KBS Real Estate Investment Trust II, Inc. - Quarter Report: 2015 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, 2015



¨	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.)
800 Newport Center Drive, Suite 700 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 11, 2015, there were 190,412,417 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, 2015

INDEX



PART I.	FINANCIAL INFORMATION		2
	Item 1.	Financial Statements	2
		Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014	2
		Consolidated Statements of Operations (unaudited) for the Three Months Ended March 31, 2015 and 2014	3
		Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three Months Ended March 31, 2015 and 2014	4
		Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2014 and the Three Months Ended March 31, 2015 (unaudited)	5
		Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2015 and 2014	6
		Condensed Notes to Consolidated Financial Statements as of March 31, 2015 (unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
	Item 4.	Controls and Procedures	41
PART II.	OTHER INFORMATION		42
	Item 1.	Legal Proceedings	42
	Item 1A.	Risk Factors	42
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
	Item 3.	Defaults upon Senior Securities	43
	Item 4.	Mine Safety Disclosures	43
	Item 5.	Other Information	43
	Item 6.	Exhibits	44
SIGNATURES			45

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, 2015			December 31, 2014
	(unaudited)
Assets
Real estate:
Land	$	207,501		$	207,501
Buildings and improvements	1,042,764			1,074,148
Tenant origination and absorption costs	92,200			109,378
Total real estate held for investment, cost	1,342,465			1,391,027
Less accumulated depreciation and amortization	(130,862		)	(168,041		)
Total real estate held for investment, net	1,211,603			1,222,986
Real estate held for sale, net	—			93,682
Total real estate, net	1,211,603			1,316,668
Real estate loans receivable, net	72,766			72,940
Total real estate and real estate-related investments, net	1,284,369			1,389,608
Cash and cash equivalents	195,890			179,021
Rents and other receivables, net	43,379			41,231
Above-market leases, net	9,570			10,271
Assets related to real estate held for sale	—			4,289
Deferred financing costs, prepaid expenses and other assets	35,113			33,096
Total assets	$	1,568,321		$	1,657,516
Liabilities and stockholders’ equity
Notes payable:
Notes payable	$	700,911		$	726,959
Notes payable related to real estate held for sale	—			63,652
Total notes payable	700,911			790,611
Accounts payable and accrued liabilities	16,062			23,183
Due to affiliate	45			38
Distributions payable	4,741			6,456
Below-market leases, net	7,833			8,904
Liabilities related to real estate held for sale	—			3,024
Other liabilities	15,424			15,773
Total liabilities	745,016			847,989
Commitments and contingencies (Note 12)
Redeemable common stock	9,318			10,000
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, 190,445,284 and 190,561,603 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively	1,904			1,905
Additional paid-in capital	1,690,011			1,690,010
Cumulative distributions in excess of net income	(876,983		)	(890,751		)
Accumulated other comprehensive loss	(945		)	(1,637		)
Total stockholders’ equity	813,987			799,527
Total liabilities and stockholders’ equity	$	1,568,321		$	1,657,516

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,
	2015		2014
Revenues:
Rental income	$	36,824	$	65,215
Tenant reimbursements	3,892		16,669
Interest income from real estate loans receivable	1,362		7,964
Other operating income	1,852		2,607
Total revenues	43,930		92,455
Expenses:
Operating, maintenance, and management	10,151		18,196
Real estate taxes and insurance	5,221		12,319
Asset management fees to affiliate	3,086		5,704
General and administrative expenses	1,123		1,288
Depreciation and amortization	12,939		28,843
Interest expense	6,847		14,635
Impairment charge on real estate	4,486		1,075
Total expenses	43,853		82,060
Other income:
Other interest income	48		33
Gain on sale of real estate, net	27,407		—
Total other income	27,455		33
Net income	$	27,532	$	10,428
Net income per common share, basic and diluted	$	0.14	$	0.05
Weighted-average number of common shares outstanding, basic and diluted	190,529,659		192,542,712

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,
	2015		2014
Net income	$	27,532	$	10,428
Other comprehensive income:
Unrealized losses on derivative instruments	—		(1,006		)
Reclassification of realized losses recognized on interest rate swaps (effective portion)	692		2,185
Reclassification of unrealized losses due to hedge ineffectiveness	—		822
Reclassification of realized losses related to swap terminations	—		157
Total other comprehensive income	692		2,158
Total comprehensive income	$	28,224	$	12,586

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, 2014 and the Three Months Ended March 31, 2015 (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, 2013	192,269,969		$	1,923		$	1,647,214		$	(369,342	)	$	(10,313	)	$	1,269,482
Net income	—		—			—			445,507			—			445,507
Other comprehensive income	—		—			—			—			8,676			8,676
Issuance of common stock	2,749,008		28			26,857			—			—			26,885
Redemptions of common stock	(4,457,374	)	(46		)	(44,613		)	—			—			(44,659		)
Transfers from redeemable common stock	—		—			60,552			—			—			60,552
Distributions declared	—		—			—			(966,916		)	—			(966,916		)
Balance, December 31, 2014	190,561,603		$	1,905		$	1,690,010		$	(890,751	)	$	(1,637	)	$	799,527
Net income	—		—			—			27,532			—			27,532
Other comprehensive income	—		—			—			—			692			692
Redemptions of common stock	(116,319	)	(1		)	(681		)	—			—			(682		)
Transfers from redeemable common stock	—		—			682			—			—			682
Distributions declared	—		—			—			(13,764		)	—			(13,764		)
Balance, March 31, 2015	190,445,284		$	1,904		$	1,690,011		$	(876,983	)	$	(945	)	$	813,987

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,
	2015			2014
Cash Flows from Operating Activities:
Net income	$	27,532		$	10,428
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	12,939			28,843
Impairment charge on real estate	4,486			1,075
Noncash interest expense (income) on real estate-related investments	3			(115		)
Deferred rent	(1,871		)	(2,669		)
Bad debt expense	210			335
Amortization of above- and below-market leases, net	(391		)	506
Amortization of deferred financing costs	642			818
Reclassification of realized losses on derivative instruments	—			157
Unrealized losses due to hedge ineffectiveness	—			822
Unrealized gain on derivative instruments	(31		)	(15		)
Gain on sale of real estate, net	(27,407		)	—
Changes in operating assets and liabilities:
Rents and other receivables	(403		)	(1,646		)
Prepaid expenses and other assets	(10,728		)	(8,745		)
Accounts payable and accrued liabilities	407			(432		)
Due to affiliates	7			—
Other liabilities	496			2,038
Net cash provided by operating activities	5,891			31,400
Cash Flows from Investing Activities:
Proceeds from sale of real estate	121,923			—
Improvements to real estate	(5,245		)	(4,296		)
Principal repayments on real estate loans receivable	171			32
Proceeds from early payoff or sale of real estate loans receivable	—			79,015
Net cash provided by investing activities	116,849			74,751
Cash Flows from Financing Activities:
Principal payments on notes payable	(89,700		)	(58,985		)
Payments of deferred financing costs	(10		)	(11		)
Payments to redeem common stock	(682		)	(30,358		)
Distributions paid to common stockholders	(15,479		)	(14,828		)
Net cash used in financing activities	(105,871		)	(104,182		)
Net increase in cash and cash equivalents	16,869			1,969
Cash and cash equivalents, beginning of period	179,021			175,042
Cash and cash equivalents, end of period	$	195,890		$	177,011
Supplemental Disclosure of Cash Flow Information:
Interest paid	$	6,299		$	13,404
Supplemental Disclosure of Noncash Transactions:
Decrease in distributions payable	$	(1,715	)	$	(36	)
Increase in accrued improvements to real estate	$	—		$	688
Distributions paid to common stockholders through common stock issuances pursuant to the dividend reinvestment plan	$	—		$	16,061

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, 2015

(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, 2015, the Company owned 12 real estate properties (consisting of 10 office properties, one office/flex property and an office campus consisting of eight office buildings) and two real estate loans receivable.

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, 2014 (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 terminated its dividend reinvestment plan effective May 29, 2014.

