Loan) by KBS REIT PROPERTIES II, LLC, in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION, dated January 27, 2011, incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

PART II. OTHER INFORMATION (CONTINUED)

Item 6.

Exhibits (continued)


10.12		Second Amended and Restated and Consolidated Secured Promissory Note (relating to the Portfolio Loan) by and between KBSII HARTMAN BUSINESS CENTER, LLC, KBSII PLANO BUSINESS PARK, LLC, KBSII HORIZON TECH CENTER, LLC, KBSII 2500 REGENT BOULEVARD, LLC, KBSII CRESCENT VIII, LLC, KBSII NATIONAL CITY TOWER, LLC, KBSII GRANITE TOWER, LLC, KBSII GATEWAY CORPORATE CENTER, LLC, KBSII I-81 INDUSTRIAL PORTFOLIO TRUST, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 8, 2011, incorporated by reference to Exhibit 10.34 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.13		Open-Ended Mortgage with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (Alberigi Drive) (relating to the Portfolio Loan) by and between KBSII I-81 INDUSTRIAL PORTFOLIO TRUST, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 8, 2011, incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.14		Open-Ended Mortgage with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (CenterPoint Boulevard) (relating to the Portfolio Loan) by and between KBSII I-81 INDUSTRIAL PORTFOLIO TRUST, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 8, 2011, incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.15		Open-Ended Mortgage with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (Capital Road) (relating to the Portfolio Loan) by and between KBSII I-81 INDUSTRIAL PORTFOLIO TRUST, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 8, 2011, incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.16		Open-Ended Mortgage with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (Oak Ridge Road) (relating to the Portfolio Loan) by and between KBSII I-81 INDUSTRIAL PORTFOLIO TRUST, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 8, 2011, incorporated by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.17		Joinder Agreement (relating to the Portfolio Loan) between KBSII I-81 INDUSTRIAL PORTFOLIO TRUST and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 8, 2011

10.18		Third Amended and Restated and Consolidated Secured Promissory Note (relating to the Portfolio Loan) by and between KBSII HARTMAN BUSINESS CENTER, LLC, KBSII PLANO BUSINESS PARK, LLC, KBSII HORIZON TECH CENTER, LLC, KBSII 2500 REGENT BOULEVARD, LLC, KBSII CRESCENT VIII, LLC, KBSII NATIONAL CITY TOWER, LLC, KBSII GRANITE TOWER, LLC, KBSII GATEWAY CORPORATE CENTER, LLC, KBSII I-81 INDUSTRIAL PORTFOLIO TRUST, LLC, KBSII TWO WESTLAKE PARK, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 25, 2011, incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.19		Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBSII TWO WESTLAKE PARK, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 25, 2011, incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

PART II. OTHER INFORMATION (CONTINUED)

Item 6.

Exhibits (continued)


10.20		Joinder Agreement (relating to the Portfolio Loan) between KBSII TWO WESTLAKE PARK, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated February 25, 2011

10.21		Fourth Amended and Restated and Consolidated Secured Promissory Note (relating to the Portfolio Loan) by and between KBSII HARTMAN BUSINESS CENTER, LLC, KBSII PLANO BUSINESS PARK, LLC, KBSII HORIZON TECH CENTER, LLC, KBSII 2500 REGENT BOULEVARD, LLC, KBSII CRESCENT VIII, LLC, KBSII NATIONAL CITY TOWER, LLC, KBSII GRANITE TOWER, LLC, KBSII GATEWAY CORPORATE CENTER, LLC, KBSII I-81 INDUSTRIAL PORTFOLIO TRUST, LLC, KBSII TWO WESTLAKE PARK, LLC, KBSII TORREY RESERVE WEST, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated March 10, 2011, incorporated by reference to Exhibit 10.41 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.22		Deed of Trust with Absolute Assignment of Leases and Rents, Security Agreement and Fixture Filing (relating to the Portfolio Loan) by and between KBSII TORREY RESERVE WEST, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated March 10, 2011, incorporated by reference to Exhibit 10.42 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010

10.23		Joinder Agreement (relating to the Portfolio Loan) between KBSII TORREY RESERVE WEST, LLC and WELLS FARGO BANK, NATIONAL ASSOCIATION, dated March 10, 2011

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

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

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002

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.


	KBS REAL ESTATE INVESTMENT TRUST II, INC.

Date: May 6, 2011	By:	/S/ CHARLES J. SCHREIBER, JR.
		Charles J. Schreiber, Jr.
		Chairman of the Board, Chief Executive Officer and Director

Date: May 6, 2011	By:	/S/ DAVID E. SNYDER
		David E. Snyder
		Chief Financial Officer