cor_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2019

 

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: 001-34877

 

CoreSite Realty Corporation

(Exact name of registrant as specified in its charter)

 

Maryland

 

27-1925611

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

1001 17th Street, Suite 500
Denver, CO

 

80202

(Address of principal executive offices)

 

(Zip Code)

 

(866) 777-2673

(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 ☒  No ☐.

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐

 

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

 

Large accelerated filer ☒

 

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller reporting company ☐

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

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

 

The number of shares of common stock outstanding at April 24, 2019, was 36,898,253.

 

 

 


 

Table of Contents

CORESITE REALTY CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED March 31, 2019

TABLE OF CONTENTS

 

year

 

 

 

    

PAGE

 

 

NO.

 

 

 

PART I. FINANCIAL INFORMATION 

 

3

 

 

 

ITEM 1. Financial Statements 

 

3

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019, and December 31, 2018 (unaudited) 

 

3

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019, and 2018 (unaudited) 

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019, and 2018 (unaudited) 

 

5

 

 

 

Condensed Consolidated Statements of Equity for the three months ended March 31, 2019, and 2018 (unaudited) 

 

6

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019, and 2018 (unaudited) 

 

7

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited) 

 

8

 

 

 

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

 

25

 

 

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 

 

39

 

 

 

ITEM 4. Controls and Procedures 

 

39

 

 

 

PART II. OTHER INFORMATION 

 

40

 

 

 

ITEM 1. Legal Proceedings 

 

40

 

 

 

ITEM 1A. Risk Factors 

 

40

 

 

 

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

 

40

 

 

 

ITEM 3. Defaults Upon Senior Securities 

 

40

 

 

 

ITEM 4. Mine Safety Disclosures 

 

40

 

 

 

ITEM 5. Other Information 

 

40

 

 

 

ITEM 6. Exhibits 

 

41

 

 

 

Signatures 

 

42

 

 

 

Exhibit 10.1

Exhibit 10.2

Exhibit 31.1

 

 

Exhibit 31.2

 

 

Exhibit 32.1

 

 

Exhibit 32.2

 

 

EX-101 INSTANCE DOCUMENT

 

 

EX-101 SCHEMA DOCUMENT

 

 

EX-101 CALCULATION LINKBASE DOCUMENT

 

 

EX-101 LABELS LINKBASE DOCUMENT

 

 

EX-101 PRESENTATION LINKBASE DOCUMENT

 

 

EX-101 DEFINITION LINKBASE DOCUMENT

 

 

 

 

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Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2019

    

2018

 

ASSETS

 

 

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

 

 

Land

 

$

86,955

 

$

86,955

 

Buildings and improvements

 

 

1,737,967

 

 

1,730,329

 

 

 

 

1,824,922

 

 

1,817,284

 

Less: Accumulated depreciation and amortization

 

 

(621,682)

 

 

(590,784)

 

Net investment in operating properties

 

 

1,203,240

 

 

1,226,500

 

Construction in progress

 

 

364,458

 

 

265,921

 

Net investments in real estate

 

 

1,567,698

 

 

1,492,421

 

Operating lease right-of-use assets, net

 

 

186,311

 

 

190,304

 

Cash and cash equivalents

 

 

2,294

 

 

2,599

 

Accounts and other receivables, net of allowance for doubtful accounts of $283 and $417 as of March 31, 2019, and December 31, 2018, respectively

 

 

26,148

 

 

18,464

 

Lease intangibles, net of accumulated amortization of $8,375 and $7,756 as of March 31, 2019, and December 31, 2018, respectively

 

 

6,324

 

 

6,943

 

Goodwill

 

 

40,646

 

 

40,646

 

Other assets, net

 

 

103,441

 

 

102,290

 

Total assets

 

$

1,932,862

 

$

1,853,667

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Debt, net of unamortized deferred financing costs of $5,284 and $5,677 as of March 31, 2019, and December 31, 2018, respectively

 

$

1,210,716

 

$

1,130,823

 

Operating lease liabilities

 

 

199,112

 

 

202,699

 

Accounts payable and accrued expenses

 

 

116,195

 

 

89,315

 

Accrued dividends and distributions

 

 

55,109

 

 

55,679

 

Acquired below-market lease contracts, net of accumulated amortization of $3,948 and $3,840 as of March 31, 2019, and December 31, 2018, respectively

 

 

2,737

 

 

2,846

 

Unearned revenue, prepaid rent and other liabilities

 

 

42,823

 

 

37,672

 

Total liabilities

 

 

1,626,692

 

 

1,519,034

 

Stockholders' equity:

 

 

 

 

