KBS Real Estate Investment Trust II, Inc. - Quarter Report: 2014 March (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, 2014



¨	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 x 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):



Large Accelerated Filer	¨		Accelerated Filer	¨
Non-Accelerated Filer	x	(Do not check if a smaller reporting company)	Smaller reporting company	¨

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 6, 2014, there were 191,541,986 outstanding shares of common stock of KBS Real Estate Investment Trust II, Inc.

Table of Contents

KBS REAL ESTATE INVESTMENT TRUST II, INC.

FORM 10-Q

March 31, 2014

INDEX



PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of March 31, 2014 (unaudited) and December 31, 2013	2
		Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2014 and 2013	3
		Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months Ended March 31, 2014 and 2013	4
		Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2013 and the Three Months Ended March 31, 2014 (unaudited)	5
		Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2014 and 2013	6
		Condensed Notes to Consolidated Financial Statements as of March 31, 2014 (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
	Item 4.	Controls and Procedures	38
PART II.	OTHER INFORMATION		39
	Item 1.	Legal Proceedings	39
	Item 1A.	Risk Factors	39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
	Item 3.	Defaults upon Senior Securities	42
	Item 4.	Mine Safety Disclosures	42
	Item 5.	Other Information	42
	Item 6.	Exhibits	42
SIGNATURES			43

Table of Contents

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, 2014			December 31, 2013
	(unaudited)
Assets
Real estate:
Land	$	224,547		$	224,547
Buildings and improvements	1,228,307			1,226,640
Tenant origination and absorption costs	155,637			160,290
Total real estate held for investment, cost	1,608,491			1,611,477
Less accumulated depreciation and amortization	(241,918		)	(231,369		)
Total real estate held for investment, net	1,366,573			1,380,108
Real estate held for sale, net	1,044,655			1,055,152
Total real estate, net	2,411,228			2,435,260
Real estate loans receivable, net	105,896			184,828
Total real estate and real estate-related investments, net	2,517,124			2,620,088
Cash and cash equivalents	177,011			175,042
Rents and other receivables, net	40,628			39,926
Above-market leases, net	18,403			19,951
Assets related to real estate held for sale	76,110			75,046
Deferred financing costs, prepaid expenses and other assets	32,373			24,247
Total assets	$	2,861,649		$	2,954,300
Liabilities and stockholders’ equity
Notes payable:
Notes payable	$	828,478		$	885,990
Notes payable related to real estate held for sale	633,890			635,363
Total notes payable	1,462,368			1,521,353
Accounts payable and accrued liabilities	24,594			24,597
Distributions payable	10,613			10,649
Below-market leases, net	16,431			17,946
Liabilities related to real estate held for sale	4,683			5,037
Other liabilities	35,480			34,674
Total liabilities	1,554,169			1,614,256
Commitments and contingencies (Note 12)
Redeemable common stock	56,265			70,562
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, 190,944,685 and 192,269,969 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively	1,909			1,923
Additional paid-in capital	1,647,227			1,647,214
Cumulative distributions in excess of net income	(389,766		)	(369,342		)
Accumulated other comprehensive loss	(8,155		)	(10,313		)
Total stockholders’ equity	1,251,215			1,269,482
Total liabilities and stockholders’ equity	$	2,861,649		$	2,954,300

See accompanying condensed notes to consolidated financial statements.

Table of Contents

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,
	2014		2013
Revenues:
Rental income	$	65,215	$	61,725
Tenant reimbursements	16,669		14,302
Interest income from real estate loans receivable	7,964		8,262
Other operating income	2,607		2,598
Total revenues	92,455		86,887
Expenses:
Operating, maintenance, and management	18,196		16,167
Real estate taxes and insurance	12,319		10,886
Asset management fees to affiliate	5,704		5,491
Real estate acquisition fees to affiliates	—		1,797
Real estate acquisition fees and expenses	—		616
General and administrative expenses	1,288		1,115
Depreciation and amortization	28,843		29,094
Interest expense	14,635		15,293
Impairment charge on real estate held for sale	1,075		—
Total expenses	82,060		80,459
Other income:
Other interest income	33		4
Total other income	33		4
Net income	$	10,428	$	6,432
Net income per common share, basic and diluted	$	0.05	$	0.03
Weighted-average number of common shares outstanding, basic and diluted	192,542,712		191,305,215

See accompanying condensed notes to consolidated financial statements.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 1. Financial Statements (continued)

KBS REAL ESTATE INVESTMENT TRUST II, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)



	Three Months Ended March 31,
	2014		2013
Net income	$	10,428	$	6,432
Other comprehensive income:
Unrealized gains on derivative instruments	1,087		1,305
Reclassification of unrealized losses due to hedge ineffectiveness	914		—
Reclassification of realized losses on derivative instruments	157		80
Total other comprehensive income	2,158		1,385
Total comprehensive income	$	12,586	$	7,817

See accompanying condensed notes to consolidated financial statements.

Table of Contents

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, 2013 and the Three Months Ended March 31, 2014 (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, 2012	190,274,167		$	1,903		$	1,633,994		$	(289,737	)	$	(17,129	)	$	1,329,031
Net income	—		—			—			55,779			—			55,779
Other comprehensive income	—		—			—			—			6,816			6,816
Issuance of common stock	7,214,805		72			70,490			—			—			70,562
Redemptions of common stock	(5,219,003	)	(52		)	(53,116		)	—			—			(53,168		)
Transfers to redeemable common stock	—		—			(4,135		)	—			—			(4,135		)
Distributions declared	—		—			—			(135,384		)	—			(135,384		)
Other offering costs	—		—			(19		)	—			—			(19		)
Balance, December 31, 2013	192,269,969		$	1,923		$	1,647,214		$	(369,342	)	$	(10,313	)	$	1,269,482
Net income	—		—			—			10,428			—			10,428
Other comprehensive income	—		—			—			—			2,158			2,158
Issuance of common stock	1,642,328		16			16,045			—			—			16,061
Redemptions of common stock	(2,967,612	)	(30		)	(30,328		)	—			—			(30,358		)
Transfers from redeemable common stock	—		—			14,296			—			—			14,296
Distributions declared	—		—			—			(30,852		)	—			(30,852		)
Balance, March 31, 2014	190,944,685		$	1,909		$	1,647,227		$	(389,766	)	$	(8,155	)	$	1,251,215

See accompanying condensed notes to consolidated financial statements.

Table of Contents

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,
	2014			2013
Cash Flows from Operating Activities:
Net income	$	10,428		$	6,432
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	28,843			29,094
Impairment charge on real estate	1,075			—
Noncash interest income on real estate-related investments	(115		)	(1,168		)
Deferred rent	(2,669		)	(3,563		)
Bad debt expense	335			241
Amortization of above- and below-market leases, net	506			496
Amortization of deferred financing costs	818			791
Reclassification of realized losses on derivative instruments	157			80
Unrealized losses due to hedge ineffectiveness	807			—
Change in fair value of contingent consideration	—			(10		)
Changes in operating assets and liabilities:
Rents and other receivables	(1,646		)	(1,582		)
Prepaid expenses and other assets	(8,745		)	(8,732		)
Accounts payable and accrued liabilities	(432		)	465
Other liabilities	2,038			1,043
Net cash provided by operating activities	31,400			23,587
Cash Flows from Investing Activities:
Acquisitions of real estate	—			(238,952		)
Improvements to real estate	(4,296		)	(2,778		)
Investments in real estate loans receivable	—			(716		)
Principal repayments on real estate loans receivable	32			474
Proceeds from the early payoff of real estate loans receivable	79,015			—
Net cash provided by (used in) investing activities	74,751			(241,972		)
Cash Flows from Financing Activities:
Proceeds from notes payable	—			328,000
Principal payments on notes payable	(58,985		)	(81,000		)
Payments of deferred financing costs	(11		)	(1,783		)
Return of contingent consideration related to acquisition of real estate	—			134
Payments to redeem common stock	(30,358		)	(10,527		)
Payments of other offering costs	—			(6		)
Distributions paid to common stockholders	(14,828		)	(19,408		)
Net cash (used in) provided by financing activities	(104,182		)	215,410
Net increase (decrease) in cash and cash equivalents	1,969			(2,975		)
Cash and cash equivalents, beginning of period	175,042			48,390
Cash and cash equivalents, end of period	$	177,011		$	45,415
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	13,404		$	14,450
Supplemental Disclosure of Noncash Transactions:
(Decrease) increase in distributions payable	$	(36	)	$	64
Increase in redeemable common stock payable	$	—		$	6,524
Increase in accrued improvements to real estate	$	688		$	1,919
Increase in lease commissions payable	$	1,131		$	53
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	16,061		$	21,537

See accompanying condensed notes to consolidated financial statements.

Table of Contents

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, 2014

(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, 2014, the Company owned 27 real estate properties (consisting of 20 office properties, one office/flex property, a portfolio of four industrial properties, an office campus consisting of eight office buildings and one individual industrial property), a leasehold interest in one industrial property and three real estate loans receivable. As of March 31, 2014, eight of the Company’s real estate properties and its leasehold interest in an industrial property were classified as held for sale.

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, 2013 (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. The Company continues to offer shares of common stock under its dividend reinvestment plan.

The Company sold 182,681,633 shares of common stock in its primary offering for gross offering proceeds of $1.8 billion. As of March 31, 2014, the Company had sold 29,796,824 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $287.4 million. Also as of March 31, 2014, the Company had redeemed 21,553,772 shares sold in the Offering for $215.2 million.


2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no significant changes to the Company’s accounting policies since it filed its audited financial statements in its Annual Report on Form 10-K for the year ended December 31, 2013. During the three months ended March 31, 2014, the Company adopted ASU No. 2014-08 (defined below), which impacts the Company’s reporting of discontinued operations. For further information about the Company’s accounting policies, refer to the Company’s consolidated financial statements and notes thereto for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Principles of Consolidation and Basis of Presentation

The accompanying unaudited consolidated financial statements and condensed notes thereto 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 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

Table of Contents

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, 2014

(unaudited)

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.

Use of Estimates

The preparation of the consolidated financial statements and condensed notes thereto 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. As of March 31, 2014, the Company had classified seven office properties, one industrial property and a leasehold interest in one industrial property as held for sale. As a result, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets for all periods presented.

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, 2014 and 2013, respectively.

Distributions declared per common share were $0.160 and $0.214 for the three months ended March 31, 2014 and 2013, respectively. Distributions declared per common share assumes each share was issued and outstanding each day during the three months ended March 31, 2014 and 2013, respectively. For each day that was a record date for distributions during the three months ended March 31, 2014 and 2013, distributions were calculated at a rate of $0.00178082 per share per day. Each day during the periods from January 1, 2014 through March 31, 2014 and January 1, 2013 through March 31, 2013 was a record date for distributions. Additionally, the Company’s board of directors declared a distribution in the amount of $0.05416667 per share of common stock to stockholders of record as of the close of business on February 4, 2013.