The Company sold 182,681,633 shares of common stock in its primary offering for gross offering proceeds of $1.8 billion. The Company sold 30,903,504 shares of common stock under its dividend reinvestment plan for gross offering proceeds of $298.2 million. Also as of March 31, 2015, the Company had redeemed 23,159,853 shares sold in the Offering for $230.2 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, 2014. 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, 2014 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, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

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, 2015

(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. During the three months ended March 31, 2015, the Company sold one office property. As a result, certain assets and liabilities were reclassified to held for sale on the consolidated balance sheets for all periods presented. Additionally, as of March 31, 2015, the Company reclassified two properties that were previously classified as held for sale to held for investment.

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, 2015 and 2014, respectively.

Distributions declared per common share were $0.072 in the aggregate for the three months ended March 31, 2015. Distributions declared per common share assumes each share was issued and outstanding each day that was a record date for distributions during the three months ended March 31, 2015. These distributions declared consisted of the following:


•	On January 15, 2015, the Company’s board of directors declared January 2015 and February 2015 distributions in the amounts of $0.02488493 and $0.02247671, respectively, per share of common stock to stockholders of record as of the close of business on January 29, 2015 and February 26, 2015, respectively.


•	On March 6, 2015, the Company’s board of directors declared a March 2015 distribution in the amount of $0.02488493 per share of common stock to stockholders of record as of the close of business on March 20, 2015.

Distributions declared per common share were $0.160 for the three months ended March 31, 2014. Distributions declared per common share assumes each share was issued and outstanding each day during the three months ended March 31, 2014. For each day that was a record date for distributions during the three months ended March 31, 2014, distributions were calculated at a rate of $0.00178082 per share per day. Each day during the period from January 1, 2014 through March 31, 2014 was a record date for distributions.

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, 2015

(unaudited)

Recently Issued Accounting Standards Update

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”). ASU No. 2014-09 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU No. 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU No. 2014-09 does not apply to lease contracts within the scope of Leases (Topic 840). ASU No. 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. The Company is still evaluating the impact of adopting ASU No. 2014-09 on its financial statements, but does not expect the adoption of ASU No. 2014-09 to have a material impact on its financial statements.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”). The amendments in ASU No. 2014-15 require management to evaluate, for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or are available to be issued when applicable) and, if so, provide related disclosures. ASU No. 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect the adoption of ASU No. 2014-15 to have a significant impact on its financial statements.

In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items (“ASU No. 2015-01”). The amendments in ASU No. 2015-01 eliminate from GAAP the concept of extraordinary items. Although the amendments will eliminate the requirements in Subtopic 225-20 for reporting entities to consider whether an underlying event or transaction is extraordinary, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU No. 2015-01 to have a significant impact on its financial statements.

In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (“ASU No. 2015-03”). The amendments in ASU No. 2015-03 require debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. ASU No. 2015-03 is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. ASU No. 2015-03 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 and is to be applied retrospectively. Early adoption is permitted for financial statements that have not been previously issued. The adoption of ASU No. 2015-03 would change the presentation of debt issuance costs as the Company presents debt issuance costs as deferred financing costs, prepaid expenses and other assets on the accompanying consolidated balance sheets.

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, 2015

(unaudited)


3.	REAL ESTATE HELD FOR INVESTMENT

As of March 31, 2015, the Company’s portfolio of real estate held for investment was composed of ten office properties, one office/flex property and an office campus consisting of eight office buildings, encompassing in the aggregate approximately 5.2 million rentable square feet. As of March 31, 2015, the Company’s real estate portfolio was 89% occupied. The following table summarizes the Company’s real estate portfolio held for investment as of March 31, 2015 (in thousands):



Property	Date Acquired	City	State	Property Type	Total Real Estate at Cost ⁽¹⁾		Accumulated Depreciation and Amortization⁽¹⁾			Total Real Estate, Net⁽¹⁾
100 & 200 Campus Drive Buildings	09/09/2008	Florham Park	NJ	Office	$	197,412	$	(42,810	)	$	154,602
300-600 Campus Drive Buildings	10/10/2008	Florham Park	NJ	Office	145,633		(1,555		)	144,078
350 E. Plumeria Building	12/18/2008	San Jose	CA	Office/Flex	36,413		(7,064		)	29,349
Willow Oaks Corporate Center	08/26/2009	Fairfax	VA	Office	102,165		(19,237		)	82,928
Pierre Laclede Center	02/04/2010	Clayton	MO	Office	67,610		(341		)	67,269
Horizon Tech Center	06/17/2010	San Diego	CA	Office	28,145		(292		)	27,853
Union Bank Plaza	09/15/2010	Los Angeles	CA	Office	184,965		(703		)	184,262
Emerald View at Vista Center	12/09/2010	West Palm Beach	FL	Office	30,647		(4,708		)	25,939
Granite Tower	12/16/2010	Denver	CO	Office	153,975		(26,609		)	127,366
Gateway Corporate Center	01/26/2011	Sacramento	CA	Office	45,174		(7,924		)	37,250
Fountainhead Plaza	09/13/2011	Tempe	AZ	Office	119,384		(2,736		)	116,648
Corporate Technology Centre	03/28/2013	San Jose	CA	Office	230,942		(16,883		)	214,059
					$	1,342,465	$	(130,862	)	$	1,211,603

_____________________

⁽¹⁾Amounts presented are net of impairment charges.

As of March 31, 2015, the following properties 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
Corporate Technology Centre	San Jose, CA	610,083	$	214,059	13.7	%	$	18,537	$	30.38	100	%
Union Bank Plaza	Los Angeles, CA	627,334	184,262		11.8	%	22,397		38.85		92	%

_____________________

⁽¹⁾Annualized base rent represents annualized contractual base rental income as of March 31, 2015, 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, 2015

(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, 2015, the leases had remaining terms, excluding options to extend, of up to 14.6 years with a weighted-average remaining term of 4.4 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 $2.5 million and $2.5 million as of March 31, 2015 and December 31, 2014, respectively.

During the three months ended March 31, 2015 and 2014, the Company recognized deferred rent from tenants, net of lease incentive amortization, of $1.9 million and $2.7 million, respectively. As of March 31, 2015 and December 31, 2014, the cumulative deferred rent balance was $41.6 million and $39.4 million, respectively, and is included in rents and other receivables on the accompanying balance sheets. The cumulative deferred rent balance included $4.1 million and $4.0 million of unamortized lease incentives as of March 31, 2015 and December 31, 2014, respectively.

As of March 31, 2015, the future minimum rental income from the Company’s properties under non-cancelable operating leases was as follows (in thousands):



April 1, 2015 through December 31, 2015	$	96,614
2016	125,509
2017	117,671
2018	98,267
2019	76,724
Thereafter	344,315
	$	859,100

As of March 31, 2015, the Company had over 250 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	33	$	29,496	21.7	%
Computer System Design & Programming	10	25,792		19.0	%
		$	55,288	40.7	%

_____________________

⁽¹⁾ Annualized base rent represents annualized contractual base rental income as of March 31, 2015, 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, 2015

(unaudited)

No other tenant industries accounted for more than 10% of annualized base rent. The Company had not identified any material tenant credit issues as of March 31, 2015. During the three months ended March 31, 2015 and 2014, the Company recorded bad debt expense of $0.2 million and $0.3 million, respectively. As of March 31, 2015, the Company had a bad debt expense reserve of approximately $0.5 million, which represented less than 1% of its annualized base rent.

As of March 31, 2015, the Company had a concentration of credit risk related to the following tenant lease that represented more than 10% of the Company’s annualized base rent:

Annualized Base Rent Statistics

Tenant

Property

Tenant Industry

Square

Feet

% of Portfolio (Net Rentable Sq. Ft.)

Annualized

Base Rent

(in thousands) ⁽¹⁾

% of Portfolio Annualized Base Rent

Annualized Base Rent per Sq. Ft.

Lease Expiration ⁽²⁾

Union Bank

Union Bank Plaza

Finance

383,785

8.3%

15,857

11.7%

41.32

09/30/2016 /

01/31/2022

_____________________

⁽²⁾ Represents the expiration date of the lease as of March 31, 2015 and does not take into account any tenant renewal or termination options.