 

 

 

Common Stock, par value $0.01, 100,000,000 shares authorized and 36,901,829 and 36,708,691 shares issued and outstanding at March 31, 2019, and December 31, 2018, respectively

 

 

364

 

 

363

 

Additional paid-in capital

 

 

494,923

 

 

491,314

 

Accumulated other comprehensive loss

 

 

(5,733)

 

 

(2,193)

 

Distributions in excess of net income

 

 

(267,849)

 

 

(246,929)

 

Total stockholders' equity

 

 

221,705

 

 

242,555

 

Noncontrolling interests

 

 

84,465

 

 

92,078

 

Total equity

 

 

306,170

 

 

334,633

 

Total liabilities and equity

 

$

1,932,862

 

$

1,853,667

 

 

See accompanying notes to condensed consolidated financial statements.

 

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CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2019

     

2018

    

Operating revenues:

 

 

 

 

 

 

 

Data center revenue:

 

 

 

 

 

 

 

Rental, power, and related revenue

 

$

117,853

 

$

110,008

 

Interconnection revenue

 

 

18,416

 

 

16,560

 

Office, light-industrial and other revenue

 

 

2,626

 

 

3,051

 

Total operating revenues

 

 

138,895

 

 

129,619

 

Operating expenses:

 

 

 

 

 

 

 

Property operating and maintenance

 

 

38,110

 

 

33,848

 

Real estate taxes and insurance

 

 

6,196

 

 

4,937

 

Depreciation and amortization

 

 

35,646

 

 

33,776

 

Sales and marketing

 

 

5,652

 

 

5,080

 

General and administrative

 

 

10,170

 

 

9,185

 

Rent 

 

 

7,688

 

 

6,400

 

Transaction costs

 

 

 —

 

 

56

 

Total operating expenses

 

 

103,462

 

 

93,282

 

Operating income

 

 

35,433

 

 

36,337

 

Interest expense

 

 

(9,498)

 

 

(7,738)

 

Income before income taxes

 

 

25,935

 

 

28,599

 

Income tax expense

 

 

(30)

 

 

(33)

 

Net income

 

$

25,905

 

$

28,566

 

Net income attributable to noncontrolling interests

 

 

6,244

 

 

8,264

 

Net income attributable to common shares

 

$

19,661

 

$

20,302

 

Net income per share attributable to common shares:

 

 

 

 

 

 

 

Basic

 

$

0.54

 

$

0.60

 

Diluted

 

$

0.54

 

$

0.59

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

Basic

 

 

36,347,781

 

 

33,935,564

 

Diluted

 

 

36,547,065

 

 

34,164,235

 

 

See accompanying notes to condensed consolidated financial statements.

 

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CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

  

Net income

 

$

25,905

 

$

28,566

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative contracts

 

 

(4,466)

 

 

609

 

Reclassification of other comprehensive income (loss) to interest expense

 

 

(198)

 

 

(32)

 

Comprehensive income

 

 

21,241

 

 

29,143

 

Comprehensive income attributable to noncontrolling interests

 

 

5,120

 

 

8,431

 

Comprehensive income attributable to common shares

 

$

16,121

 

$

20,712

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited and in thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

   

 

 

   

Accumulated

   

 

 

   

 

 

   

 

 

   

 

 

   

 

   

 

 

 

 

   

Additional

   

Other

   

Distributions

   

Total

   

 

   

 

 

   

 

   

Common Shares

   

Paid-in

   

Comprehensive

   

in Excess of

   

Stockholders'

   

Noncontrolling

   

Total

   

 

   

Number

    

Amount

   

Capital

   

Income (Loss)

   

Net Income

   

Equity

   

Interests

   

Equity

   

Balance at January 1, 2019

 

36,708,691

 

$

363

 

$

491,314

 

$

(2,193)

 

$

(246,929)

 

$

242,555

 

$

92,078

 

$

334,633

 

Issuance of stock awards, net of forfeitures

 

192,009

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Exercise of stock options

 

1,129

 

 

 —

 

 

17

 

 

 —

 

 

 —

 

 

17

 

 

 —

 

 

17

 

Share-based compensation

 

 —

 

 

 1

 

 

3,592

 

 

 —

 

 

 —

 

 

3,593

 

 

 —

 

 

3,593

 

Dividends and distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(40,581)

 

 

(40,581)

 

 

(12,733)

 

 

(53,314)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

19,661

 

 

19,661

 

 

6,244

 

 

25,905

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

(3,540)

 

 

 —

 

 

(3,540)

 

 

(1,124)

 

 

(4,664)

 

Balance at March 31, 2019

 