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.”

Table of Contents

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, 2014

(unaudited)

Recently Issued Accounting Standards Update

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”). ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: a) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; b) the component of an entity or group of components of an entity is disposed of by sale; and c) the component of an entity or group of components of an entity is disposed of other than by sale. ASU No. 2014-08 also requires additional disclosures about discontinued operations. ASU No. 2014-08 is effective for reporting periods beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company early adopted ASU No. 2014-08 for the reporting period beginning January 1, 2014. As a result of the adoption of ASU No. 2014-08, results of operations for properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation described above. Additionally, any gain or loss on sale of real estate that does not meet the criteria for classification as a discontinued operation would be presented, on the consolidated statements of operations, below income from continuing operations and income from discontinued operations.


3.	REAL ESTATE HELD FOR INVESTMENT

As of March 31, 2014, the Company’s portfolio of real estate held for investment was composed of 13 office properties, one office/flex property, a portfolio of four industrial properties and an office campus consisting of eight office buildings, encompassing in the aggregate approximately 7.7 million rentable square feet. For a discussion on the Company’s real estate properties held for sale, see Note 6, “Real Estate Held for Sale.” As of March 31, 2014, the Company’s real estate portfolio was 93% occupied. The following table summarizes the Company’s real estate portfolio held for investment as of March 31, 2014 and December 31, 2013 (in thousands):



	Land		Buildings and Improvements			Tenant Origination and Absorption Costs			Total Real Estate Held for Investment
As of March 31, 2014:
Office	$	217,297	$	1,165,652		$	143,227		$	1,526,176
Industrial	7,250		62,655			12,410			82,315
Total real estate, cost	$	224,547	$	1,228,307		$	155,637		$	1,608,491
Accumulated depreciation and amortization	—		(160,239		)	(81,679		)	(241,918		)
Total real estate held for investment, net	$	224,547	$	1,068,068		$	73,958		$	1,366,573
As of December 31, 2013:
Office	$	217,297	$	1,163,985		$	147,880		$	1,529,162
Industrial	7,250		62,655			12,410			82,315
Total real estate, cost	$	224,547	$	1,226,640		$	160,290		$	1,611,477
Accumulated depreciation and amortization	—		(151,191		)	(80,178		)	(231,369		)
Total real estate held for investment, net	$	224,547	$	1,075,449		$	80,112		$	1,380,108

Table of Contents

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, 2014

(unaudited)

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, 2014, the leases had remaining terms, excluding options to extend, of up to 11.4 years with a weighted-average remaining term of 3.9 years. Some of the leases have provisions to extend the term of the leases, options for early termination for all or part of the leased premises 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 a security deposit from the tenant in the form of a cash deposit and/or a letter of credit. The amount required as a security deposit varies depending upon the terms of the respective lease and the creditworthiness of the tenant, but generally is not a significant amount. 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 $3.3 million and $3.3 million as of March 31, 2014 and December 31, 2013, respectively.

During the three months ended March 31, 2014 and 2013, the Company recognized deferred rent from tenants, net of lease incentive amortization, of $2.7 million and $3.6 million, respectively. As of March 31, 2014 and December 31, 2013, the cumulative deferred rent balance was $36.9 million and $35.8 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $3.4 million and $3.3 million of unamortized lease incentives as of March 31, 2014 and December 31, 2013, respectively.

As of March 31, 2014, the future minimum rental income from the Company’s properties under non-cancelable operating leases was as follows (in thousands):



April 1, 2014 through December 31, 2014	$	115,254
2015	143,314
2016	130,185
2017	112,036
2018	87,265
Thereafter	210,167
	$	798,221

As of March 31, 2014, the Company had over 300 tenants over a diverse range of industries and geographic areas. 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
Finance	41	$	32,921	20.4	%
Computer System Design & Programming	17	31,247		19.3	%
Legal Services	50	18,454		11.4	%
		$	82,622	51.1	%

_____________________

⁽¹⁾ Annualized base rent represents annualized contractual base rental income as of March 31, 2014, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

Table of Contents

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, 2014

(unaudited)

No other tenant industries accounted for more than 10% of annualized base rent. No material tenant credit issues have been identified at this time. During the three months ended March 31, 2014 and 2013, the Company recorded bad debt expense of $0.3 million and $0.2 million, respectively. As of March 31, 2014, the Company had a bad debt expense reserve of approximately $0.4 million, which represents less than 1% of its annualized base rent.

As of March 31, 2014, there were no leases that accounted for more than 10% of annualized base rent.

Geographic Concentration Risk

As of March 31, 2014, the Company’s net investments in real estate in California and New Jersey represented 18.3% and 11.1% of the Company’s total assets, respectively. As a result, the geographic concentration of the Company’s portfolio makes it particularly susceptible to adverse economic developments in the California and New Jersey real estate markets. Any adverse economic or real estate developments in these markets, 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 and its ability to make distributions to stockholders. Additionally, as of March 31, 2014, the Company owned one office property held for sale located in Chicago, Illinois which represented approximately 19.1% of the Company’s total assets and 19.5% of the Company’s total revenues. See Note 6, “Real Estate Held for Sale.”


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

As of March 31, 2014 and December 31, 2013, 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) were as follows (in thousands):



	Tenant Origination and Absorption Costs						Above-Market Lease Assets						Below-Market Lease Liabilities
	March 31, 2014			December 31, 2013			March 31, 2014			December 31, 2013			March 31, 2014			December 31, 2013
Cost	$	155,637		$	160,290		$	33,103		$	34,267		$	(38,347	)	$	(39,513	)
Accumulated Amortization	(81,679		)	(80,178		)	(14,700		)	(14,316		)	21,916			21,567
Net Amount	$	73,958		$	80,112		$	18,403		$	19,951		$	(16,431	)	$	(17,946	)

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, 2014 and 2013 were 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,
	2014			2013			2014			2013			2014		2013
Amortization	$	(9,066	)	$	(10,172	)	$	(2,375	)	$	(2,192	)	$	1,869	$	1,696

Table of Contents

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, 2014

(unaudited)


5.	REAL ESTATE LOANS RECEIVABLE

As of March 31, 2014 and December 31, 2013, the Company, through indirect wholly owned subsidiaries, had invested in or originated 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,

2014 ⁽¹⁾

Book Value

as of

March 31,

2014 ⁽²⁾

Book Value

as of

December 31,

2013 ⁽²⁾

Contractual Interest Rate ⁽³⁾

Annualized Effective Interest Rate⁽³⁾

Maturity Date ⁽⁴⁾

Pappas Commerce First Mortgage Origination ⁽⁵⁾

Boston, Massachusetts

04/05/2010

Industrial

Mortgage

32,673

⁽⁵⁾

9.6%

07/01/2014

Sheraton Charlotte Airport Hotel First Mortgage

Charlotte, North Carolina

07/11/2011

Hotel

Mortgage

14,430

14,444

14,477

7.5%

7.6%

08/01/2018

Summit I & II First Mortgage

Reston, Virginia

01/17/2012

Office

Mortgage

58,750

58,779

58,781

7.5%

7.6%

02/01/2017

Tuscan Inn First Mortgage Origination ⁽⁶⁾

San Francisco, California

01/21/2010

Hotel

Mortgage

—

20,077

⁽⁶⁾

Chase Tower First Mortgage Origination⁽⁷⁾

Austin, Texas

01/25/2010

Office

Mortgage

—

58,820

⁽⁷⁾

105,853

105,896

184,828

_____________________

⁽¹⁾Outstanding principal balance as of March 31, 2014 represents original principal balance outstanding under the loan, increased for any subsequent fundings and reduced for any principal paydowns.

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

⁽³⁾Contractual interest rate is the stated interest rate on the face of the loan. Annualized effective interest rate is calculated as the actual interest income recognized in 2014, using the interest method, annualized and divided by the average amortized cost basis of the investment. The contractual interest rates and annualized effective interest rates presented are as of March 31, 2014.

⁽⁴⁾Maturity dates are as of March 31, 2014; subject to certain conditions, the maturity dates of certain real estate loans receivable may be extended beyond the maturity date shown.

⁽⁵⁾As of March 31, 2014, $31.9 million had been disbursed under the Pappas Commerce First Mortgage. Interest on the loan is calculated at a fixed rate of 9.5%. Outstanding principal balance also includes a protective advance of $0.8 million made on June 22, 2011 to cover property taxes and to fund the tax and insurance reserve account. Interest on the protective advance is calculated at a fixed rate of 14.5%.

⁽⁶⁾On February 7, 2014, the Company, through an indirect wholly owned subsidiary, entered into an early payoff agreement with the borrower of the Tuscan Inn First Mortgage Origination, pursuant to which the borrower of the Tuscan Inn First Mortgage Origination paid off the entire principal balance outstanding and accrued interest in the amount of $20.2 million.

⁽⁷⁾On February 14, 2014, the Company, through an indirect wholly owned subsidiary, entered into an early payoff agreement with the borrower of the Chase Tower First Mortgage Origination, pursuant to which the borrower of the Chase Tower Mortgage Origination paid off the entire principal balance outstanding and accrued interest in the amount of $58.9 million. Additionally, the borrower paid a yield maintenance premium of $4.9 million in accordance with the early payoff agreement, which was recorded in interest income from real estate loans receivable.

The following summarizes the activity related to real estate loans receivable for the three months ended March 31, 2014 (in thousands):



Real estate loans receivable - December 31, 2013	$	184,828
Principal repayments received on real estate loans receivable	(32		)
Payoff of the Tuscan Inn First Mortgage Origination	(20,200		)
Payoff of the Chase Tower First Mortgage Origination	(58,815		)
Amortization of closing costs and origination fees on real estate loans receivable	115
Real estate loans receivable - March 31, 2014	$	105,896

Table of Contents

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, 2014

(unaudited)

For the three months ended March 31, 2014 and 2013, interest income from real estate loans receivable consisted of the following (in thousands):



	Three Months Ended March 31,
	2014		2013
Contractual interest income	$	2,932	$	7,094
Prepayment fee received on real estate loan receivable	4,917		—
Accretion of purchase discounts	—		1,301
Amortization of closing costs and origination fees	115		(133		)
Interest income from real estate loans receivable	$	7,964	$	8,262

As of March 31, 2014 and December 31, 2013, interest receivable from real estate loans receivable was $0.7 million and $1.3 million, respectively, and was included in rents and other receivables.