Geographic Concentration Risk

As of March 31, 2015, the Company’s net investments in real estate in California and New Jersey represented 31.4% and 19.1% 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.

Impairment of Real Estate

During the three months ended March 31, 2015, the Company recorded impairment charges of $4.5 million with respect to two real estate properties that were reclassified from held for sale to held for investment. The impairment charge was recorded to adjust the carrying values of the properties for any depreciation and amortization expense that would have been recognized if the properties had always been classified as held for investment, which otherwise would have been recorded through depreciation and amortization expense and rental income (related to the amortization of above-market lease assets and below-market lease liabilities).

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, 2015

(unaudited)


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

As of March 31, 2015 and December 31, 2014, 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, 2015			December 31, 2014			March 31, 2015			December 31, 2014			March 31, 2015			December 31, 2014
Cost	$	92,200		$	109,378		$	15,876		$	17,281		$	(23,649	)	$	(24,917	)
Accumulated Amortization	(36,763		)	(49,302		)	(6,306		)	(7,010		)	15,816			16,013
Net Amount	$	55,437		$	60,076		$	9,570		$	10,271		$	(7,833	)	$	(8,904	)

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, 2015 and 2014 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,
	2015			2014			2015			2014			2015		2014
Amortization	$	(3,633	)	$	(9,066	)	$	(748	)	$	(2,375	)	$	1,139	$	1,869

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, 2015

(unaudited)


5.	REAL ESTATE LOANS RECEIVABLE

As of March 31, 2015 and December 31, 2014, 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, 2015 ⁽¹⁾		Book Value as of March 31, 2015 ⁽²⁾		Book Value as of December 31, 2014 ⁽²⁾		Contractual Interest Rate ⁽³⁾	Annualized Effective Interest Rate⁽³⁾	Maturity Date ⁽⁴⁾
Sheraton Charlotte Airport Hotel First Mortgage
Charlotte, North Carolina	07/11/2011	Hotel	Mortgage	$	14,306	$	14,317	$	14,353	7.5%	7.6%	08/01/2018
Summit I & II First Mortgage
Reston, Virginia	01/17/2012	Office	Mortgage	58,432		58,449		58,587		7.5%	7.6%	02/01/2017
				$	72,738	$	72,766	$	72,940

_____________________

⁽¹⁾Outstanding principal balance as of March 31, 2015 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 2015, using the interest method, annualized and divided by the average amortized cost basis of the investment during 2015. The contractual interest rates and annualized effective interest rates presented are as of March 31, 2015.

⁽⁴⁾Maturity dates are as of March 31, 2015; subject to certain conditions, the maturity dates of certain real estate loans receivable may be extended beyond the maturity date shown.

The following summarizes the activity related to real estate loans receivable for the three months ended March 31, 2015 (in thousands):



Real estate loans receivable - December 31, 2014	$	72,940
Principal repayments received on real estate loans receivable	(171		)
Amortization of closing costs and origination fees on real estate loans receivable	(3		)
Real estate loans receivable - March 31, 2015	$	72,766

For the three months ended March 31, 2015 and 2014, interest income from real estate loans receivable consisted of the following (in thousands):



	Three Months Ended March 31,
	2015			2014
Contractual interest income	$	1,365		$	2,932
Prepayment fee received on real estate loan receivable	—			4,917
Amortization of closing costs and origination fees	(3		)	115
Interest income from real estate loans receivable	$	1,362		$	7,964

As of March 31, 2015 and December 31, 2014, interest receivable from real estate loans receivable was $0.5 million and $0.5 million, respectively, and was included in rents and other receivables.

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, 2015

(unaudited)


6.	REAL ESTATE SALES

In accordance with 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”), 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. Properties that were classified as held for sale in financial statements issued prior to January 1, 2014 will remain in discontinued operations on the Company’s consolidated statements of operations. Prior to the adoption of ASU No. 2014-08, the operations of properties held for sale or to be disposed of and the aggregate net gains recognized upon their disposition were presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented.

During the three months ended March 31, 2015, the Company disposed of one office property. During the year ended December 31, 2014, the Company disposed of nine office properties, one industrial property, a portfolio of four industrial properties and a leasehold interest in one industrial property. The results of operations for the properties sold during the three months ended March 31, 2015 and the year ended December 31, 2014 are included in continuing operations on the Company’s consolidated statements of operations. The following table summarizes certain revenue and expenses related to the Company’s real estate properties that were sold during the year ended December 31, 2014 and three months ended March 31, 2015, which were included in continuing operations (in thousands):



	Three Months Ended March 31,
	2015		2014
Revenues
Rental income	$	1,835	$	30,853
Tenant reimbursements	160		12,054
Other operating income	127		971
Total revenues	2,122		43,878
Expenses
Operating, maintenance, and management	624		9,447
Real estate taxes and insurance	196		7,246
Asset management fees to affiliate	108		2,643
General and administrative expenses	—		41
Depreciation and amortization	—		13,664
Interest expense	411		7,171
Impairment charge on real estate	—		1,075
Total expenses	$	1,339	$	41,287

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 as of that date. 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 which the Company had entered into) 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, 2015

(unaudited)

The following summary presents the major components of assets and liabilities related to real estate held for sale as of March 31, 2015 and December 31, 2014 (in thousands). No real estate properties were held for sale as of March 31, 2015.



	March 31, 2015		December 31, 2014
Assets related to real estate held for sale
Total real estate, at cost and net of impairment charge	$	—	$	116,264
Accumulated depreciation and amortization	—		(22,582		)
Real estate held for sale, net	—		93,682
Other assets	—		4,289
Total assets related to real estate held for sale	$	—	$	97,971
Liabilities related to real estate held for sale
Notes payable	—		63,652
Other liabilities	—		3,024
Total liabilities related to real estate held for sale	$	—	$	66,676

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, 2015

(unaudited)


7.	NOTES PAYABLE

As of March 31, 2015 and December 31, 2014, 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, 2015		Principal as of December 31, 2014		Contractual Interest Rate as of March 31, 2015⁽¹⁾	Effective Interest Rate as of March 31, 2015⁽¹⁾	Payment Type	Maturity Date ⁽²⁾
Amended and Restated Portfolio Revolving Loan Facility ⁽³⁾	$	75,438	$	75,438	One-month LIBOR + 1.80% ⁽³⁾	3.1%	Interest Only	06/21/2017
Union Bank Plaza Mortgage Loan ⁽⁴⁾	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 ⁽⁵⁾	95,033		184,733		One-month LIBOR + 2.15%	4.2%	Interest Only	01/27/2016
Fountainhead Plaza Mortgage Loan	80,000		80,000		One-month LIBOR + 1.90%	2.9%	Interest Only	12/01/2015
Portfolio Mortgage Loan #3 ⁽⁶⁾	107,640		107,640		One-month LIBOR + 1.75% - 1.85%	2.4%	Interest Only	03/01/2016
Corporate Technology Centre Mortgage Loan ⁽⁷⁾	140,000		140,000		3.50%	3.5%	⁽⁷⁾	04/01/2020
300-600 Campus Drive Revolving Loan ⁽⁸⁾	78,000		78,000		One-month LIBOR + 2.05% ⁽⁸⁾	2.9%	Interest Only	08/01/2016
	$	700,911	$	790,611

_____________________

⁽¹⁾ Contractual interest rate represents the interest rate in effect under the loan as of March 31, 2015. Effective interest rate is calculated as the actual interest rate in effect as of March 31, 2015 (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, 2015, 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, 2015; subject to certain conditions, the maturity dates of certain loans may be extended beyond the maturity date shown.

⁽³⁾ As of March 31, 2015, the Amended and Restated Portfolio Revolving Loan Facility was secured by 350 E. Plumeria Building and Pierre Laclede Center.

⁽⁴⁾ As of March 31, 2015, $105.0 million of the Union Bank Plaza Mortgage Loan 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.

⁽⁵⁾As of March 31, 2015, Portfolio Mortgage Loan #1 was secured by Horizon Tech Center, Granite Tower and Gateway Corporate Center. On February 13, 2015, in connection with the disposition of National City Tower, the Company repaid $89.7 million of principal due under this loan and National City Tower was released as security from Portfolio Mortgage Loan #1.