36,901,829

 

$

364

 

$

494,923

 

$

(5,733)

 

$

(267,849)

 

$

221,705

 

$

84,465

 

$

306,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

 

 

   

 

 

   

Accumulated

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   

 

 

 

 

   

Additional

   

Other

   

Distributions

   

Total

   

 

   

 

 

 

 

   

Common Shares

   

Paid-in

   

Comprehensive

   

in Excess of

   

Stockholders'

   

Noncontrolling

   

Total

 

 

   

Number

    

Amount

   

Capital

   

Income (Loss)

   

Net Income

   

Equity

   

Interests

   

Equity

 

Balance at January 1, 2018

 

34,240,815

 

$

338

 

$

457,495

 

$

753

 

$

(177,566)

 

$

281,020

 

$

137,624

 

$

418,644

 

Redemption of noncontrolling interests

 

7,056

 

 

 —

 

 

70

 

 

 —

 

 

 —

 

 

70

 

 

(70)

 

 

 —

 

Issuance of stock awards, net of forfeitures

 

201,181

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Exercise of stock options

 

5,161

 

 

 —

 

 

100

 

 

 —

 

 

 —

 

 

100

 

 

 —

 

 

100

 

Share-based compensation

 

 —

 

 

 2

 

 

2,739

 

 

 —

 

 

 —

 

 

2,741

 

 

 —

 

 

2,741

 

Dividends and distributions

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(33,749)

 

 

(33,749)

 

 

(13,553)

 

 

(47,302)

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

20,302

 

 

20,302

 

 

8,264

 

 

28,566

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

410

 

 

 —

 

 

410

 

 

167

 

 

577

 

Balance at March 31, 2018

 

34,454,213

 

$

340

 

$

460,404

 

$

1,163

 

$

(191,013)

 

$

270,894

 

$

132,432

 

$

403,326

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

  

2019

  

2018

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

Net income

 

$

25,905

 

$

28,566

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

35,646

 

 

33,776

Amortization of above/below market leases

 

 

(86)

 

 

(175)

Amortization of deferred financing costs

 

 

611

 

 

566

Share-based compensation

 

 

3,432

 

 

2,626

Bad debt expense

 

 

(27)

 

 

(145)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(7,658)

 

 

3,942

Deferred rent receivable

 

 

1,036

 

 

(1,250)

Deferred leasing costs

 

 

(2,694)

 

 

(3,405)

Other assets

 

 

(4,519)

 

 

(4,709)

Accounts payable and accrued expenses

 

 

2,757

 

 

(1,956)

Unearned revenue, prepaid rent and other liabilities

 

 

857

 

 

1,911

Operating leases

 

 

643

 

 

(1,400)

Net cash provided by operating activities

 

 

55,903

 

 

58,347

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

Tenant improvements

 

 

(1,046)

 

 

(1,295)

Real estate improvements

 

 

(80,795)

 

 

(54,338)

Business combinations and asset acquisitions

 

 

 —

 

 

(4,383)

Net cash used in investing activities

 

 

(81,841)

 

 

(60,016)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

17

 

 

100

Proceeds from revolving credit facility

 

 

88,000

 

 

67,000

Payments on revolving credit facility

 

 

(8,500)

 

 

(20,000)

Dividends and distributions

 

 

(53,884)

 

 

(47,599)

Net cash provided by (used in) financing activities

 

 

25,633

 

 

(499)

Net change in cash and cash equivalents

 

 

(305)

 

 

(2,168)

Cash and cash equivalents, beginning of period

 

 

2,599

 

 

5,247

Cash and cash equivalents, end of period

 

$

2,294

 

$

3,079

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

Cash paid for interest, net of capitalized amounts

 

$

6,350

 

$

4,354

Cash paid for operating lease liabilities

 

$

6,071

 

$

6,795

NON-CASH INVESTING AND FINANCING ACTIVITY

 

 

 

 

 

 

Construction costs payable capitalized to real estate

 

$

66,123

 

$

22,061

Accrual of dividends and distributions

 

$

55,109

 

$

48,678

 

See accompanying notes to condensed consolidated financial statements.

 

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CORESITE REALTY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2019

(unaudited)

 

1. Organization and Description of Business

 

CoreSite Realty Corporation (the “Company,” “we,” “us,” or “our”) was organized in the State of Maryland on February 17, 2010, and is a fully-integrated, self-administered, and self-managed real estate investment trust (“REIT”). Through our controlling interest in CoreSite, L.P. (our “Operating Partnership”), we are engaged in the business of owning, acquiring, constructing and operating data centers. As of March 31, 2019, the Company owns a 75.9% common interest in our Operating Partnership, and affiliates of The Carlyle Group and others own a 24.1% interest in our Operating Partnership. See additional discussion in Note 10, Noncontrolling Interests — Operating Partnership.