6.	REAL ESTATE HELD FOR SALE

During the three months ended March 31, 2014, the Company classified seven office properties, one industrial property and a leasehold interest in one industrial property with an aggregate net book value of $1.0 billion as held for sale. In accordance with the Company’s early adoption of ASU No. 2014-08, properties that are classified as held for sale in the ordinary course of business on or subsequent to January 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations. For more information, see Note 2, “Summary of Significant Accounting Policies — Recently Issued Accounting Standards Update.”

The following table summarizes certain revenue and expenses from the Company’s real estate held for sale for the three months ended March 31, 2014 and 2013 (in thousands), which were included in continuing operations:



	Three Months Ended March 31,
	2014		2013
Revenues
Rental income	$	24,876	$	24,673
Tenant reimbursements	11,254		10,585
Other operating income	552		554
Expenses
Operating, maintenance, and management	7,278		6,390
Real estate taxes and insurance	6,382		6,006
Asset management fees to affiliate	2,315		2,293
General and administrative expenses	35		(7		)
Depreciation and amortization	9,973		11,348
Interest expense	7,001		6,477
Impairment charge on real estate	1,075		—

During the three months ended March 31, 2014, the Company recorded an impairment charge of $1.1 million related to a real estate property held for sale. The impairment charge represents the difference between the carrying value of the real estate and the fair value of the real estate (based on a purchase and sale agreement into which the Company had entered) less costs to sell.

Table of Contents

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, 2014

(unaudited)

The following summary presents the major components of assets and liabilities related to real estate held for sale as of March 31, 2014 and December 31, 2013 (in thousands):



	March 31, 2014			December 31, 2013
Assets related to real estate held for sale
Total real estate, at cost and net of impairment charge	$	1,185,375		$	1,186,606
Accumulated depreciation and amortization	(140,720		)	(131,454		)
Real estate held for sale, net	1,044,655			1,055,152
Other assets	76,110			75,046
Total assets related to real estate held for sale	$	1,120,765		$	1,130,198
Liabilities related to real estate held for sale
Notes payable	633,890			635,363
Other liabilities	4,683			5,037
Total liabilities related to real estate held for sale	$	638,573		$	640,400

As of March 31, 2014, the following property held for sale 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	$	546,168	19.1	%	$	45,359	$	35.02	99.4	%

_____________________

⁽¹⁾Annualized base rent represents annualized contractual base rental income as of March 31, 2014, adjusted to straight-line any contractual tenant concessions (including free rent), rent increases and rent decreases from the lease’s inception through the balance of the lease term.

Table of Contents

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, 2014

(unaudited)


7.	NOTES PAYABLE

As of March 31, 2014 and December 31, 2013, the Company’s notes payable, including notes payable related to real estate held for sale, consisted of the following (dollars in thousands):



	Principal as of March 31, 2014		Principal as of December 31, 2013		Contractual Interest Rate as of March 31, 2014⁽¹⁾	Effective Interest Rate as of March 31, 2014 ⁽¹⁾	Payment Type	Maturity Date ⁽²⁾
Portfolio Revolving Loan Facility ⁽³⁾	$	105,000	$	105,000	One-month LIBOR + 1.80% ⁽³⁾	3.5%	Interest Only	06/21/2017
300 N. LaSalle Building Mortgage Loan ⁽⁴⁾	346,589		348,061		4.25%	4.3%	⁽⁴⁾	08/01/2015
Union Bank Plaza Mortgage Loan ⁽⁵⁾	105,000		105,000		One-month LIBOR + 1.75%	3.5%	Interest Only	09/15/2015
Emerald View at Vista Center Mortgage Loan	19,800		19,800		One-month LIBOR + 2.25%	4.6%	Interest Only	01/01/2016
Portfolio Mortgage Loan #1 ⁽⁶⁾	341,544		341,544		One-month LIBOR + 2.15%	3.7%	Interest Only	01/27/2016
601 Tower Mortgage Loan ⁽⁷⁾	16,320		16,320		⁽⁷⁾	3.5%	Interest Only	06/03/2015
CityPlace Tower Mortgage Loan	71,000		71,000		3.59%	3.6%	Interest Only	08/01/2015
Fountainhead Plaza Mortgage Loan	80,000		80,000		One-month LIBOR + 1.90%	2.9%	Interest Only	12/01/2015
Portfolio Mortgage Loan #2 ⁽⁸⁾	18,115		75,628		One-month LIBOR + 2.75%	3.0%	Interest Only	01/01/2016
Portfolio Mortgage Loan #3 ⁽⁹⁾	141,000		141,000		One-month LIBOR + 1.75% - 1.85%	2.3%	Interest Only	03/01/2016
Corporate Technology Centre Mortgage Loan ⁽¹⁰⁾	140,000		140,000		3.50%	3.5%	⁽¹⁰⁾	04/01/2020
300-600 Campus Drive Revolving Loan ⁽¹¹⁾	78,000		78,000		One-month LIBOR + 2.05% ⁽¹¹⁾	2.9%	Interest Only	08/01/2016
	$	1,462,368	$	1,521,353

_____________________

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of March 31, 2014. Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2014 (consisting of the contractual interest rate and the effect of interest rate swaps and contractual floor rates, if applicable), using interest rate indices as of March 31, 2014, 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, 2014; subject to certain conditions, the maturity dates of certain loans may be extended beyond the maturity date shown.

⁽³⁾ On April 30, 2010, the Company entered into a four-year revolving loan facility for an amount up to $100.0 million. On June 21, 2013, the Portfolio Revolving Loan Facility was amended and restated to increase the borrowing capacity from $100.0 million to $145.0 million and to extend the maturity date to June 21, 2017. The Amended and Restated Portfolio Revolving Loan Facility is secured by Mountain View Corporate Center, 350 E. Plumeria Building, Pierre Laclede Center and One Main Place. As of March 31, 2014, the $105.0 million non‑revolving portion had been funded, and the $40.0 million revolving portion remained available for future disbursements, subject to certain terms and conditions contained in the loan documents.

⁽⁴⁾ Monthly payments were initially interest-only. Beginning on September 1, 2013, monthly payments include principal and interest with principal payments calculated using an amortization schedule of 30 years for the balance of the loan term, with the remaining principal balance, all accrued and unpaid interest and any other amounts due at maturity.

⁽⁵⁾ 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, 2014, $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.

⁽⁶⁾The Portfolio Mortgage Loan #1 is secured by Plano Business Park, Horizon Tech Center, Crescent VIII, National City Tower, Granite Tower, Gateway Corporate Center, I-81 Industrial Portfolio, Two Westlake Park, Torrey Reserve West and the Company’s leasehold interest in the Dallas Cowboys Distribution Center.

⁽⁷⁾ On June 6, 2011, the Company entered into a four-year $32.6 million revolving credit loan. As of March 31, 2014, $16.3 million had been disbursed to the Company under the mortgage loan and $16.3 million remained available for future disbursements under the revolving loan facility, subject to certain conditions set forth in the loan agreement. The interest rate on the $16.3 million outstanding as of March 31, 2014 was calculated at a fixed rate of 3.54% per annum. The interest rate on the $16.3 million available for future disbursements as of March 31, 2014 will be calculated at a variable rate of 220 basis points over one-month LIBOR.

⁽⁸⁾ The Portfolio Mortgage Loan #2 is secured by the Pappas Commerce First Mortgage Origination and the Sheraton Charlotte Airport Hotel First Mortgage. Principal payments received as prepayments or upon the maturity of the underlying collateral are required to be remitted as principal repayments on the Portfolio Mortgage Loan #2.

⁽⁹⁾ On March 6, 2013, the Company entered into a three-year senior secured credit facility for borrowings of up to $235.0 million, of which $141.0 million is non-revolving debt and $94.0 million is revolving debt. As of March 31, 2014, the principal balance consisted of the $141.0 million non-revolving portion. The revolving portion of $94.0 million remains available for future disbursements, subject to certain terms and conditions contained in the loan documents. The Portfolio Mortgage Loan #3 is secured by the 100 & 200 Campus Drive Buildings, Metropolitan Center and Willow Oaks Corporate Center.

⁽¹⁰⁾ Monthly payments are initially interest-only. Beginning on May 1, 2017, monthly payments include principal and interest with principal payments calculated using an amortization schedule of 30 years for the balance of the loan term, with the remaining principal balance, all accrued and unpaid interest and any other amounts due at maturity.

⁽¹¹⁾ On July 10, 2013, the Company entered into a three-year senior secured credit facility for borrowings of up to $120.0 million, of which $95.0 million is non-revolving debt and $25.0 million is revolving debt. As of March 31, 2014, the principal balance consisted of $78.0 million of the non-revolving portion. The remaining non-revolving portion of $17.0 million and the revolving portion of $25.0 million remain available for future disbursements, subject to certain terms and conditions contained in the loan documents.

Table of Contents

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, 2014

(unaudited)

As of March 31, 2014 and December 31, 2013, the Company’s deferred financing costs were $5.0 million and $5.6 million, respectively, net of amortization, and are included in deferred financing costs, prepaid expenses and other assets on the accompanying consolidated balance sheets.

During the three months ended March 31, 2014 and 2013, the Company incurred $14.6 million and $15.3 million of interest expense, respectively. As of March 31, 2014 and December 31, 2013, $2.2 million and $2.5 million, respectively, of interest expense were payable. Included in interest expense for the three months ended March 31, 2014 and 2013 were $0.8 million and $0.8 million of amortization of deferred financing costs, respectively. Interest expense incurred as a result of the Company’s interest rate swap agreements were $2.3 million and $2.4 million for the three months ended March 31, 2014 and 2013, respectively. Included in interest expense for the three months ended March 31, 2014 was unrealized losses of $0.8 million as a result of hedge ineffectiveness.

The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of March 31, 2014 (in thousands):



April 1, 2014 through December 31, 2014	$	4,512
2015	614,397
2016	598,459
2017	106,781
2018	2,750
Thereafter	135,469
	$	1,462,368

Certain of the Company’s notes payable contain financial debt covenants. As of March 31, 2014, the Company was in compliance with these debt covenants.


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 but one of the Company’s interest rate swaps are designated as cash flow hedges.