⁽⁶⁾ As of March 31, 2015, the principal balance of Portfolio Mortgage Loan #3 consisted of the $107.6 million non-revolving portion. The revolving portion of $71.8 million remained available for future disbursements, subject to certain terms and conditions contained in the loan documents. As of March 31, 2015, the Portfolio Mortgage Loan #3 was secured by the 100 & 200 Campus Drive Buildings and Willow Oaks Corporate Center.

⁽⁷⁾ Monthly payments are initially interest-only. Beginning on May 1, 2017, monthly payments for Corporate Technology Centre Mortgage Loan 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.

⁽⁸⁾ As of March 31, 2015, the principal balance of the 300-600 Campus Drive Revolving Loan 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 remained available for future disbursements, subject to certain terms and conditions contained in the loan documents.

As of March 31, 2015 and December 31, 2014, the Company’s deferred financing costs were $2.6 million and $3.1 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, 2015 and 2014, the Company incurred $6.8 million and $14.6 million of interest expense, respectively. As of March 31, 2015 and December 31, 2014, $1.9 million and $2.2 million, respectively, of interest expense were payable. Included in interest expense for the three months ended March 31, 2015 and 2014 were $0.6 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 $1.8 million and $3.1 million for the three months ended March 31, 2015 and 2014, 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, 2015

(unaudited)

The following is a schedule of maturities, including principal amortization payments, for all notes payable outstanding as of March 31, 2015 (in thousands):



April 1, 2015 through December 31, 2015	$	185,000
2016	300,473
2017	77,218
2018	2,750
2019	2,848
Thereafter	132,622
	$	700,911

Certain of the Company’s notes payable contain financial debt covenants. As of March 31, 2015, 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 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.

The following table summarizes the notional amount and other information related to the Company’s interest rate swaps as of March 31, 2015 and December 31, 2014. The notional amount 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):

Derivative Instruments

March 31, 2015

December 31, 2014

Reference Rate as of March 31, 2015

Weighted-Average

Fix Pay Rate

Weighted-Average Remaining Term

in Years

Number of Instruments

Notional Amount

Number of Instruments

Notional Amount

Interest Rate Swaps ⁽¹⁾

$558,058

$596,575

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

1.31%

1.1

_____________________

⁽¹⁾ During the three months ended March 31, 2015, the Company terminated one interest rate swap agreement and paid an aggregate breakage fee of $0.2 million. As of March 31, 2015 and December 31, 2014, none of the Company’s interest rate swaps were designated as cash flow hedges.

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, 2015

(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, 2015 and December 31, 2014 (dollars in thousands):



Derivative Instruments	Balance Sheet Location	March 31, 2015				December 31, 2014
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	$	122
Interest Rate Swaps	Other liabilities, at fair value	10	$	(3,903	)	9	$	(4,749	)

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. Amounts in other comprehensive income (loss) will be reclassified into earnings in the periods in which earnings are affected by the hedged cash flow. The change in fair value of the ineffective portion is recognized directly in earnings. With respect to swap agreements that were terminated for which 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 is reclassified into earnings over the period of the original forecasted hedged transaction. The change in fair value of a derivative instrument that is not designated as a cash flow hedge is recorded as interest expense in the accompanying consolidated statements of operations. The following table summarizes the effects of derivative instruments on the Company’s consolidated statements of operations (in thousands):



	For the Three Months Ended March 31,
	2015			2014
Derivatives designated as hedging instruments ⁽¹⁾
Amount of loss recognized on interest rate swaps (effective portion)	$	692		$	2,185
Unrealized losses due to hedge ineffectiveness	—			822
Reclassification of realized losses related to swap terminations	—			157
	692			3,164
Derivatives not designated as hedging instruments
Realized loss recognized on interest rate swaps	989			—
Unrealized gain on interest rate swaps	(31		)	(15		)
Losses related to swap terminations	170			—
	1,128			(15		)
Increase in interest expense as a result of derivatives	$	1,820		$	3,149

_____________________

⁽¹⁾ All of the Company’s interest rate swap agreements were initially designated as cash flow hedges. During 2014, the Company dedesignated all of its interest rate swap instruments due to the anticipated early repayment of debt in connection with asset sales, and therefore, certain hedged forecasted transactions were no longer probable beyond the projected asset sale date.

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, 2015

(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, 2015

(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, 2015 and December 31, 2014, which carrying amounts do not generally approximate the fair values (in thousands):



	March 31, 2015						December 31, 2014
	Face Value		Carrying Amount		Fair Value		Face Value		Carrying Amount		Fair Value
Financial assets:
Real estate loans receivable	$	72,738	$	72,766	$	73,327	$	72,908	$	72,940	$	73,414
Financial liabilities:
Notes payable	$	700,911	$	700,911	$	703,509	$	790,611	$	790,611	$	794,439

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, 2015, the Company measured the following 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:
Liability derivatives	$	3,903	$	—	$	3,903	$	—

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, 2015

(unaudited)


10.	RELATED PARTY TRANSACTIONS

The Company has entered into the Advisory Agreement with the Advisor. This agreement entitles the Advisor to specified fees upon the provision of certain services with regard to the management of the Company’s investments, among other services, and the disposition of investments, as well as reimbursement of 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. and anticipate that they will serve as the advisor and dealer manager, respectively, for KBS Growth & Income REIT, 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, 2015 and 2014, no other business 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.

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, 2015 and 2014, respectively, and any related amounts payable as of March 31, 2015 and December 31, 2014 (in thousands):



	Incurred				Payable as of
	Three Months Ended March 31,				March 31,		December 31,
	2015		2014		2015		2014
Expensed
Asset management fees	$	3,086	$	5,704	$	—	$	—
Reimbursement of operating expenses ⁽¹⁾	45		36		45		38
Disposition fees ⁽²⁾	1,239		—		—		—
	$	4,370	$	5,740	$	45	$	38

_____________________

⁽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 $34,000 and $36,000 for the three months ended March 31, 2015 and 2014, respectively, and were the only type of employee costs reimbursed under the Advisory Agreement for the three months ended March 31, 2015 and 2014. 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.

⁽²⁾ Disposition fees with respect to real estate sold are included in the gain on sale of real estate, net in the accompanying consolidated statements of operations. Disposition fees with respect to real estate loans receivable sold are included in the gain on payoff or sale of real estate loans receivable in the accompanying consolidated statements of operations.

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, 2015

(unaudited)


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, asset management fees, 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 and provision for bad debt) less interest expense. The Company defines NOI for its real estate-related segment as interest income less loan servicing costs and 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, asset management fees 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. During the year ended December 31, 2014, the Company revised its definition of NOI to exclude asset management fees, which the Company does not consider to be controllable in connection with the management of each property or real estate-related asset and is viewed by the chief operating decision makers as a corporate-level administrative expense. NOI for all prior periods presented has been adjusted to conform to the current period 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, 2015

(unaudited)

The following tables summarize total revenues and NOI for each reportable segment for the three months ended March 31, 2015 and 2014 and total assets and total liabilities for each reportable segment as of March 31, 2015 and December 31, 2014 (in thousands):



	For the Three Months Ended March 31,
	2015		2014
Revenues:
Real estate segment ⁽¹⁾	$	42,568	$	84,491
Real estate-related segment	1,362		7,964
Total revenues	$	43,930	$	92,455
Interest Expense:
Real estate segment ⁽¹⁾	$	6,847	$	14,229
Real estate-related segment	—		406
Total interest expense	$	6,847	$	14,635
NOI:
Real estate segment ⁽¹⁾	$	20,359	$	39,798
Real estate-related segment	1,352		7,507
Total NOI	$	21,711	$	47,305

	As of March 31,		As of December 31,
	2015		2014
Assets:
Real estate segment	$	1,312,022	$	1,317,990
Real estate-related segment	73,279		73,457
Total segment assets	1,385,301		1,391,447
Real estate held for sale	—		97,971
Corporate-level ⁽²⁾	183,020		168,098
Total assets	$	1,568,321	$	1,657,516
Liabilities:
Real estate segment	$	739,710	$	774,173
Real estate-related segment	13		2
Total segment liabilities	739,723		774,175
Real estate held for sale	—		66,676
Corporate-level ⁽³⁾	5,293		7,138
Total liabilities	$	745,016	$	847,989

_____________________

⁽¹⁾ Amounts include properties sold. See Note 6, “Real Estate Sales” for more information.