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidation and Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by our management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2019, are not necessarily indicative of the expected results for the year ending December 31, 2019. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Our Operating Partnership meets the definition and criteria of a variable interest entity (“VIE”) and we are the primary beneficiary of the VIE. Our sole significant asset is the investment in our Operating Partnership, and consequently, substantially all of our assets and liabilities represent those assets and liabilities of our Operating Partnership. Our debt is an obligation of our Operating Partnership where the creditors also have recourse against the credit of the Company. Intercompany balances and transactions have been eliminated upon consolidation.

 

Recent Accounting Pronouncements Not Yet Adopted

 

Fair Value Measurement

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 improves the overall usefulness of disclosures to financial statement users and reduces unnecessary costs in preparing fair value measurement disclosures. The standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We do not expect the provisions of ASU 2018-13 to have a material impact on our condensed consolidated financial statements.

Intangibles – Goodwill and Other – Internal-Use Software

 

In August 2018, the FASB issued guidance codified in ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies that implementation costs incurred by customers in cloud computing arrangements are deferred if they would be capitalized by customers in software licensing arrangements under the internal-use software guidance. Additionally, ASU 2018-15 clarifies that all capitalized costs must be presented in the same financial statement line item as the cloud computing arrangement. The standard will be effective, on either a prospective or retrospective basis, for interim and annual reporting periods beginning after

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December 15, 2019, with early adoption permitted. We are currently evaluating the provisions of ASU 2018-15 and whether the provisions will have a material impact on our condensed consolidated financial statements.

We determined that all other recently issued accounting pronouncements will not have a material impact on our consolidated financial statements or do not apply to our operations.

Use of Estimates

 

The preparation of these unaudited condensed consolidated financial statements, in conformity with GAAP, requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates, including those related to assessing our standalone selling prices, performance-based equity compensation plans and the carrying values of our real estate properties, goodwill, and accrued liabilities. We base our estimates on historical experience, current market conditions, and various other assumptions that we believe to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could vary under different assumptions or conditions.

 

Investments in Real Estate

 

Real estate investments are carried at cost less accumulated depreciation and amortization. The cost of real estate includes the purchase price of property and leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized. During land development and construction periods, we capitalize construction costs, legal fees, financing costs, real estate taxes and insurance, rent expense and internal costs of personnel performing development, if such costs are incremental and identifiable to a specific development project. Capitalization of costs begins upon commencement of development efforts and ceases when the project is ready for its intended use and held available for occupancy. Interest is capitalized during the period of development based upon applying the weighted-average borrowing rate to the actual development costs expended. Capitalized interest costs were $2.6 million and $1.1 million for the three months ended March 31, 2019, and 2018, respectively.

 

Depreciation and amortization are calculated using the straight-line method over the following useful lives of the assets:

 

 

 

 

Buildings

    

27 to 40 years

Building improvements

 

1 to 10 years

Leasehold improvements

 

The shorter of the lease term or useful life of the asset

 

Depreciation expense was $32.2 million and $29.1 million for the three months ended March 31, 2019, and 2018, respectively.

 

Acquisition of Investment in Real Estate

 

When accounting for business combinations and asset acquisitions, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and building improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and the value of customer relationships. The primary difference between business combinations and asset acquisitions is that asset acquisitions require cost accumulation and allocation at a relative fair value. Acquisition costs are capitalized for asset acquisitions and expensed for business combinations.

 

The fair value of the land and building of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” fair value is then allocated to land and building based on management's determination of the fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.

 

The fair value of intangibles related to in-place leases includes the value of lease intangibles for above-market and below-market leases, lease origination costs, and customer relationships, determined on a lease-by-lease basis. Above-

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market and below-market leases are valued based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management's estimate of market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease and, for below-market leases, over a time period equal to the initial term plus any below-market fixed rate renewal periods. Lease origination costs include estimates of costs avoided associated with leasing the property, including tenant allowances and improvements and leasing commissions. Customer relationship intangibles relate to the additional revenue opportunities expected to be generated through interconnection services and utility services to be provided to the in-place lease tenants.

 

The capitalized values for above and below-market lease intangibles, lease origination costs, and customer relationships are amortized over the term of the underlying leases or the expected customer relationship. Amortization related to above-market and below-market leases where the Company is the lessor is recorded as either a reduction of or an increase to rental revenue, amortization related to above-market and below-market leases where the Company is the lessee is recorded as either a reduction of or an increase to rent expense. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off.