The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of March 31, 2014 and December 31, 2013. 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):

March 31, 2014

December 31, 2013

Weighted-Average

Fix Pay Rate

Weighted-Average Remaining Term

in Years

Derivative Instruments

Number of Instruments

Notional Amount

Number of Instruments

Notional Amount

Reference Rate as of March 31, 2014

Interest Rate Swaps

$662,350

$842,150

One-month LIBOR/
Fixed at 0.50% - 2.39%

1.36%

1.9

Table of Contents

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, 2014

(unaudited)

The following table sets forth the fair value of the Company’s derivative instruments as well as their classification on the consolidated balance sheets as of March 31, 2014 and December 31, 2013 (dollars in thousands):



		March 31, 2014				December 31, 2013
Derivative Instruments	Balance Sheet Location	Number of Instruments	Fair Value			Number of Instruments	Fair Value
Interest Rate Swaps	Deferred financing costs, prepaid expenses and other assets, at fair value	2	$	186		2	$	225
Interest Rate Swaps	Other liabilities, at fair value	11	$	(9,027	)	14	$	(10,260	)

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 comprehensive income (loss) and as other comprehensive income in the accompanying consolidated statements of stockholders’ equity. The Company recorded unrealized gains of $1.1 million and $1.3 million on derivative instruments designated as cash flow hedges in accumulated other comprehensive income (loss) during the three months ended March 31, 2014 and 2013, respectively. 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 its variable rate notes payable, the Company recognized an additional $2.3 million and $2.4 million of interest expense related to the effective portion of cash flow hedges during the three months ended March 31, 2014 and 2013, respectively. The change in fair value of the ineffective portion is recognized directly in earnings. During the three months ended March 31, 2014, the Company recorded $0.8 million of unrealized swap losses as interest expense resulting from hedge ineffectiveness primarily due to the anticipated early repayment of debt in connection with asset sales and the Company dedesignating the hedge due to certain hedged forecasted transactions no longer being probable beyond the projected asset sale date. During the three months ended March 31, 2013, 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 the additional interest expense totaled $7.5 million as of March 31, 2014 and was included in accumulated other comprehensive income (loss).

In conjunction with the refinancing of the Portfolio Mortgage Loan #3 on March 6, 2013, the Company terminated the swap agreements with respect to eight swaps and paid an aggregate breakage fee of $1.1 million. Because it remains probable that the original hedged forecasted transactions (i.e., LIBOR-based debt service payments) will occur, the loss related to the termination of these swap agreements is included in accumulated other comprehensive income (loss) and will be reclassified into earnings over the period of the original forecasted hedged transaction. During the three months ended March 31, 2014 and 2013, the Company reclassified $0.2 million and $0.1 million of the loss related to the termination of swap agreements into earnings as an increase to interest expense, respectively.

Table of Contents

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, 2014

(unaudited)


9.	FAIR VALUE DISCLOSURES

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.

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. The following is a summary of the methods and assumptions used by management in estimating the fair value of each class of assets and liabilities for which it is practicable to estimate the fair value:

Cash and cash equivalents, 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: The Company’s real estate loans receivable 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. The Company classifies these inputs as Level 3 inputs.

Derivative instruments: The Company’s derivative instruments are presented at fair value on the accompanying consolidated balance sheets. The valuation of these instruments is determined 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 risks to the contracts, are incorporated in the fair values to account for potential nonperformance risk.

Table of Contents

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, 2014

(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. The Company classifies these inputs as Level 3 inputs.

The following were the face values, carrying amounts and fair values of the Company’s real estate loans receivable and notes payable as of March 31, 2014 and December 31, 2013, which carrying amounts do not approximate the fair values (in thousands):



	March 31, 2014						December 31, 2013
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial assets:
Real estate loans receivable	$	105,853	$	105,896	$	106,504	$	184,900	$	184,828	$	190,485
Financial liabilities:
Notes payable	$	1,462,368	$	1,462,368	$	1,474,959	$	1,521,353	$	1,521,353	$	1,526,075

Disclosure of the fair values of financial instruments is based on pertinent information available to the Company as of the period end and requires a significant amount of judgment. Despite increased capital market and credit market activity, transaction volume for certain financial instruments remains relatively low. This has made the estimation of fair values difficult and, therefore, both 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, 2014, 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)
Recurring Basis:
Asset derivatives	$	186		$	—	$	186		$	—
Liability derivatives	(9,027		)	—		(9,027		)	—

As of March 31, 2014, the Company measured the following asset at fair value on a nonrecurring basis (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:
Impaired real estate held for sale	$	24,265	$	—	$	—	$	24,265

Table of Contents

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, 2014

(unaudited)

As of March 31, 2014, one of the Company’s real estate properties held for sale was measured at estimated fair value as this property was impaired and the carrying value was adjusted to the property’s estimated fair value less costs to sell. The Company determined the fair value of the impaired real estate property held for sale based on the estimated sales price. The estimated sales price was based on a purchase and sale agreement into which the Company had entered.


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 entitled the Advisor and/or the Dealer Manager to specified fees upon the provision of certain services with regard to the Offering and entitle the Advisor to specified fees upon the provision of certain services with regard to the investment of funds in real estate and real estate-related investments, the management of those investments, among other services, and the disposition of investments, as well as reimbursement of organization and offering costs incurred by the Advisor and the Dealer Manager on behalf of the Company, such as expenses related to the dividend reinvestment plan, and certain costs incurred by the Advisor in 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 has also entered into a fee reimbursement agreement with the Dealer Manager pursuant to which the Company agreed to reimburse the Dealer Manager for certain fees and expenses it incurs for administering the Company’s participation in the Depository Trust & Clearing Corporation Alternative Investment Product Platform with respect to certain accounts of the Company’s investors serviced through the platform. The Advisor and Dealer Manager also serve as the advisor and dealer manager, respectively, for KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc. and KBS Strategic Opportunity REIT II, Inc.

On January 6, 2014, the Company, together with KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc., KBS Strategic Opportunity REIT II, Inc., the Dealer Manager, the Advisor and other KBS-affiliated entities, entered into an errors and omissions and directors and officers liability insurance program where the lower tiers of such insurance coverage are shared. The cost of these lower tiers is allocated by the Advisor and its insurance broker among each of the various entities covered by the program, and is billed directly to each entity. The allocation of these shared coverage costs is proportionate to the pricing by the insurance marketplace for the first tiers of directors and officers liability coverage purchased individually by each REIT. The Advisor’s and the Dealer Manager’s portion of the shared lower tiers’ cost is proportionate to the respective entities’ prior cost for the errors and omissions insurance.

During the three months ended March 31, 2014 and 2013, no other transactions occurred between the Company and KBS Real Estate Investment Trust, Inc., KBS Real Estate Investment Trust III, Inc., KBS Strategic Opportunity REIT, Inc., KBS Legacy Partners Apartment REIT, Inc. and KBS Strategic Opportunity REIT II, Inc.

Table of Contents

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, 2014

(unaudited)

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, 2014 and 2013, respectively, and any related amounts payable as of March 31, 2014 and December 31, 2013 (in thousands):



	Incurred				Payable as of
	Three Months Ended March 31,				March 31,		December 31,
	2014		2013		2014		2013
Expensed
Asset management fees	$	5,704	$	5,491	$	—	$	—
Reimbursement of operating expenses ⁽¹⁾	36		25		—		—
Acquisition fees	—		1,797		—		—
	$	5,740	$	7,313	$	—	$	—

_____________________

⁽¹⁾ The Advisor may seek reimbursement for certain employee costs under the Advisory Agreement. The Company reimburses 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 amounts totaled $36,000 and $25,000 for the three months ended March 31, 2014 and 2013, respectively, and were the only type of employee costs reimbursed under the Advisory Agreement for the three months ended March 31, 2014 and 2013. 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.


11.	SEGMENT INFORMATION

The Company presently operates in two reportable 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 or originated mortgage loans and an A-Note. All revenues earned from the Company’s two reporting segments were from external customers and there were no intersegment sales or transfers. The Company does not allocate corporate-level accounts to its reporting 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, asset management fees and interest expense. 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.

Table of Contents

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, 2014

(unaudited)

The following tables summarize total revenues and NOI for each reportable segment for the three months ended March 31, 2014 and 2013 and total assets and total liabilities for each reportable segment as of March 31, 2014 and December 31, 2013 (in thousands):



	For the Three Months Ended March 31,
	2014		2013
Revenues:
Real estate segment ⁽¹⁾	$	84,491	$	78,625
Real estate-related segment	7,964		8,262
Total segment revenues	$	92,455	$	86,887

Interest Expense:
Real estate segment ⁽¹⁾	$	14,229	$	13,950
Real estate-related segment	406		1,131
Total segment interest expense	14,635		15,081
Corporate-level	—		212
Total interest expense	$	14,635	$	15,293

NOI:
Real estate segment ⁽¹⁾	$	34,358	$	32,678
Real estate-related segment	7,243		6,584
Total NOI	$	41,601	$	39,262

	As of March 31,		As of December 31,
	2014		2013
Assets:
Real estate segment	$	1,482,087	$	1,492,182
Real estate-related segment	107,236		229,457
Total segment assets	1,589,323		1,721,639
Real estate held for sale	1,120,765		1,130,198
Corporate-level ⁽²⁾	151,561		102,463
Total assets	$	2,861,649	$	2,954,300
Liabilities:
Real estate segment	$	886,176	$	886,657
Real estate-related segment	18,199		75,820
Total segment liabilities	904,375		962,477
Real estate held for sale	638,573		640,400
Corporate-level ⁽³⁾	11,221		11,379
Total liabilities	$	1,554,169	$	1,614,256

_____________________

⁽¹⁾ Amounts include properties held for sale. See Note 6, “Real Estate Held for Sale” for more information.

⁽²⁾ Total corporate-level assets consisted primarily of cash and cash equivalents of approximately $150.9 million and $102.2 million as of March 31, 2014 and December 31, 2013, respectively.

⁽³⁾ As of March 31, 2014 and December 31, 2013, corporate-level liabilities consisted primarily of distributions payable.

Table of Contents

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, 2014

(unaudited)

The following table reconciles the Company’s net income to its NOI for the three months ended March 31, 2014 and 2013 (in thousands):



	For the Three Months Ended March 31,
	2014			2013
Net income	$	10,428		$	6,432
Other interest income	(33		)	(4		)
Real estate acquisition fees to affiliates	—			1,797
Real estate acquisition fees and expenses	—			616
General and administrative expenses	1,288			1,115
Depreciation and amortization	28,843			29,094
Impairment charge on real estate	1,075			—
Corporate-level interest expense	—			212
NOI	$	41,601		$	39,262


12.	COMMITMENTS AND CONTINGENCIES

Economic Dependency

The Company is dependent on the Advisor for certain services that are essential to the Company, including: the 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 any of these services, the Company will be required to obtain such services from other sources.

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, 2014.

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 the Company’s 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.

Table of Contents

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, 2014

(unaudited)


13.	SUBSEQUENT EVENTS

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

Distributions Paid

On April 1, 2014, the Company paid distributions of $10.6 million, which related to distributions declared for daily record dates for each day in the period from March 1, 2014 through March 31, 2014. On May 1, 2014, the Company paid distributions of $10.2 million, which related to distributions declared for daily record dates for each day in the period from April 1, 2014 through April 30, 2014.