⁽²⁾ Total corporate-level assets consisted primarily of cash and cash equivalents of approximately $182.8 million and $167.8 million as of March 31, 2015 and December 31, 2014, respectively.

⁽³⁾ As of March 31, 2015 and December 31, 2014, 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, 2015

(unaudited)

The following table reconciles the Company’s net income to its NOI for the three months ended March 31, 2015 and 2014 (in thousands):



	For the Three Months Ended March 31,
	2015			2014
Net income	$	27,532		$	10,428
Gain on sale of real estate, net	(27,407		)	—
Other interest income	(48		)	(33		)
Asset management fees to affiliate	3,086			5,704
General and administrative expenses	1,123			1,288
Depreciation and amortization	12,939			28,843
Impairment charge on real estate	4,486			1,075
NOI	$	21,711		$	47,305


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, 2015.

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, 2015

(unaudited)


13.	SUBSEQUENT EVENTS

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

Distributions Paid

On April 1, 2015, the Company paid distributions of $4.7 million, which related to distributions declared for March 2015 in the amount of $0.02488493 per share of common stock to stockholders of record as of the close of business on March 20, 2015. On May 1, 2015, the Company paid distributions of $4.6 million, which related to distributions declared for April 2015 in the amount of $0.02408219 per share of common stock to stockholders of record as of the close of business on April 20, 2015.

Distributions Declared

On May 13, 2015, the Company’s board of directors declared a May 2015 distribution in the amount of $0.02488493 per share of common stock to stockholders of record as of the close of business on May 20, 2015, which the Company expects to pay in June 2015, and a June 2015 distribution in the amount of $0.02408219 per share of common stock to stockholders of record as of the close of business on June 19, 2015, which the Company expects to pay in July 2015.

Table of Contents

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:

•

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 also expect to fund other distributions from the net proceeds from the sale of real estate and from the receipt of principal payments from, or the sale of, our real estate-related loans receivable.

•

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.

•

Our share redemption program provides only for redemptions sought upon a stockholder’s death, “qualifying disability” or “determination of incompetence” (each as defined in the share redemption program document, and, together with redemptions sought in connection with a stockholder’s death, “special redemptions”). The dollar amounts available for such redemptions are determined by the board of directors and may be reviewed and adjusted from time to time. Additionally, redemptions are further subject to limitations described in our share redemption program. We currently do not expect to have funds available for ordinary redemptions in the future.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

•

Since we have terminated our dividend reinvestment plan, we may have to use a greater proportion of our cash flow from operations to meet cash requirements 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 special redemptions under our share redemption program. This may reduce cash available for distributions.

•

During the three months ended March 31, 2015, we disposed of one office property, and during the year ended December 31, 2014, we sold 15 real estate properties and received loan repayments on three of our real estate loans receivable. As a result of our disposition activity, our general and administrative expenses, which are not directly related to the size of our portfolio, will increase as a percentage of our cash flow from operations and this increase could be significant.

All forward-looking statements should be read in light of the risks identified in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, as 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 we 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, 2015, we owned 12 real estate properties (consisting of 10 office properties, one office/flex property and an office campus consisting of eight office buildings) and two real estate loans receivable.

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 terminated the offering under our dividend reinvestment plan effective May 29, 2014. We sold 30,903,504 shares of common stock under our dividend reinvestment plan for gross offering proceeds of $298.2 million. Also as of March 31, 2015, we had redeemed 23,159,853 shares sold in our offering for $230.2 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.

Current conditions in the global capital markets remain volatile as the world’s economic growth has been affected by geopolitical and economic events. Geopolitical events in Europe and the Middle East escalated throughout 2014, and into 2015. The rise of the Islamic State and the struggle between the Ukrainian government and pro-Russian rebels have kept the U.S. and its allies engaged in international military conflicts. The slowdown in global economic growth, and in particular the slowing of the Chinese economy, has had a ripple effect through the energy and commodity markets. Decreasing demand for commodities, in particular oil, has led to a steep price decline in most commodity market prices. In this type of economic environment, deflation is a real risk. While the U.S. economy has rebounded from the recent recession, the remainder of the world’s industrialized and emerging economies have struggled to maintain even low levels of economic growth.

Central bank interventions and the use of monetary policy to combat the lingering effects of the recent recession continue to dominate the performance of the global economy. In 2012, Japan embarked on a massive quantitative easing (“QE”) program designed to kick start the country’s economy. To date the program has led to lower Japanese interest rates, a run up in the Japanese stock markets and a devaluation of the yen. In Europe, the European Central Bank (ECB) announced its own QE program in January 2015. The long awaited announcement has led to lower European interest rates and a weakening of the Euro against other currencies.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

The Federal Reserve has maintained an accommodative monetary policy since the beginning of the financial crisis. Through a variety of monetary tools and programs, the Federal Reserve injected trillions of U.S. dollars into the global financial markets. The U.S. QE program focused on the purchase of U.S. treasury bonds and mortgage backed securities. In October of 2014, the Federal Reserve concluded the most recent phase of QE. The end of this program has shifted investor focus to the timing of an eventual interest rate increase by the Federal Reserve.

In the United States, recent economic data has been improving. Slow and steady growth in the labor markets drove unemployment below 6%. Consumer spending in the United States has increased, and is being driven by lower debt service burdens, record high stock market valuations, rebounding home prices and a dramatic decrease in the cost of gasoline. Consumer confidence levels are starting to reach levels last seen in the 1990s. U.S. gross domestic product (“U.S. GDP”) has continued to grow at a moderate annualized rate. On an annual basis, U.S. GDP growth in 2014 was 2.4%, which was a slight improvement over 2013’s growth rate of 2.2%. In the second half of 2014, the U.S. dollar began to appreciate against the currencies of other nations. However, the effects of a strong dollar and weak international economic growth began to materialize in the form of reduced corporate earnings in the fourth quarter of 2014. The labor force participation rate continues to be low and personal income growth has remained muted. During the first quarter of 2015, U.S. GDP increased at an annual rate of 0.2%.

The U.S. dollar has remained a safe haven currency and the U.S. commercial real estate market has benefited from an inflow of foreign capital. Initially, gateway markets such as New York City and San Francisco benefited from a high demand for commercial properties. In 2014, the commercial real estate market recovery spread to secondary and tertiary markets, and most asset classes. The U.S. commercial real estate market has gained favor as an alternative investment class and capital flows continue to improve. Looking forward, however, the recovery in commercial real estate is expected to remain uneven across geographies and among property types.

As the dollar strengthens, the flow of capital into the United States could be curtailed. International demand for U.S. assets has been driven, in part, by the perception that U.S. real assets and the U.S. dollar are safe havens from some market risks. A decrease in flow of capital into the United States could lead to a decrease in the demand for U.S. commercial real estate assets, and result in a decline in commercial real estate valuations.

After several years of improving market conditions, the recovery in the U.S. residential real estate market recently began to slow. The initial recovery was driven by low interest rates, pent-up demand from the consumer sector and institutional investors in the form of buy-to-rent portfolios. In 2014, investor demand for homes slowed and stringent mortgage lending standards reduced demand in the residential markets. In addition, as referenced above, the Federal Reserve’s QE program, which peaked at $85 billion a month in purchases of long-term treasury bonds and mortgage backed securities, ended on October 31, 2014. This reduction in market support could cause the demand for residential real estate to decrease further.

Overall, despite indications of recovery in the United States, uncertainties abound. China’s export-based economy has slowed and the Japanese government continues to experiment with QE. The EU is faced with the economic collapse of Greece, another recession and an escalating military conflict in the Ukraine. In the United States, the Federal Reserve is faced with the impact of a strong dollar and record low interest rates. In the short-term, we anticipate that market conditions will continue to remain volatile and, combined with a challenging global 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 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 have become more volatile as the global capital markets react to increasing economic and geopolitical risks.