 

The carrying value of intangible assets is reviewed for impairment in connection with its respective asset group whenever events or changes in circumstances indicate that the asset group may not be recoverable. An impairment loss is recognized if the carrying amount of the asset group is not recoverable and its carrying amount exceeds its estimated fair value. No impairment loss related to these intangible assets was recognized for the three months ended March 31, 2019, or 2018.

 

The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. As of March 31, 2019, and December 31, 2018, we had $40.6 million of goodwill at each date. The Company’s goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. No impairment loss was recognized for the three months ended March 31, 2019, or 2018.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include all non-restricted cash held in financial institutions and other non-restricted highly liquid short-term investments with original maturities at acquisition of three months or less.

 

Initial Direct Costs

 

Initial direct costs include commissions paid to third parties, including brokers, leasing and referral agents, and internal sales commissions paid to employees for successful execution of lease agreements. Initial direct costs are incremental costs that would not have been incurred if the lease agreement had not been executed. These initial direct costs are capitalized and generally amortized over the term of the related leases using the straight-line method. If a customer lease terminates prior to the expiration of its initial term, any unamortized initial direct costs related to the lease are written off to amortization expense. Amortization of initial direct costs were $3.4 million and $3.9 million for the three months ended March 31, 2019, and 2018, respectively. Initial direct costs are included within other assets in the condensed consolidated balance sheets and consisted of the following, net of amortization, as of March 31, 2019, and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2019

    

2018

 

Internal sales commissions

 

$

13,732

 

$

14,199

 

Third party commissions

 

 

9,594

 

 

9,855

 

Other

 

 

549

 

 

597

 

Total

 

$

23,875

 

$

24,651

 

 

Deferred Financing Costs

 

Deferred financing costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are capitalized and amortized on a straight-line basis, which approximates the effective-interest method,

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over the term of the indebtedness and the amortization is included as a component of interest expense. Depending on the type of debt instrument, deferred financing costs are reported either in other assets or as a direct deduction from the carrying amount of the related debt liabilities in our condensed consolidated balance sheets.

 

Recoverability of Long-Lived Assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the assets. The estimation of expected future net cash flows is inherently uncertain and relies, to a considerable extent, on assumptions regarding current and future economics and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the long-lived assets. To the extent that impairment has occurred, the excess of the carrying amount of long-lived assets over its estimated fair value would be recognized as an impairment loss charged to net income. For the three months ended March 31, 2019, and 2018, no impairment of long-lived assets was recognized in the condensed consolidated financial statements.

 

Derivative Instruments and Hedging Activities

 

We reflect all derivative instruments at fair value as either assets or liabilities on the condensed consolidated balance sheets. For those derivative instruments that are designated and qualify as hedging instruments, we record the gain or loss on the hedging instruments as a component of accumulated other comprehensive income or loss. For derivatives that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized within net income. See additional discussion in Note 8, Derivatives and Hedging Activities.

 

Internal-Use Software

 

We recognize internal-use software development costs based on the development stage of the project and nature of the cost. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Internal and external costs incurred to develop internal-use software during the application development stage are capitalized. Internal and external training costs and maintenance costs during the post-implementation-operation stage are expensed as incurred. Completed projects are placed into service and amortized over the estimated useful life of the software. No impairment of internal-use software was recognized in the condensed consolidated financial statements for the three months ended March 31, 2019, and 2018.

 

Revenue Recognition

 

Rental, Power, and Related Revenue

 

We derive our revenues from leases with customers for data center and office and light-industrial space. Our leases include rental revenue lease components and nonlease revenue components, such as power and tenant reimbursements. We have elected to combine all of our nonlease revenue components that have the same pattern of transfer as the related operating lease component into a single combined lease component.

 

Our leases with customers are classified as operating leases and rental revenue is recognized on a straight-line basis over the customer lease term. Occasionally, our customer leases include options to extend or terminate the lease agreements. We do not include any of these extension or termination options in a customer’s lease term for lease classification purposes or for recognizing rental revenue unless we are reasonably certain the customer will exercise these extension or termination options. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent receivable within other assets on our condensed consolidated balance sheets.

 

In general, we provide two power products for our data center leased space, consisting of a fixed (breakered-amperage) and a variable (sub-metered) model. Customer power arrangements are coterminous with the customer’s underlying lease and have the same pattern of transfer over the lease term and are therefore combined with lease revenue within our condensed consolidated statements of operations. For variable power arrangements, a customer pays us variable monthly fees for the specific amount of power utilized at the current utility rates. We recognize variable power revenue each

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month as the uncertainty related to the consideration is resolved, as power is provided to our customers, and as our customers utilize the power.