Distributions Declared

On May 9, 2014, the Company’s board of directors declared distributions based on daily record dates for the period from June 1, 2014 through June 30, 2014, which the Company expects to pay in July 2014, and distributions based on daily record dates for the period from July 1, 2014 through July 31, 2014, which the Company expects to pay in August 2014. 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 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 in the Company’s now terminated primary initial public offering or a 6.3% annualized rate based on the Company’s December 18, 2013 estimated value per share of $10.29.

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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 and 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/or 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-sponsored programs and KBS-advised investors and conflicts in allocating time among us and these other programs and investors. These conflicts could result in unanticipated actions.


•	We pay substantial fees to and expenses of our advisor and its affiliates. 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 from time to time may use proceeds from financings, if necessary, to fund a portion of our distributions during our operational stage. We may also fund such distributions from the net proceeds from the sale of real estate and from the receipt of principal payments on our real estate-related investments.

•

We depend on tenants for the revenue generated by our real estate investments and, accordingly, the revenue generated by our real estate investments is dependent upon the success and economic viability of our tenants. Revenues from our properties could decrease due to a reduction in occupancy (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.

•

Our investments in real estate and mortgage loans 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.


•	Disruptions in the financial markets and uncertain economic conditions could adversely affect our ability to implement our business strategy and generate returns to our stockholders.


•	Certain of our debt obligations have variable interest rates and related payments that vary with the movement of LIBOR or other indexes. Increases in these indexes could increase the amount of our debt payments and limit our ability to pay distributions to our stockholders.

•

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, capital expenditures, tenant improvement costs and leasing costs related to our real estate properties; reserves required by financings of our real estate properties; the repayment of debt; and the repurchase of shares under our share redemption program. If such funds are not available from our 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.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

All forward-looking statements should be read in light of the risks identified in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, each filed with the Securities and Exchange Commission (the “SEC”).

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 continue 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 our advisor, KBS Capital Advisors LLC, pursuant to an advisory agreement. KBS Capital Advisors conducts our operations and manages our portfolio of real estate and real estate-related 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, 2014, we owned 27 real estate properties (consisting of 20 office properties, one office/flex property, a portfolio of four industrial properties, an office campus consisting of eight office buildings and one individual industrial property), a leasehold interest in one industrial property and three real estate loans receivable. As of March 31, 2014, eight of our real estate properties and our leasehold interest in an industrial property were classified as held for sale.

On September 27, 2007, we filed a registration statement on Form S-11 with 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 sold 182,681,633 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, 2014, we had sold 29,796,824 shares of common stock under our dividend reinvestment plan for gross offering proceeds of $287.4 million. Also as of March 31, 2014, we had redeemed 21,553,772 shares sold in our offering for $215.2 million.

Market Outlook – Real Estate and Real Estate Finance Markets

The following discussion is based on management’s beliefs, observations and expectations with respect to the real estate and real estate finance markets.

In the wake of the sub-par recovery of the U.S. economy, and despite recent improvements regarding the pace of job growth, concerns persist regarding income growth and the overall economic health of domestic consumers, businesses and governments. The federal government has employed an array of fiscal and monetary policies to attempt to help get the U.S. economy onto a sound and sustainable growth path. The road to recovery has been anything but smooth, but early estimates indicate that the second half of 2013 saw U.S. GDP increase by over 3%.

In February of 2014, Congress ended a lengthy dispute with the White House and unconditionally extended the government’s borrowing limit until March 2015. While this action should provide some measure of stability, the federal government is still facing major policy issues, including passage of a federal budget. The federal government is currently working from a modified sequestration budget that was not intended to be a long-term solution.

The Federal Reserve has maintained an accommodative monetary policy since the introduction of quantitative easing (“QE”) in October of 2008. The Federal Reserve has injected trillions of U.S. dollars into the global financial markets through the purchases of U.S. treasury bonds and mortgage backed securities. At this point in time, it is unclear what the final cost or impact of this program will be. In December 2013, the speculation as to the possible end of QE programs was ended with the announcement by the Federal Reserve of the tapering of government purchases of U.S. treasury securities and U.S. agency mortgages. The tapering of these purchases led to increased volatility in the emerging markets which has, in turn, triggered a global repricing of financial assets that has impacted stocks, bonds (both corporate and sovereign) and currencies.

Despite cuts to federal government spending, U.S. GDP has continued to grow at moderate level. In the third quarter of 2013, U.S. GDP increased at an annual rate of 4.1% and the third estimate of fourth quarter 2013 reflects an annual rate increase in U.S. GDP of 2.6%. A combination of pent-up U.S. consumer demand and global demand for U.S. equipment, machinery and airplanes has contributed to the strong growth.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The U.S. dollar has remained a safe haven currency and the U.S. commercial property markets have benefited from an inflow of foreign capital. Gateway markets such as New York City and San Francisco continue to benefit from a strong bid for commercial properties. Over the past two years, transaction volumes increased and the re-emergence of the CMBS market and the availability of debt capital have contributed to the ongoing economic recovery. This trend continued into 2014 and the U.S. commercial real estate market gained favor as an alternative investment. Looking forward, however, the recovery in commercial real estate is expected to remain uneven across geographies and among property types.

The U.S. residential real estate market has been recovering. Low interest rates, pent-up demand from the consumer sector and the introduction of institutional investors in the form of buy-to-rent portfolios have all contributed to a broad recovery of home prices. Some markets have recovered to pre-recession levels, but the majority of U.S. housing markets still have not recaptured the equity lost as a result of the recent recession, which weighs on consumer confidence. Impediments to a continued recovery in this market include rising interest rates, more stringent underwriting standards for borrowers and a potential slowdown in demand by institutional investors. In addition, as referenced above, the Federal Reserve’s QE program, which peaked at $85 billion a month in purchases of long-term treasury securities and mortgage backed securities, is slowly being scaled down. It is anticipated that the removal of the Federal Reserve’s purchases in the mortgage backed securities market will contribute to increases in the cost of future mortgage financing.

In Europe, concerns remain regarding the economic burden of sovereign debt and the pace of economic recovery. Some European banks hold material quantities of sovereign debt on their balance sheets. The possible default or restructuring of the sovereign debt obligations of certain European Union countries and the resulting potential negative impact on the global financial markets remains of concern. The uncertainty surrounding the size of the problem and how regulators and governments intend to remedy the situation has caused many investors to reassess their pricing of sovereign risks. Europe has benefited from the emerging markets investor exodus and the yields on almost all European sovereign debt have declined.

Europe’s gain has come at the cost of emerging market countries such as South Africa, Turkey and Argentina. Capital outflows destabilized local markets for most of 2013, as investors struggled with the implications of the end of QE programs.

The global rating agencies continue to be vigilant in their analysis of the health of the global financial markets. In November 2012, Moody’s downgraded France’s sovereign debt rating to Aa1 from AAA and, in February 2013, Moody’s downgraded the U.K. government debt to Aa1 from AAA as well. In the past two years, Asia also has seen a number of ratings downgrades, with Fitch downgrading Japan to A+ in May of 2012 and China to A+ in April of 2013. The global ratings agencies continue to have a number of sovereign issuers on negative watch as governments have struggled to resolve their budget issues and face growing debt obligations. Beginning in late 2013, these credit issues shifted away from the European sovereign credits to Asia and to some emerging market nations, such as Turkey, Russia, South America, Brazil and Argentina.

Overall, despite indications of recovery both in the United States and abroad, uncertainties abound. China’s export-based economy slowed and Japan embarked upon a large scale QE program of its own in 2013. In the United States, the Federal Reserve announced the tapering of the current QE program which, when combined with the adversarial political climate at the federal level, has led to high levels of uncertainty and increased volatility in the capital markets. In the short-term, 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

The economic events that have occurred since the onset of the recession in 2008 have no precedent. While current forecasts for the U.S. economy are positive, there is a level of uncertainty inherent to this outlook. Currently, both the investing and leasing environments are highly competitive. While there has been an increase in the amount of capital flowing into the U.S. real estate markets, which has resulted in an increase in real estate values in certain markets, the uncertainty regarding the economic environment has made businesses reluctant to make long-term commitments or changes in their business plans. Possible future declines in rental rates, slower or potentially negative net absorption of leased space and expectations of future rental concessions, including free rent to renew tenants early, to retain tenants who are up for renewal or to attract new tenants, may result in decreases in cash flows. Historically low interest rates could help offset some of the impact of these potential decreases in operating cash flow for properties financed with variable rate mortgages; however, interest rates likely will not remain at these historically low levels for the remaining life of many of our investments. Interest rates became more volatile as the capital markets reacted to the December 2013 announcement of the tapering of QE.

Table of Contents

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

All of our real estate-related investments are directly secured by commercial real estate. As a result, our real estate-related investments in general have been and likely will continue to be impacted by the same factors impacting our real estate investments. The relatively high yields and the improving credit position of many U.S. tenants and borrowers have attracted global capital. However, the real estate and capital markets are fluid and the positive trends can reverse quickly. Economic conditions remain relatively unstable and can have a negative impact on the performance of collateral securing our loan investments, and therefore may impact the ability of some borrowers under our loans to make contractual interest payments to us.

As of March 31, 2014, we had fixed-rate real estate loans receivable with an aggregate outstanding principal balance of $105.9 million and an aggregate carrying value (including origination and closing costs) of $105.9 million that mature between 2014 and 2018.

Impact on Our Financing Activities

In light of the risks associated with potentially volatile operating cash flows from some of our real estate properties, we may have difficulty refinancing some of our debt obligations prior to or at maturity or we may not be able to refinance these obligations at terms as favorable as the terms of our existing indebtedness. Recent financial market conditions have improved from the bottom of the economic cycle, but material risks are still present. Market conditions can change quickly, potentially negatively impacting the value of our investments.

As of March 31, 2014, we had debt obligations in the aggregate principal amount of $1.5 billion, all of which have an initial maturity between 2015 and 2020. We have a total of $573.9 million of fixed rate notes payable and $888.5 million of variable rate notes payable. The interest rates on $662.4 million of our variable rate notes payable are effectively fixed through interest rate swap agreements. As of March 31, 2014, we did not have any debt obligations scheduled to mature within 12 months of that date.

Liquidity and Capital Resources

Our principal demands for funds during the short- and long-term are and will be for: the payment of operating expenses, capital expenditures and general and administrative expenses; payments under debt obligations; redemptions of common stock pursuant to our share redemption program; and payments of distributions to stockholders. To date, we have had five primary sources of capital for meeting our cash requirements:


•	Proceeds from our now terminated primary offering;


•	Proceeds from common stock issued under our dividend reinvestment plan;


•	Debt financings;


•	Proceeds from the sale of real estate and the repayments of real estate-related investments; 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. We intend to use our cash on hand, cash flow generated by our real estate operations and real estate-related investments, proceeds from debt financing, proceeds from our dividend reinvestment plan, proceeds from the sale of real estate properties and principal repayments on our real estate loans receivable as our primary sources of immediate and long-term liquidity. As of March 31, 2014, we had an aggregate of $175.3 million available for future disbursements under four credit facilities, subject to certain conditions and restrictions 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, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our 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, 2014, our real estate held for investment was 93% occupied and our bad debt reserve was less than 1% of annualized base rent.