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 higher 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, 2015, we had fixed-rate real estate loans receivable with an aggregate outstanding principal balance of $72.7 million and an aggregate carrying value (including unamortized origination and closing costs) of $72.8 million that mature in 2017 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, 2015, we had debt obligations in the aggregate principal amount of $700.9 million with a weighted-average remaining term of 1.9 years. We had a total of $140.0 million of fixed rate notes payable and $560.9 million of variable rate notes payable as of March 31, 2015. The interest rates on $558.1 million of our variable rate notes payable are effectively fixed through interest rate swap agreements. As of March 31, 2015, we had a total of $407.5 million of 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; special 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 now terminated dividend reinvestment plan;


•	Debt financings;


•	Proceeds from the sale of real estate and the repayment or sale of real estate-related investments; and


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

We ceased offering shares of common stock in our primary offering on December 31, 2010 and terminated our dividend reinvestment plan effective May 29, 2014. We intend to use our cash on hand, cash flow generated by our real estate and real estate-related investments, proceeds from debt financing, proceeds from the sale of real estate properties and principal repayments on or sales of our real estate loans receivable as our primary sources of immediate and long-term liquidity. As of March 31, 2015, we had an aggregate of $96.8 million available for future disbursements under two credit facilities, subject to certain conditions and restrictions set forth in the respective loan agreements.

Our share redemption program provides only for special redemptions. During each calendar year, such special redemptions are limited to an annual dollar amount determined by the board of directors, which may be reviewed during the year and increased or decreased upon ten business days’ notice to our stockholders. Special redemptions 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. We currently do not expect to make ordinary redemptions in the future. On December 2, 2014, our board of directors approved an annual dollar limitation of $10.0 million in the aggregate for the calendar year 2015 (subject to review and adjustment during the year by the board of directors), and further subject to the limitations described in the share redemption program. As of March 31, 2015, we had $9.3 million available for special redemptions for the remainder of 2015.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

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, 2015, our real estate held for investment was 89% 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 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, 2015, the borrowers under our real estate loans receivable were current on their debt service payments to us.

During the three months ended March 31, 2015, we disposed of one office property.

For the three months ended March 31, 2015, our cash needs for capital expenditures and the payment of debt obligations were met with the proceeds from the payoff or sale of real estate loans receivable and proceeds from the sales of real estate properties. Operating cash needs during the same period were met with 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, 2015 using cash flows from operations and cash on hand. We believe that our cash on hand, cash flow from operations, availability under our credit facilities, proceeds from the sales of real estate properties and the repayment of or sales of our real estate loans receivable will be sufficient to meet our liquidity needs for the foreseeable future.

On December 4, 2014, our board of directors approved an estimated value per share of our common stock of $5.86 based on the estimated value of our assets less the estimated value of our liabilities, divided by the number of shares outstanding, all as of September 30, 2014. For a full description of the assumptions, methodologies and limitations used to value our assets and liabilities in connection with the calculation of our estimated value per share, see our Current Report on Form 8-K dated December 2, 2014 and filed with the SEC on December 4, 2014.

Our cash flow from operations has decreased and will continue to decrease as a result of our disposition activity, and we have adjusted our distribution policy with respect to the amount of monthly distribution payments to take into account our disposition activity and current real estate investments. We may continue to make strategic asset sales as opportunities become available in the market. Any future special distributions we make from the proceeds of future dispositions will reduce our estimated value per share and this reduction will be reflected in our updated estimated value per share, which we expect to update in December of each year, or more frequently.

Cash Flows from Operating Activities

As of March 31, 2015, we owned 12 real estate properties (consisting of 10 office properties, one office/flex property and an office campus consisting of eight office buildings) and two real estate loans receivable. During the three months ended March 31, 2015, net cash provided by operating activities was $5.9 million, compared to $31.4 million during the three months ended March 31, 2014. Net cash provided by operating activities decreased in 2015 primarily as a result of the sale of real estate properties and the payoff or sale of real estate loans receivable. We anticipate additional asset sales in the future, which would further reduce net cash provided by operating activities.

Cash Flows from Investing Activities

Net cash provided by investing activities was $116.8 million for the three months ended March 31, 2015, and primarily consisted of the following:


•	$121.9 million of proceeds from the sale of one office property;


•	$5.3 million used for improvements to real estate; and


•	$0.2 million of proceeds from principal repayments on real estate loans receivable.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

Cash Flows from Financing Activities

During the three months ended March 31, 2015, net cash used in financing activities was $105.9 million and consisted primarily of the following:


•	$89.7 million of principal payments on notes payable;


•	$15.5 million of cash distributions; and


•	$0.7 million of cash used for redemptions of common stock.

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 also reimbursed our advisor and our dealer manager for certain offering costs related to our now terminated dividend reinvestment plan and will continue to reimburse our advisor and our dealer manager for certain stockholder services.

As of March 31, 2015, we had $195.9 million of cash and cash equivalents and up to $96.8 million available for future disbursements under two 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 utilized 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. We limit 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, 2015, our borrowings and other liabilities were approximately 41% of both the cost (before deducting depreciation or other noncash reserves) and book value (before deducting depreciation) of our tangible assets, respectively.

Contractual Commitments and Contingencies

The following is a summary of our contractual obligations as of March 31, 2015 (in thousands):



			Payments Due During the Years Ending December 31,
Contractual Obligations	Total		Remainder of 2015		2016-2017		2018-2019		Thereafter
Outstanding debt obligations ⁽¹⁾	$	700,911	$	185,000	$	377,691	$	5,598	$	132,622
Interest payments on outstanding debt obligations ⁽²⁾	42,303		16,002		15,268		9,490		1,543

_____________________

⁽¹⁾ Amounts include principal payments only.

⁽²⁾ Projected interest payments are based on the outstanding principal amounts, maturity dates and interest rates in effect as of March 31, 2015 (consisting of the contractual interest rate and the effect of interest rate floors and swaps, if applicable). We incurred interest expense of $6.1 million, excluding non-cash interest expense of $(31,000) related to interest rate swap agreements, swap termination expense of $0.2 million and amortization of deferred financing costs totaling $0.6 million during the three months ended March 31, 2015.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

Results of Operations

Overview

As of March 31, 2014, we owned 20 office properties, one office/flex property, a portfolio of four industrial properties, an office campus consisting of eight office buildings, one industrial property, a leasehold interest in one industrial property and three real estate loans receivable. Subsequent to March 31, 2014, we sold ten office properties, one industrial property, a portfolio of four industrial properties and a leasehold interest in one industrial property. Additionally, we received repayment in full of one of our real estate loans receivable. As a result, as of March 31, 2015, we owned 10 office properties, one office/flex property, an office campus consisting of eight office buildings and two real estate loans receivable. The results of operations presented for the three months ended March 31, 2015 and 2014 are not directly comparable due to the dispositions of real estate properties and payoff or sale of one real estate loan receivable subsequent to March 31, 2014. In general, we expect income and expenses to decrease in future periods due to disposition activity.

Comparison of the three months ended March 31, 2015 versus the three months ended March 31, 2014

The following table provides summary information about our results of operations for the three months ended March 31, 2015 and 2014 (dollar amounts in thousands):



	Three Months Ended March 31,				Increase (Decrease)			Percentage Change		$ Change Due to Dispositions ⁽¹⁾			$ Change Due to Properties or Loans Held Throughout Both Periods ⁽²⁾
	2015		2014		Increase (Decrease)			Percentage Change		$ Change Due to Dispositions ⁽¹⁾
Rental income	$	36,824	$	65,215	$	(28,391	)	(44	)%	$	(29,018	)	$	627
Tenant reimbursements	3,892		16,669		(12,777		)	(77	)%	(11,894		)	(883		)
Interest income from real estate loans receivable	1,362		7,964		(6,602		)	(83	)%	(6,595		)	(7		)
Other operating income	1,852		2,607		(755		)	(29	)%	(844		)	89
Operating, maintenance and management costs	10,151		18,196		(8,045		)	(44	)%	(8,801		)	756
Real estate taxes and insurance	5,221		12,319		(7,098		)	(58	)%	(7,061		)	(37		)
Asset management fees to affiliate	3,086		5,704		(2,618		)	(46	)%	(2,663		)	45
General and administrative expenses	1,123		1,288		(165		)	(13	)%	n/a			n/a
Depreciation and amortization	12,939		28,843		(15,904		)	(55	)%	(13,664		)	(2,240		)
Interest expense	6,847		14,635		(7,788		)	(53	)%	(6,760		)	(1,028		)
Impairment charge on real estate	4,486		1,075		3,411			317	%	(1,075		)	4,486
Gain on sale of real estate, net	27,407		—		27,407			100	%	27,407			—

_____________________

⁽¹⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 related to investments disposed of on or after January 1, 2014.