 

Some of our leases contain provisions under which our customers reimburse us for common area maintenance and other executory costs. These customer reimbursements are variable and are recognized in the period that the expenses are recognized. These services have the same pattern of transfer over the lease term and are also combined with lease revenue within our condensed consolidated statements of operations.

 

Interconnection Revenue

 

We also derive revenue from interconnection services, which are generally contracted on a month-to-month basis cancellable by us or the customer at any time. Interconnection services are accounted for as separate contracts and are not combined with lease and power arrangements. We recognize interconnection revenue each month as these services are delivered to, and utilized by, our customers. 

 

A provision for uncollectible accounts is recorded if a receivable balance relating to contractual rent, rental revenue recorded on a straight-line basis, tenant reimbursements or other billed amounts is considered by management to be uncollectible. At March 31, 2019, and December 31, 2018, the allowance for doubtful accounts totaled $0.3 million and $0.4 million, respectively, on the condensed consolidated balance sheets.

 

Lessee Accounting

We determine if an arrangement is a lease at inception. Our operating lease agreements are primarily for real estate space and are included within operating lease ROU assets and operating lease liabilities on the condensed consolidated balance sheets. We elected the practical expedient to combine our lease and related nonlease components for our lessee building leases.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Our variable lease payments consist of nonlease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets also include any lease payments made and exclude lease incentives. Many of our lessee agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.

Share-Based Compensation

 

We account for share-based compensation using the fair value method of accounting. The estimated fair value of the stock options granted by us is calculated based on the Black-Scholes option-pricing model. The fair value of restricted share-based and Operating Partnership unit compensation is based on the fair value of our common stock on the date of the grant. The fair value of performance share awards, which have a market condition, is based on a Monte Carlo simulation. The fair value for all share-based compensation is amortized on a straight-line basis over the vesting period. We have elected to account for forfeitures as they occur.

 

Asset Retirement and Environmental Remediation Obligations

 

We record accruals for estimated asset retirement and environmental remediation obligations. The obligations relate primarily to the removal of asbestos during development of properties as well as the estimated equipment removal costs upon termination of a certain lease where we are the lessee. At March 31, 2019, and December 31, 2018, the amount included in unearned revenue, prepaid rent and other liabilities on the condensed consolidated balance sheets was approximately $1.6 million at each date.

 

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Income Taxes

 

We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2010. To qualify as a REIT, we are required to distribute at least 90% of our taxable income to our stockholders and meet various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we generally are not subject to corporate level federal income tax on the earnings distributed currently to our stockholders. If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates.

 

To maintain REIT status, we must distribute a minimum of 90% of our taxable income. However, it is our policy and intent, subject to change, to distribute 100% of our taxable income and therefore, no provision is required in the accompanying condensed consolidated financial statements for federal income taxes with regard to our activities and our subsidiary pass-through entities. The allocable share of taxable income is included in the income tax returns of its stockholders. We are subject to the statutory requirements of the locations in which we conduct business. State and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.

 

We have elected to treat certain subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as services for our tenants that could be considered otherwise impermissible for us to perform and holding assets that we cannot hold directly. A TRS is subject to corporate level federal and state income taxes.

 

Deferred income taxes are recognized in certain taxable entities. Deferred income tax generally is a function of the period's temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior years that previously had been recognized as deferred income tax assets and the reversal of any previously recorded deferred income tax liabilities. A valuation allowance for deferred income tax assets is provided if we believe all or some portion of the deferred income tax asset may more likely than not be realized. Any increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in the estimated realizability of the related deferred income tax asset is included in deferred tax expense. As of March 31, 2019, and December 31, 2018, the gross deferred income taxes were not material.

 

We currently have no liabilities for uncertain income tax positions. The earliest tax year for which we are subject to examination is 2015.

 

Concentration of Credit Risks

 

Our cash and cash equivalents are maintained in various financial institutions, which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts, and management believes that the Company is not exposed to any significant credit risk in this area. We have no off-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts, or foreign currency hedging arrangements.

 

Segment Information

 

We manage our business as one reportable segment consisting of investments in data centers located in the United States. Although we provide services in several markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics amongst all markets, including the nature of the services provided and the type of customers purchasing these services.