Our real estate-related investments generate cash flow in the form of interest income, which is reduced by loan servicing fees, debt service payments, the payment of asset management fees and corporate general and administrative expenses. Cash flow from operations from our real estate-related investments is primarily dependent on the operating performance of the underlying collateral and the borrower’s ability to make debt service payments. As of March 31, 2014, the borrowers under our real estate loans receivable were current on their debt service payments to us.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

During the three months ended March 31, 2014, we classified seven office properties, one industrial property and a leasehold interest in one industrial property with an aggregate net book value of $1.0 billion as held for sale. If we sell a significant portion of these assets, we expect to make a special distribution to stockholders of a significant portion of the net proceeds from the sale, after payments of fees, expenses, the debt related to the assets and allowance for cash reserves. We expect that any special distribution will constitute a return of a portion of the stockholders’ invested capital for federal income tax purposes and will also reduce our estimated value per share. If we sell a significant portion of these assets, our cash flow from operations would decrease and we would adjust our distribution policy with respect to monthly distribution payments and our redemption policy.

For the three months ended March 31, 2014, our cash needs for capital expenditures and the payment of debt obligations were met with the proceeds from the payoff of two of our real estate loans receivable and proceeds from 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, 2014 using current period cash flows from operations. We believe that our cash on hand, proceeds from our dividend reinvestment plan, cash flow from operations, availability under our credit facilities, proceeds from asset sales and the repayment of our real estate loans receivable will be sufficient to meet our liquidity needs for the foreseeable future.

Cash Flows from Operating Activities

As of March 31, 2014, we owned 27 real estate properties (consisting of 20 office properties, one office/flex property, a portfolio consisting of four industrial properties, an office campus consisting of eight office buildings and one individual industrial property), a leasehold interest in one industrial property and three real estate loans receivable. As of March 31, 2014, eight of our real estate properties and our leasehold interest in an industrial property were classified as held for sale. During the three months ended March 31, 2014, net cash provided by operating activities was $31.4 million, compared to $23.6 million during the three months ended March 31, 2013. Net cash from operations increased in 2014 primarily as a result of an increase in revenues from our real estate operations.

Cash Flows from Investing Activities

Net cash provided by investing activities was $74.8 million for the three months ended March 31, 2014, and primarily consisted of the following:


•	$79.0 million of proceeds from the early payoff of two real estate loans receivable; and


•	$4.3 million used for improvements to real estate;

Cash Flows from Financing Activities

During the three months ended March 31, 2014, net cash used in financing activities was $104.2 million and consisted primarily of the following:


•	$59.0 million of principal payments on notes payable;


•	$30.4 million of cash used for redemptions of common stock; and


•	$14.8 million of net cash distributions, after giving effect to distributions reinvested by stockholders of $16.1 million.

In addition to using our capital resources to meet our debt service obligations, for capital expenditures and for operating costs, we use our capital resources to make certain payments to our advisor. We paid our advisor fees in connection with the acquisition and origination of our assets and pay our advisor fees in connection with the management and disposition of our assets and for certain costs incurred by our advisor in providing services to us. Among the fees payable to our advisor is an asset management fee. With respect to investments in real estate, we pay our advisor a monthly asset management fee equal to one-twelfth of 0.75% of the amount paid or allocated to acquire the investment, plus the cost of any subsequent development, construction or improvements to the property. 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 our proportionate share of the underlying investment. With respect to investments in loans and any investments other than real estate, we pay our advisor a monthly asset management 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. We will also continue to reimburse our advisor and our dealer manager for certain offering costs related to our dividend reinvestment plan and for certain stockholder services.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

As of March 31, 2014, we had $177.0 million of cash and cash equivalents and up to $175.3 million available for future disbursements under our credit facilities, subject to certain conditions and restrictions set forth in the respective loan agreements, to meet our operational and capital needs.

In order to execute our investment strategy, we primarily utilize secured 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. Our charter limits our total liabilities 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. As of March 31, 2014, our borrowings and other liabilities were approximately 48% of both the cost (before depreciation or other noncash reserves) and book value (before depreciation) of our tangible assets, respectively.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of March 31, 2014 (in thousands):



			Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2014		2015-2016		2017-2018		Thereafter
Outstanding debt obligations ⁽¹⁾	$	1,462,368	$	4,512	$	1,212,856	$	109,531	$	135,469
Interest payments on outstanding debt obligations ⁽²⁾	112,076		38,902		55,542		11,393		6,239

_____________________

⁽¹⁾ Amounts include principal payments only.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts and interest rates in effect as of March 31, 2014 (consisting of the contractual interest rate and the effect of interest rate floors and swaps, if applicable). We incurred interest expense of $13.0 million, excluding amortization of deferred financing costs totaling $0.8 million, during the three months ended March 31, 2014.

Results of Operations

Overview

As of March 31, 2013, we owned 20 office properties, one office/flex property, a portfolio of four industrial properties, an office campus consisting of eight office buildings, one individual industrial property, a leasehold interest in one industrial property and seven real estate loans receivable. As of March 31, 2014, including real estate properties that were classified as held for sale, we owned 20 office properties, one office/flex property, a portfolio of four industrial properties, an office campus consisting of eight office buildings, one individual industrial property, a leasehold interest in one industrial property and three real estate loans receivable. The results of operations presented for the three months ended March 31, 2014 and 2013 are not directly comparable due to the acquisition of an office campus in 2013 and the disposition or payoff of four real estate loans receivable subsequent to March 31, 2013. In general, we expect income and expenses to decrease in future periods due to disposition activity.

Table of Contents

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, 2014 versus the three months ended March 31, 2013

The following table provides summary information about our results of operations for the three months ended March 31, 2014 and 2013 (dollar amounts in thousands):



	Three Months Ended March 31,				Increase (Decrease)			Percentage Change		$ Change Due to Acquisition of Real Estate Property ⁽¹⁾			$ Change Due to Properties or Loans Held Throughout Both Periods ⁽²⁾
	2014		2013		Increase (Decrease)			Percentage Change		$ Change Due to Acquisition of Real Estate Property ⁽¹⁾
Rental income	$	65,215	$	61,725	$	3,490		6	%	$	4,092		$	(602	)
Tenant reimbursements	16,669		14,302		2,367			17	%	1,048			1,319
Interest income from real estate loans receivable	7,964		8,262		(298		)	(4	)%	—			(298		)
Other operating income	2,607		2,598		9			—	%	—			9
Operating, maintenance and management costs	18,196		16,167		2,029			13	%	129			1,900
Real estate taxes and insurance	12,319		10,886		1,433			13	%	848			585
Asset management fees to affiliate	5,704		5,491		213			4	%	427			(214		)
Real estate acquisition fees to affiliates	—		1,797		(1,797		)	(100	)%	(1,797		)	—
Real estate acquisition fees and expenses	—		616		(616		)	(100	)%	(616		)	—
General and administrative expenses	1,288		1,115		173			16	%	n/a			n/a
Depreciation and amortization	28,843		29,094		(251		)	(1	)%	2,114			(2,365		)
Interest expense	14,635		15,293		(658		)	(4	)%	1,178			(1,836		)
Impairment charge on real estate	1,075		—		1,075			100	%	—			1,075

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 related to real estate and real estate-related investments acquired or originated on or after January 1, 2013.

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 related to real estate and real estate-related investments owned by us throughout both periods presented.

Rental income and tenant reimbursements increased from $76.0 million for the three months ended March 31, 2013 to $81.9 million for the three months ended March 31, 2014, primarily as a result of the acquisition of an office campus in March 2013. Rental income from properties held throughout both periods decreased by $0.6 million due to lease expirations subsequent to March 31, 2013. Tenant reimbursements from properties held throughout both periods increased by $1.3 million due to higher property tax recoveries and monthly operating recoveries. Overall, we expect rental income and tenant reimbursements to decrease in future periods due to anticipated asset sales. For the three months ended March 31, 2014 and 2013, rental income and tenant reimbursements from our real estate properties held for sale were $36.1 million and $35.3 million, respectively.

Interest income from our real estate loans receivable, recognized using the interest method, decreased from $8.3 million for the three months ended March 31, 2013 to $8.0 million for the three months ended March 31, 2014, primarily as a result of the sale and payoff of real estate loans receivable subsequent to March 31, 2013, partially offset by a prepayment fee received for the early repayment of a note receivable. Interest income included $1.2 million and $0.1 million in accretion of purchase price discounts, net of amortization of closing costs, for the three months ended March 31, 2013 and March 31, 2014, respectively. Interest income from real estate loans receivable in future periods compared to historical periods will decrease as a result of the potential impact of future principal repayments or sales of any of our real estate loans receivable.

Operating, maintenance and management costs increased from $16.2 million for the three months ended March 31, 2013 to $18.2 million for the three months ended March 31, 2014. The increase primarily was due to higher snow removal costs, repair and maintenance costs and utility costs related to properties held throughout both periods and the acquisition of an office campus in March 2013. Operating, maintenance and management costs may increase in future periods, as compared to historical periods, as a result of inflation. We expect operating, maintenance and management costs overall to decrease in future periods due to anticipated asset sales. For the three months ended March 31, 2014 and 2013, operating, maintenance and management costs from our real estate properties held for sale was $7.3 million and $6.4 million, respectively.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Real estate taxes and insurance increased from $10.9 million for the three months ended March 31, 2013 to $12.3 million for the three months ended March 31, 2014. This increase of $1.4 million consisted of a $0.8 million increase related to the acquisition of an office campus in March 2013 and a $0.6 million increase in real estate taxes for properties held throughout both periods primarily related to reassessments of property values in 2014. We expect real estate taxes and insurance to decrease in future periods due to anticipated asset sales. For the three months ended March 31, 2014 and 2013, real estate taxes and insurance from our real estate properties held for sale was $6.4 million and $6.0 million, respectively.

Asset management fees with respect to our real estate and real estate-related investments increased from $5.5 million for the three months ended March 31, 2013 to $5.7 million for the three months ended March 31, 2014, as a result of the acquisition of an office campus in March 2013, partially offset by a decrease in asset management fees due to the sale and payoff of real estate loans receivable subsequent to March 31, 2013. All asset management fees incurred as of March 31, 2014 have been paid. We expect asset management fees to decrease in future periods due to anticipated asset sales. For the three months ended March 31, 2014 and 2013, asset management fees from our real estate properties held for sale was $2.3 million and $2.3 million, respectively.