⁽²⁾ Represents the dollar amount increase (decrease) for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 related to real estate and real estate-related investments owned by us throughout both periods presented.

Rental income and tenant reimbursements decreased from $81.9 million for the three months ended March 31, 2014 to $40.7 million for the three months ended March 31, 2015, primarily due to the disposition of real estate properties. Overall, we expect rental income and tenant reimbursements to decrease in future periods due to the disposition of real estate properties and anticipated dispositions of real estate properties. For the three months ended March 31, 2015 and 2014, rental income and tenant reimbursements from our real estate properties sold were $2.0 million and $42.9 million, respectively.

Interest income from our real estate loans receivable, recognized using the interest method, decreased from $8.0 million for the three months ended March 31, 2014 to $1.4 million for the three months ended March 31, 2015, primarily as a result of the payoff or sale of real estate loans receivable subsequent to January 1, 2014. In addition, we received a prepayment fee for the early repayment of a note receivable during the three months ended March 31, 2014. 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 payoffs or sales of our real estate loans receivable.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

Operating, maintenance and management costs decreased from $18.2 million for the three months ended March 31, 2014 to $10.2 million for the three months ended March 31, 2015. The decrease was primarily due to the disposition of real estate properties subsequent to January 1, 2014, partially offset by an increase in repair and maintenance costs and bad debt expenses for real estate properties held throughout both periods. Operating, maintenance and management costs may increase in future periods, as compared to historical periods, as a result of inflation. Overall, we expect operating, maintenance and management costs to decrease in future periods due to the disposition of real estate properties and anticipated disposition of real estate properties. For the three months ended March 31, 2015 and 2014, operating, maintenance and management costs from our real estate properties sold were $0.6 million and $9.4 million, respectively.

Real estate taxes and insurance decreased from $12.3 million for the three months ended March 31, 2014 to $5.2 million for the three months ended March 31, 2015. This decrease was primarily due to the disposition of real estate properties subsequent to January 1, 2014. We expect real estate taxes and insurance to decrease in future periods due to the disposition of real estate properties and anticipated dispositions of real estate properties. For the three months ended March 31, 2015 and 2014, real estate taxes and insurance from our real estate properties sold were $0.2 million and $7.2 million, respectively.

Asset management fees with respect to our real estate and real estate-related investments decreased from $5.7 million for the three months ended March 31, 2014 to $3.1 million for the three months ended March 31, 2015, due to the disposition of real estate properties and the payoff or sale of real estate loans receivable subsequent to January 1, 2014. All asset management fees incurred as of March 31, 2015 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, 2015 and 2014, asset management fees from our real estate properties sold were $0.1 million and $2.6 million, respectively.

Depreciation and amortization decreased from $28.8 million for the three months ended March 31, 2014 to $12.9 million for the three months ended March 31, 2015 due to (i) the disposition of real estate properties subsequent to January 1, 2014, (ii) the reclassification of two real estate properties from held for sale to held for investment, which resulted in a portion of the depreciation and amortization expense being classified as an impairment charge during the three months ended March 31, 2015 and (iii) a decrease in amortization of tenant origination and absorption costs for properties held throughout both periods. We expect depreciation and amortization to decrease in future periods due to the disposition of real estate properties and anticipated dispositions of real estate properties and to an overall decrease in amortization of tenant origination costs related to lease expirations. For the three months ended March 31, 2015 and 2014, depreciation and amortization from our real estate properties sold or held for sale was $0 and $13.7 million, respectively.

Interest expense decreased from $14.6 million for the three months ended March 31, 2014 to $6.8 million for the three months ended March 31, 2015. Included in interest expense is the amortization of deferred financing costs of $0.8 million and $0.6 million for the three months ended March 31, 2014 and 2015, respectively. The decrease in interest expense is primarily due to an overall decrease to our total debt outstanding due to loan payoffs or reductions in connection with dispositions and in part due to a decrease in the average loan balance of our existing notes payable related to properties held throughout both periods. Also included in interest expense during the three months ended March 31, 2014 was $0.8 million of unrealized swap losses primarily due to hedge ineffectiveness as a result of anticipated early repayment of debt in connection with asset sales. As of March 31, 2015, we had dedesignated all of our interest rate swap agreements. As a result, changes to the fair value of our interest rate swap agreements will be recognized directly in earnings as interest expense. In general, we expect interest expense to decrease in future periods due to debt repayments related to assets sold and anticipated asset sales, 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, to the extent that such variable rate debt is not subject to an interest rate swap agreement) 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, 2015 and 2014, interest expense from our real estate properties sold was $0.4 million and $7.2 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)

During the three months ended March 31, 2015, we recognized an impairment charge on real estate properties held for investment of $4.5 million with respect to two of our real estate properties that were reclassified from held for sale to held for investment during the three months ended March 31, 2015. The impairment charge related to the reclassified properties was recorded to adjust the carrying values of the properties for any depreciation and amortization expense that would have been recognized if the properties had always been classified as held for investment, which otherwise would have been recorded through depreciation and amortization expense and rental income (related to the amortization of above-market lease assets and below-market lease liabilities). 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 as of that date. 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 entered) less costs to sell.

We recognized a gain on sale of real estate of $27.4 million related to the disposition of one office property during the three months ended March 31, 2015. We did not dispose of any real estate during the three months ended March 31, 2014.

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. 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 as interpreted by management. 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.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

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; however, neither FFO nor MFFO reflect adjustments for the operations of properties and real estate-related investments sold or held for sale during the periods presented. During periods of significant disposition activity, FFO and MFFO are much more limited measures of future performance and dividend sustainability. In connection with our presentation of FFO and MFFO, we are providing information related to the proportion of MFFO related to properties and real estate-related investments sold or held for sale as of March 31, 2015.

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 unrealized gains (losses) on derivative instruments 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 expect 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 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

•

Unrealized gains (losses) on derivative instruments. These adjustments include unrealized gains (losses) from mark-to-market adjustments on interest rate swaps and losses due to hedge ineffectiveness. The change in fair value of interest rate swaps not designated as a hedge and the change in fair value of the ineffective portion of interest rate swaps are non-cash adjustments recognized directly in earnings and are included in interest expense. We have excluded these adjustments in our calculation of MFFO to more appropriately reflect the economic impact of our interest rate swap agreements.

Table of Contents

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, 2015 and 2014, respectively (in thousands). No conclusions or comparisons should be made from the presentation of these periods.



	For the Three Months Ended March 31,
	2015			2014
Net income	$	27,532		$	10,428
Depreciation of real estate assets	7,186			14,876
Amortization of lease-related costs	5,753			13,967
Impairment charge on real estate	4,486			1,075
Gain on sale of real estate, net	(27,407		)	—
FFO	17,550			40,346
Straight-line rent and amortization of above- and below-market leases	(2,262		)	(2,163		)
Amortization of discounts and closing costs	3			(115		)
Prepayment fee received on note receivable	—			(4,917		)
Termination fees on derivative instruments	170			157
Unrealized (gain) losses on derivative instruments	(31		)	807
MFFO	$	15,430		$	34,115

Our calculation of MFFO above includes amounts related to the operations of 16 real estate properties sold and three real estate loans receivable sold or paid off between January 1, 2014 and March 31, 2015. Please refer to the table below with respect to the proportion of MFFO related to real estate properties or real estate-related investments sold as of March 31, 2015 (in thousands).