 

 

 

 

 

 

 

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3. Investment in Real Estate

 

The following is a summary of the properties owned or leased by market at March 31, 2019 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buildings and

 

Construction in

 

 

 

 

Market

    

Land

    

Improvements

    

Progress

    

Total Cost

 

Boston

 

$

5,154

 

$

109,526

 

$

678

 

$

115,358

 

Chicago

 

 

5,493

 

 

114,188

 

 

26,362

 

 

146,043

 

Denver

 

 

 -

 

 

31,848

 

 

175

 

 

32,023

 

Los Angeles

 

 

18,672

 

 

339,080

 

 

67,173

 

 

424,925

 

Miami

 

 

728

 

 

14,166

 

 

42

 

 

14,936

 

New York

 

 

2,729

 

 

153,246

 

 

34,680

 

 

190,655

 

Northern Virginia

 

 

22,793

 

 

347,340

 

 

127,278

 

 

497,411

 

San Francisco Bay(1)

 

 

31,386

 

 

628,573

 

 

108,070

 

 

768,029

 

Total

 

$

86,955

 

$

1,737,967

 

$

364,458

 

$

2,189,380

 

 

 


(1)

On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our Santa Clara campus for a purchase price of $26 million. We expect to develop an approximately 200,000 NRSF turn-key data center building on the acquired land parcel, which we refer to as SV9, as the existing office tenants vacate upon expiration of their leases and upon the receipt of necessary entitlements.

 

 

4. Other Assets

 

Other assets consisted of the following, net of amortization and depreciation, if applicable for each line item, as of March 31, 2019, and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2019

    

2018

 

Deferred rent receivable

 

$

42,126

 

$

43,162

 

Initial direct costs

 

 

23,875

 

 

24,651

 

Internal-use software

 

 

17,543

 

 

17,708

 

Prepaid expenses

 

 

10,480

 

 

7,090

 

Corporate furniture, fixtures and equipment

 

 

4,720

 

 

5,006

 

Deferred financing costs - revolving credit facility

 

 

2,660

 

 

2,880

 

Other

 

 

2,037

 

 

1,793

 

Total

 

$

103,441

 

$

102,290

 

 

 

5. Leases

 

As the lessee, we currently lease real estate space under noncancelable operating lease agreements for our turn-key data centers at NY1, LA1, LA4, DC1, DC2, DE1, and DE2, and our corporate headquarters located in Denver, Colorado. Our leases have remaining lease terms ranging from 1 year to 11 years, some of the leases include options to extend the leases for up to an additional 20 years. We do not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these renewal options at this time. The weighted-average remaining non-cancelable lease term for our operating leases was nine years and ten years at March 31, 2019, and December 31, 2018, respectively. The weighted-average discount rate was 4.9% at each date.

 

The components of lease expense were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2018

 

Lease expense:

 

 

 

 

 

 

 

Operating lease expense

 

$

6,396

 

$

5,227

 

Variable lease expense

 

 

1,292

 

 

1,173

 

Rent expense

 

$

7,688

 

$

6,400

 

 

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6. Lease Revenue

 

The components of data center, office, light-industrial, and other lease revenue were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

2019

 

2018

 

Lease revenue:

 

 

 

 

 

 

 

 

Minimum lease revenue

 

 

$

99,410

 

$

94,788

 

Variable lease revenue

 

 

 

21,069

 

 

18,271

 

Total lease revenue

 

 

$

120,479

 

$

113,059

 

 

 

 

7. Debt

 

A summary of outstanding indebtedness as of March 31, 2019, and December 31, 2018, is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maturity

 

March 31,

 

December 31,

 

 

    

Interest Rate

    

Date

    

2019

    

2018

 

Revolving credit facility

 

3.94% and 3.95% at March 31, 2019, and December 31, 2018, respectively

 

April 19, 2022

 

$

291,000

 

$

211,500

 

2020 Senior unsecured term loan(1)

 

3.36% and 3.37% at March 31, 2019, and December 31, 2018, respectively

 

June 24, 2020

 

 

150,000

 

 

150,000

 

2021 Senior unsecured term loan

 

3.89% and 3.90% at March 31, 2019, and December 31, 2018, respectively

 

February 2, 2021

 

 

100,000

 

 

100,000

 

2022 Senior unsecured term loan

 

3.89% and 3.65% at March 31, 2019, and December 31, 2018, respectively

 

April 19, 2022

 

 

200,000

 

 

200,000

 

2023 Senior unsecured term loan(2)

 

4.00% and 4.01% at March 31, 2019, and December 31, 2018, respectively

 

April 19, 2023

 

 

150,000

 

 

150,000

 

2023 Senior unsecured notes

 

4.19% at March 31, 2019, and December 31, 2018, respectively

 

June 15, 2023

 

 

150,000

 

 

150,000

 

2024 Senior unsecured notes

 