Real estate acquisition fees and expenses to affiliates and non-affiliates were $2.4 million for the three months ended March 31, 2013 and related to the acquisition of an office campus in March 2013. We did not incur any real estate acquisition fees and expenses during the three months ended March 31, 2014. We do not expect to incur real estate acquisition fees and expenses in the future.

Depreciation and amortization decreased from $29.1 million for the three months ended March 31, 2013 to $28.8 million for the three months ended March 31, 2014 as a result of a $2.4 million decrease in amortization of tenant origination costs related to lease expirations subsequent to March 31, 2013 for properties held throughout both periods, partially offset by an increase of $2.1 million as a result of the acquisition of an office campus in March 2013. We expect depreciation and amortization to decrease in future periods due anticipated asset sales and to an overall decrease in amortization of tenant origination costs related to lease expirations. For the three months ended March 31, 2014 and 2013, depreciation and amortization from our real estate properties held for sale was $10.0 million and $11.3 million.

Interest expense decreased from $15.3 million for the three months ended March 31, 2013 to $14.6 million for the three months ended March 31, 2014. Included in interest expense is the amortization of deferred financing costs of $0.8 million and $0.8 million for the three months ended March 31, 2013 and 2014, respectively. Also included in interest expense for the three months ended March 31, 2014 was unrealized losses of $0.807 million as a result of hedge ineffectiveness. The decrease in interest expense is primarily due to an overall decrease to the average loan balance of our existing notes payable related to properties held throughout both periods, partially offset by an increase in interest expense due to increased borrowings in connection with the acquisition of an office campus in March 2013. In general, we expect interest expense to decrease in future periods due to anticipated asset sales and related debt repayments, which may be offset by certain fees and costs that may be incurred due to the prepayment of certain loans. Our interest expense in future periods will also vary based on fluctuations in one-month LIBOR (for our variable rate debt) and our level of future borrowings, which will depend on the availability and cost of debt financing, draws on our credit facilities and any debt repayments we make. For the three months ended March 31, 2014 and 2013, interest expense from our real estate properties held for sale was $7.0 million and $6.5 million, respectively.

During the three months ended March 31, 2014, we recognized an impairment charge of $1.1 million on a real estate property held for sale. The impairment charge represents the difference between the carrying value of the real estate and the estimated sales price of the real estate (based on a purchase and sale agreement into which we have entered) less costs to sell. We did not recognize any impairment charge during the three months ended March 31, 2013.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Funds from Operations and Modified Funds from Operations

We believe that funds from operations (“FFO”) is a beneficial indicator of the performance of an equity REIT. We compute FFO in accordance with the current National Association of Real Estate Investment Trusts (“NAREIT”) definition. FFO represents net income, excluding 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), impairment losses on real estate assets, depreciation and amortization of real estate assets, and adjustments for unconsolidated partnerships and joint ventures. We believe FFO facilitates comparisons of operating performance between periods and among other REITs. However, 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. 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 provides a more informed and appropriate basis on which to make decisions involving operating, financing, and investing activities, and when compared year over year, FFO reflects the impact on our operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs, which may not be immediately apparent from net income or loss.

Changes in accounting rules have resulted in a substantial increase in the number of non-operating and non-cash items included in the calculation of FFO. Items such as acquisition fees and expenses, which had previously been capitalized prior to 2009, are currently expensed and accounted for as operating expenses. As a result, our management also uses modified funds from operations (“MFFO”) as an indicator of our ongoing performance as well as our dividend sustainability. MFFO excludes from FFO: acquisition fees and expenses; adjustments related to contingent purchase price obligations; amounts relating to straight-line rents and amortization of above and below market intangible lease assets and liabilities; accretion of discounts and amortization of premiums on debt investments; amortization of closing costs relating to debt investments; impairments of real estate-related investments; mark-to-market adjustments included in net income; and gains or losses included in net income for the extinguishment or sale of debt or hedges. We compute MFFO in accordance with the definition of MFFO included in the practice guideline issued by the Investment Program Association (“IPA”) in November 2010. Our computation of MFFO may not be comparable to other REITs that do not compute MFFO in accordance with the current IPA definition or that interpret the current IPA definition differently than we do.

We believe that MFFO is helpful as a measure of ongoing operating performance because it excludes costs that management considers more reflective of investing activities and other non-operating items included in FFO. Management believes that excluding acquisition costs from MFFO provides investors with supplemental performance information that is consistent with management’s analysis of the operating performance of the portfolio over time, including periods after our acquisition stage. MFFO also excludes non-cash items such as straight-line rental revenue. Additionally, we believe that MFFO provides investors with supplemental performance information that is consistent with the performance indicators and analysis used by management, in addition to net income and cash flows from operating activities as defined by GAAP, to evaluate the sustainability of our operating performance. MFFO provides comparability in evaluating the operating performance of our portfolio with other non-traded REITs which typically have limited lives with short and defined acquisition periods and targeted exit strategies. MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.

FFO and MFFO are non-GAAP financial measures and do 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 and MFFO include adjustments that investors may deem subjective, such as adding back expenses such as depreciation and amortization and the other items described above. Accordingly, FFO and MFFO should not be considered as alternatives to net income as an indicator of our current and historical operating performance. In addition, FFO and MFFO do not represent cash flows from operating activities determined in accordance with GAAP and should not be considered an indication of our liquidity. We believe FFO and MFFO, in addition to net income and cash flows from operating activities as defined by GAAP, are meaningful supplemental performance measures.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Although MFFO includes other adjustments, the exclusion of straight-line rent, the amortization of above- and below-market leases, the amortization of discounts and closing costs, prepayment fees received on notes receivable and acquisition fees and expenses are the most significant adjustments for the periods presented. We have excluded these items based on the following economic considerations:

•

Adjustments for straight-line rent. These are adjustments to rental revenue as required by GAAP to recognize contractual lease payments on a straight-line basis over the life of the respective lease. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the current economic impact of our in-place leases, also providing investors with a useful supplemental metric that addresses core operating performance by removing rent we hope to receive in a future period or rent that was received in a prior period;

•

Amortization of above- and below-market leases. Similar to depreciation and amortization of real estate assets and lease related costs that are excluded from FFO, GAAP implicitly assumes that the value of intangible lease assets and liabilities diminishes predictably over time and requires that these charges be recognized currently in revenue. Since real estate values and market lease rates in the aggregate have historically risen or fallen with local market conditions, management believes that by excluding these charges, MFFO provides useful supplemental information on the realized economics of the real estate;

•

Amortization of discounts and closing costs. Discounts and closing costs related to debt investments are amortized over the term of the loan as an adjustment to interest income. This application results in income recognition that is different than the underlying contractual terms of the debt investments. We have excluded the amortization of discounts and closing costs related to our debt investments in our calculation of MFFO to more appropriately reflect the economic impact of our debt investments, as discounts will not be economically recognized until the loan is repaid and closing costs are essentially the same as acquisition fees and expenses on real estate (discussed below). We believe excluding these items provides investors with a useful supplemental metric that directly addresses core operating performance;


•	Prepayment fees received on notes receivable. Prepayment fees related to the notes receivable are included in interest income from real estate loans receivable. Although these amounts increase net income, we exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate-related investments on a comparative basis; and

•

Acquisition fees and expenses. Acquisition fees and expenses related to the acquisition of real estate are expensed. Although these amounts reduce net income, we exclude them from MFFO to more appropriately present the ongoing operating performance of our real estate investments on a comparative basis. Additionally, acquisition fees and expenses have been funded from the proceeds from our now terminated initial public offering and debt financings and not from our operations. We believe this exclusion is useful to investors as it allows investors to more accurately evaluate the sustainability of our operating performance.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Our calculation of FFO, which we believe is consistent with the calculation of FFO as defined by NAREIT, is presented in the following table, along with our calculation of MFFO, for the three months ended March 31, 2014 and 2013, respectively (in thousands). No conclusions or comparisons should be made from the presentation of these periods.



	For the Three Months Ended March 31,
	2014			2013
Net income	$	10,428		$	6,432
Depreciation of real estate assets	14,876			13,645
Amortization of lease-related costs	13,967			15,449
Impairment charge on real estate	1,075			—
FFO	40,346			35,526
Straight-line rent and amortization of above- and below-market leases	(2,163		)	(3,067		)
Amortization of discounts and closing costs	(115		)	(1,168		)
Prepayment fee received on note receivable	(4,917		)	—
Adjustment to valuation of contingent purchase consideration	—			(10		)
Reclassification of realized losses from other comprehensive income	157			80
Unrealized losses on derivative instruments due to hedge ineffectiveness	807			—
Real estate acquisition fees to affiliates	—			1,797
Real estate acquisition fees and expenses	—			616
MFFO	$	34,115		$	33,774

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

Distributions

From time to time during our operational stage, we may not pay distributions solely from our cash flow from operations or FFO, in which case distributions may be paid in part from debt financing, proceeds from asset sales and the sale or repayment of our real estate loans receivable. Distributions declared, distributions paid and cash flow from operations were as follows for the first quarter of 2014 (in thousands, except per share amounts):



	Distributions Declared ⁽¹⁾		Distributions Declared Per Share ^{(1) (2)}		Distributions Paid ⁽³⁾						Cash Flow From Operations
Period	Distributions Declared ⁽¹⁾		Distributions Declared Per Share ^{(1) (2)}		Cash		Reinvested		Total		Cash Flow From Operations
First Quarter 2014	$	30,852	$	0.160	$	14,828	$	16,061	$	30,889	$	31,400

_____________________

⁽¹⁾ Distributions for the period from January 1, 2014 through March 31, 2014 were based on daily record dates and were calculated at a rate of $0.00178082 per share per day.

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

⁽³⁾ Distributions are paid on a monthly basis. In general, distributions for all record dates of a given month are paid on or about the first business day of the following month.

For the three months ended March 31, 2014, we paid aggregate distributions of $30.9 million, including $14.8 million of distributions paid in cash and $16.1 million of distributions reinvested through our dividend reinvestment plan. FFO and cash flow from operations for the three months ended March 31, 2014 were $40.3 million and $31.4 million, respectively. We funded our total distributions paid, which includes net cash distributions and distributions reinvested by stockholders, with current period operating cash flow. For purposes of determining the source of our distributions paid, we assume first that we use cash flow from operations from the relevant periods to fund distribution payments. See the reconciliation of FFO to net income above.