	For the Three Months Ended March 31,
	2015		2014
MFFO by component:
Assets held for investment	$	14,640	$	15,637
Real estate properties sold	790		17,062
Real estate loans receivable sold or paid off	—		1,416
MFFO	$	15,430	$	34,115

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.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

Distributions

Distributions declared, distributions paid and cash flow from operations were as follows for the first quarter of 2015 (in thousands, except per share amounts):



Period	Distributions Declared ⁽¹⁾		Distributions Declared Per Share⁽¹⁾⁽²⁾		Distributions Paid ⁽³⁾		Cash Flow From Operations
First Quarter 2015	$	13,764	$	0.072	$	15,479	$	5,891

_____________________

⁽¹⁾ “Distributions Declared” and “Distributions Declared Per Share” consist of the following:


•	On January 15, 2015, our board of directors declared January 2015 and February 2015 distributions in the amounts of $0.02488493 and $0.02247671, respectively, per share of common stock to stockholders of record as of the close of business on January 29, 2015 and February 26, 2015, respectively. These distributions totaled approximately $4.7 million and $4.3 million, respectively.


•	On March 6, 2015, our board of directors declared a March 2015 distribution in the amount of $0.02488493 per share of common stock to stockholders of record as of the close of business on March 20, 2015. This distribution totaled approximately $4.7 million.

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

⁽³⁾ Other than special distributions, distributions generally are paid on a monthly basis, on or about the first business day of the following month.

For the three months ended March 31, 2015, we paid aggregate distributions of $15.5 million, all of which were paid in cash. FFO and cash flow from operations for the three months ended March 31, 2015 were $17.6 million and $5.9 million, respectively. We funded our total distributions paid with $5.9 million of current period cash flow from operations and $9.6 million of cash on hand. 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.

Over the long term, we expect that our distributions will generally 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 mortgage and other real estate-related loans).

During the three months ended March 31, 2015, we disposed of one office property, and during the year ended December 31, 2014, we sold 15 real estate properties and received loan repayments on three of our real estate loans receivable. Our cash flow from operations has decreased and will continue to decrease as a result of our disposition activity, and we have adjusted our distribution policy with respect to the amount of monthly distribution payments to take into account our disposition activity and current real estate investments. We may continue to make strategic asset sales as opportunities become available in the market. Any future special distributions we make from the proceeds of future dispositions will reduce our estimated value per share and this reduction will be reflected in our updated estimated value per share, which we expect to update in December of each year, or more frequently.

Our operating performance and ability to pay distributions from our cash flow from operations and/or the disposition of our assets 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 I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, each as filed with the SEC. Those factors include: the future operating performance of our investments in the existing real estate and the 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; our ability to successfully dispose of some of our assets; and the sources and amounts of cash we have available for distributions.

Table of Contents

PART I. FINANCIAL INFORMATION (CONTINUED)

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

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, 2014 filed with the SEC. There have been no significant changes to our policies during 2015.

Subsequent Events

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

Distributions Paid

On April 1, 2015, we paid distributions of $4.7 million, which related to distributions declared for March 2015 in the amount of $0.02488493 per share of common stock to stockholders of record as of the close of business on March 20, 2015. On May 1, 2015, we paid distributions of $4.6 million, which related to distributions declared for April 2015 in the amount of $0.02408219 per share of common stock to stockholders of record as of the close of business on April 20, 2015.

Distributions Declared

On May 13, 2015, our board of directors declared a May 2015 distribution in the amount of $0.02488493 per share of common stock to stockholders of record as of the close of business on May 20, 2015, which we expect to pay in June 2015, and a June 2015 distribution in the amount of $0.02408219 per share of common stock to stockholders of record as of the close of business on June 19, which we expect to pay in July 2015.

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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, to fund the financing and refinancing of 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 variable 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, 2015, the fair value and carrying value of our fixed rate real estate loans receivable were $73.3 million and $72.8 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, 2015, the fair value of our fixed rate debt was $141.9 million and the carrying value of our fixed rate debt was $140.0 million. The fair value estimate of our fixed rate debt was 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, 2015. 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 variable rate instruments. As of March 31, 2015, we were exposed to market risks related to fluctuations in interest rates on $2.8 million of variable rate debt outstanding, after giving consideration to the impact of interest rate swap agreements on approximately $558.1 million of our variable rate debt. Based on interest rates as of March 31, 2015, if interest rates were 100 basis points higher during the 12 months ending March 31, 2016, interest expense on our variable rate debt would increase by $29,000. As of March 31, 2015, one-month LIBOR was 0.17625% and if this index was reduced to 0% during the 12 months ending March 31, 2016, interest expense on our variable rate debt would decrease by $5,000.

The weighted-average annual effective interest rate of our fixed rate real estate loans receivable as of March 31, 2015 was 7.6%. The weighted-average annual effective interest rate represents the effective interest rate as of March 31, 2015, 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, 2015 were 3.5% and 3.2%, respectively. The weighted-average interest rate represents the actual interest rate in effect as of March 31, 2015 (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, 2015, 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, 2015 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

Please see the risks discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC.

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.

•

During each calendar year, special redemptions are limited to an annual dollar amount determined by the board of directors, which may be reviewed during the year and increased or decreased 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 the stockholders. On December 2, 2014, the board of directors approved the dollar amount limitation for special redemptions for calendar year 2015 of $10.0 million in the aggregate, as may be reviewed and adjusted from time to time by the board of directors.


•	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.

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.

Pursuant to the share redemption program, redemptions made in connection with special redemptions 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 only redemptions we made under our share redemption program during the three months ended March 31, 2015 were those that qualified as, and met the requirements for, special redemptions under our share redemption program and we fulfilled all special redemption requests eligible for redemption under our share redemption program. We funded redemptions during the three months ended March 31, 2015 with proceeds from the sale of real estate properties and proceeds from the payoff or maturity of real estate loans receivable.

We may amend, suspend or terminate our share redemption program with 30 days’ notice to our stockholders, provided that we may increase or decrease 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 do not currently expect to have funds available for ordinary redemptions in the future.

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PART II. OTHER INFORMATION (CONTINUED)

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

During the three months ended March 31, 2015, 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 2015	27,535	$	5.86	⁽³⁾
February 2015	30,945	$	5.86	⁽³⁾
March 2015	57,839	$	5.86	⁽³⁾
Total	116,319

_____________________

⁽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), on October 17, 2013 (which amendment became effective on November 16, 2013) and on May 19, 2014 (which amendment became effective on June 18, 2014).

⁽²⁾ In accordance with our share redemption program, the redemption price for special redemptions is equal to the most recent estimated value per share of our common stock as of the redemption date. On December 4, 2014, our board of directors approved an estimated value per share of our common stock of $5.86 (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, 2014. The change in the redemption price became effective for the December 2014 redemption date and is effective until the estimated value per share is updated. We expect to utilize our advisor and/or an independent valuation firm to update the estimated value per share in December of each year, or more frequently. 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 Current Report on Form 8-K dated December 2, 2014 and filed with the SEC on December 4, 2014.

⁽³⁾ We limit the dollar value of shares that may be redeemed under the share redemption program as described above. For the three months ended March 31, 2015, we redeemed $0.7 million of shares, which represented all redemption requests received in good order and eligible for redemption through the March 2015 redemption date. Based on the redemption limitations described above and redemptions through March 31, 2015, we may redeem up to $9.3 million of shares in connection with special redemptions for the remainder of 2015.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

Departure of Chief Financial Officer

On May 8, 2015, David Snyder notified us of his decision to resign as our Chief Financial Officer and from all other officer positions with us, our advisor, its affiliates, and other KBS-sponsored companies. Mr. Snyder’s resignation will be effective as of June 10, 2015. Mr. Snyder’s resignation is not due to any disagreement with us, our advisor, its affiliates, and other KBS-sponsored companies.

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PART II. OTHER INFORMATION (CONTINUED)

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

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		Eighth Amended and Restated Share Redemption Program, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed May 19, 2014

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 14, 2015	By:	/S/ CHARLES J. SCHREIBER, JR.
			Charles J. Schreiber, Jr.
			Chairman of the Board, Chief Executive Officer and Director
			(principal executive officer)

Date:	May 14, 2015	By:	/S/ DAVID E. SNYDER
			David E. Snyder
			Chief Financial Officer
			(principal financial officer)