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PART I. FINANCIAL INFORMATION (CONTINUED)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Over the long-term, we expect that substantially all of our distributions will continue to be paid from cash flow from operations and FFO from current or prior periods (except with respect to distributions related to sales of our assets and distributions related to the repayment of principal under investments we have made in real estate-related 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,” “Liquidity and Capital Resources” and “Results of Operations” herein, and the risks discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013, each as filed with the SEC. Those factors include: the future operating performance of our investments in the existing real estate and financial environment; 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; our ability to refinance existing indebtedness at comparable terms; 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 as of 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, 2013 filed with the SEC. There have been no significant changes to our policies during 2014.

Subsequent Events

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

Distributions Paid

On April 1, 2014, we paid distributions of $10.6 million, which related to distributions declared for daily record dates for each day in the period from March 1, 2014 through March 31, 2014. On May 1, 2014, we paid distributions of $10.2 million, which related to distributions declared for daily record dates for each day in the period from April 1, 2014 through April 30, 2014.

Distributions Declared

On May 9, 2014, our board of directors declared distributions based on daily record dates for the period from June 1, 2014 through June 30, 2014, which we expect to pay in July 2014, and distributions based on daily record dates for the period from July 1, 2014 through July 31, 2014, which we expect to pay in August 2014. 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 in our now terminated primary initial public offering or a 6.3% annualized rate based on our December 18, 2013 estimated value per share of $10.29.

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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, related to our real estate and real estate-related investment portfolio, and to fund our operations. 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 of distributions to our stockholders and that the losses may exceed the amount we invested in the instruments.

We borrow funds and made real estate-related 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. As of March 31, 2014, the fair value and carrying value of our fixed rate real estate loans receivable were $106.5 million and $105.9 million, respectively. The fair value estimate of our real estate loans receivable is calculated 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. As of March 31, 2014, the fair value of our fixed rate debt was $583.5 million and the carrying value of our fixed rate debt was $573.9 million. The fair value estimate of our fixed rate debt is calculated 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 as of March 31, 2014. 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 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. As of March 31, 2014, we were exposed to market risks related to fluctuations in interest rates on $226.1 million of variable rate debt outstanding, after giving consideration to the impact of interest rate swap agreements on approximately $662.4 million of our variable rate debt. Based on interest rates as of March 31, 2014, if interest rates were 100 basis points higher during the 12 months ending March 31, 2015, interest expense on our variable rate debt would increase by $0.5 million. As of March 31, 2014, one-month LIBOR was 0.152% and if this index was reduced to 0% during the 12 months ending March 31, 2015, interest expense on our variable rate debt would decrease by $0.1 million.

The weighted-average annual effective interest rates of our fixed rate real estate loans receivable as of March 31, 2014 was 8.3%. The weighted-average annual effective interest rate represents the effective interest rate as of March 31, 2014, using the interest method, which 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 as of March 31, 2014 were 4.0% and 3.3%, respectively. The weighted-average interest rate represents the actual interest rate in effect as of March 31, 2014 (consisting of the contractual interest rate and the effect of interest rate swaps and floors, if applicable), using interest rate indices as of March 31, 2014, where applicable.

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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 principal executive officer and principal 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 principal executive officer and principal 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 principal executive officer and our principal 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 the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to the risks discussed below, please see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC.

To the extent we sell a significant portion of our assets, our general and administrative expenses as a percentage of our cash flow from operations would increase and this increase could be significant.

Our real estate properties generate cash flow in the form of rental revenues and tenant reimbursements and our real estate-related investments generate cash flow in the form of interest income. During the three months ended March 31, 2014, we classified seven office properties, one industrial property and a leasehold interest in one industrial property with an aggregate net book value of $1.0 billion as held for sale. If we sell a significant portion of our assets, our cash flow from operations would decrease; however, our general and administrative expenses are not directly related to the size of our portfolio and thus would not decrease proportionately. As a result, our general and administrative expenses as a percentage of cash flow from operations would increase and, depending on the amount of assets we sell, this increase could be significant.

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


a)	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.


b)	Not applicable.


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

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


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

•

During any calendar year, we may redeem only the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year, provided that we may not redeem more than $3.0 million of shares in the aggregate each month, excluding shares redeemed in connection with a stockholder’s death, qualifying disability or determination of incompetence; provided, however, we may increase the funding available for the redemption of shares pursuant to our share redemption program upon ten business days’ notice to our stockholders. We may provide notice by including such information (a) in a Current Report on Form 8-K or in our annual or quarterly reports, all publicly filed with the Securities and Exchange Commission or (b) in a separate mailing to our stockholders.


•	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 General Corporation Law, as amended from time to time, which prohibits distributions that would cause a corporation to fail to meet statutory tests of solvency.

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PART II. OTHER INFORMATION (CONTINUED)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)

On October 16, 2013, our board of directors approved additional funding for the redemption of shares pursuant to our share redemption program as follows: once we have redeemed $3.0 million of shares in the aggregate in any month (excluding shares redeemed in connection with a stockholder’s death, qualifying disability or determination of incompetence), then an additional $20.0 million of funds in the aggregate is available for the redemption of shares on redemption dates commencing with the November 29, 2013 redemption date (excluding shares redeemed in connection with a stockholder’s death, qualifying disability or determination of incompetence) until such $20.0 million of funds is exhausted; provided that, in no event may we redeem, during any calendar year, more shares than the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. The other limitations of our share redemption program remain in full force and effect, including those set forth above. As of March 31, 2014, we had exhausted all $20.0 million of these funds.

On March 7, 2014, our board of directors again approved additional funding for the redemption of shares pursuant our share redemption program. Once we have redeemed $3.0 million of shares in the aggregate in any month (excluding shares redeemed in connection with a stockholder’s death, qualifying disability or determination of incompetence), then an additional $30.0 million of funds in the aggregate is available for the redemption of shares on redemption dates commencing with the March 31, 2014 redemption date (excluding shares redeemed in connection with a stockholder’s death, qualifying disability or determination of incompetence) until such $30.0 million of funds is exhausted; provided that, in no event may we redeem, during any calendar year, more shares than the number of shares that we could purchase with the amount of net proceeds from the sale of shares under our dividend reinvestment plan during the prior calendar year. The other limitations of our share redemption program remain in full force and effect, including those set forth above. As of March 31, 2014, we had exhausted $10.4 million of these funds and had $19.6 million available to be used for eligible redemptions, subject to the above limits, once we have redeemed $3.0 million of shares in the aggregate in any month (excluding shares redeemed in connection with a stockholder’s death, qualifying disability or determination of incompetence).

Pursuant to the share redemption program, redemptions made in connection with a stockholder’s death, qualifying disability or determination of incompetence are made at a price per share equal to the most recent estimated value per share of our common stock as of the applicable redemption date. The price at which we redeem all other shares eligible for redemption is as follows:


•	For those shares held by the redeeming stockholder for at least one year, 92.5% of our most recent estimated value per share as of the applicable redemption date;


•	For those shares held by the redeeming stockholder for at least two years, 95.0% of our most recent estimated value per share as of the applicable redemption date;


•	For those shares held by the redeeming stockholder for at least three years, 97.5% of our most recent estimated value per share as of the applicable redemption date; and


•	For those shares held by the redeeming stockholder for at least four years, 100% of our most recent estimated value per share as of the applicable redemption date.

For purposes of determining the time period a redeeming stockholder has held each share, the time period begins as of the date the stockholder acquired the share; provided, that shares purchased by the redeeming stockholder pursuant to our dividend reinvestment plan will be deemed to have been acquired on the same date as the initial share to which the dividend reinvestment plan shares relate. The date of the share’s original issuance by us is not determinative. In addition, as described above, the shares owned by a stockholder may be redeemed at different prices depending on how long the stockholder has held each share submitted for redemption.

If we cannot repurchase all shares presented for redemption in any month because of the limitations on redemptions set forth in our share redemption program, then we will honor redemption requests on a pro rata basis, except that if a pro rata redemption would result in a stockholder owning less than the minimum purchase requirement described in our currently effective, or our most recently effective, registration statement as such registration statement has been amended or supplemented, then we would redeem all of such stockholder’s shares.

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PART II. OTHER INFORMATION (CONTINUED)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (continued)

On December 18, 2013, our board of directors approved an estimated value per share of our common stock of $10.29 (unaudited), based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, as of September 30, 2013, with the exception of our real estate properties, which were appraised as of November 30, 2013. This estimated value per share was used to calculate the redemption price effective for the December 2013 redemption date, which was December 31, 2013, and will be used to calculate the redemption price until our estimated value per share is updated. We currently expect to utilize our advisor and/or an independent valuation firm to update our estimated value per share in December 2014, in accordance with recommended IPA guidelines, but we are not required to update our estimated value per share more frequently than every 18 months. For a full description of the methodologies used to value our assets and liabilities in connection with the calculation of the estimated value per share, see our Annual Report on Form 10-K for the year ended December 31, 2013 at Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities — Market Information.”

We may amend, suspend or terminate the share redemption program with 30 days’ notice to our stockholders, provided that we may increase the funding available for the redemption of shares under the program upon ten business 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.

We funded redemptions during the three months ended March 31, 2014 with proceeds from our dividend reinvestment plan. During the three months ended March 31, 2014, 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 2014	869,191	$	10.25	⁽³⁾
February 2014	720,046	$	10.22	⁽³⁾
March 2014	1,378,375	$	10.22	⁽³⁾
Total	2,967,612

_____________________

⁽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), on March 11, 2011 (which amendment became effective on April 10, 2011), on May 18, 2012 (which amendment became effective on June 17, 2012), on June 29, 2012 (which amendment became effective on July 29, 2012), on October 18, 2012 (which amendment became effective on November 17, 2012), on March 8, 2013 (which amendment became effective on April 7, 2013) and on October 17, 2013 (which amendment became effective on November 16, 2013).

⁽²⁾ The prices at which we redeem shares under the program are set forth above.

⁽³⁾ We limit the dollar value of shares that may be redeemed under our share redemption program as described above. For the three months ended March 31, 2014, we redeemed $30.4 million of shares, which represented all redemption requests received in good order and eligible for redemption through the March 2014 redemption date. Based on the amount of net proceeds raised from the sale of shares under the dividend reinvestment plan during 2013, we have $40.2 million available for eligible redemptions during the remainder of 2014, subject to the limitations described above, including the monthly limitation for ordinary redemptions.

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PART II. OTHER INFORMATION (CONTINUED)

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits



Ex.		Description

3.1		Second Articles of Amendment and Restatement 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		Third Amended and Restated Dividend Reinvestment Plan, incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2013

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

99.1		Seventh Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed October 17, 2013

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

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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 12, 2014	By:	/S/ CHARLES J. SCHREIBER, JR.
			Charles J. Schreiber, Jr.
			Chairman of the Board, Chief Executive Officer and Director
			(principal executive officer)

Date:	May 12, 2014	By:	/S/ DAVID E. SNYDER
			David E. Snyder
			Chief Financial Officer
			(principal financial officer)