3.91% at March 31, 2019, and December 31, 2018, respectively

 

April 20, 2024

 

 

175,000

 

 

175,000

 

Total principal outstanding

 

 

 

`

 

 

1,216,000

 

 

1,136,500

 

Unamortized deferred financing costs

 

 

 

 

 

 

(5,284)

 

 

(5,677)

 

Total debt

 

 

 

 

 

$

1,210,716

 

$

1,130,823

 


(1)

Our Operating Partnership has in place a swap agreement with respect to the 2020 Term Loan (as defined below), effective through May 5, 2020, to swap the variable interest rate associated with $75 million, or 50% of the principal amount, of the 2020 Term Loan to a fixed rate of approximately 2.83% per annum at our current leverage ratio as of March 31, 2019. The interest rate on the remaining $75 million of the 2020 Term Loan is based on the London Interbank Offered Rate (“LIBOR”) plus the applicable spread. The effective interest rate as of March 31, 2019, is 3.36%. See Note 8 – Derivatives and Hedging Activities.

(2)

Our Operating Partnership has in place a swap agreement with respect to the 2023 Term Loan (as defined below), effective through April 5, 2023, to swap the variable interest rate associated with $75 million, or 50% of the principal amount of the 2023 Term Loan, to a fixed rate of approximately 4.12% per annum at our current leverage ratio as of March 31, 2019. The interest rate on the remaining $75 million of the 2023 Term Loan is based on LIBOR plus the applicable spread. The effective interest rate as of March 31, 2019, is 4.00%. See Note 8 – Derivatives and Hedging Activities.

 

Revolving Credit Facility

 

On April 19, 2018, our Operating Partnership and certain subsidiary co-borrowers entered into the Fourth Amended and Restated Credit Agreement (as amended and restated, the “Amended and Restated Credit Agreement”), which amended and restated our previous credit agreement to provide additional liquidity of $250 million, which was used to pay down a portion of the then-existing revolving credit facility, fund continued development across our portfolio, and for general corporate purposes. The Amended and Restated Credit Agreement, among other things, increased the revolving credit facility from $350 million to $450 million, decreased the interest rates on borrowings under the revolving credit facility and certain term loans, and extended the maturity date from June 24, 2019, to April 19, 2022, with a one-time extension

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option, which, if exercised, would extend the maturity date to April 19, 2023. The exercise of the extension option is subject to the payment of an extension fee equal to 10 basis points of the total commitments under the Amended and Restated Credit Agreement at initial maturity and certain other customary conditions. The Amended and Restated Credit Agreement increased our total commitment from $600 million to $850 million, consisting of a $450 million revolving credit facility, a $150 million senior unsecured term loan scheduled to mature on June 24, 2020, a $100 million senior unsecured term loan scheduled to mature on February 2, 2021, and a new $150 million senior unsecured term loan scheduled to mature on April 19, 2023. See “2020 Senior Unsecured Term Loan,” “2021 Senior Unsecured Term Loan,” and “2023 Senior Unsecured Term Loan” below for a discussion of the $150 million, $100 million, and $150 million senior unsecured term loans, respectively. The Amended and Restated Credit Agreement also increased our accordion feature by $150 million to $350 million, which allows our Operating Partnership to increase the total commitments from $850 million to $1.2 billion, under specified circumstances, including securing capital from new or existing lenders.

 

Borrowings under the revolving credit facility were amended to bear interest at a variable rate per annum equal to either (i) LIBOR plus 145 basis points to 205 basis points, or (ii) a base rate plus 45 basis points to 105 basis points, each depending on our Operating Partnership’s leverage ratio. At March 31, 2019, our Operating Partnership’s leverage ratio was 26.3% and the interest rate was LIBOR plus 145 basis points.

 

The total amount available for borrowing under the revolving credit facility, is equal to the lesser of $450.0 million or the availability calculated based on our unencumbered asset pool. As of March 31, 2019, the borrowing capacity was $450.0 million. As of March 31, 2019, $291.0 million was borrowed and outstanding, $4.9 million was outstanding under letters of credit, and therefore $154.1 million remained available for us to borrow under the revolving credit facility.

 

Our ability to borrow under the Amended and Restated Credit Agreement is subject to ongoing compliance with a number of financial covenants and other customary restrictive covenants, including, among others:

 

·

a maximum leverage ratio (defined as total consolidated indebtedness to total gross asset value) of 60%, which, as of March 31, 2019, was 26.3%

·

a maximum secured debt ratio (defined as total consolidated secured debt to total gross asset value) of 40%, which, as of March 31, 2019, was 0.0%

·

a minimum fixed charge coverage ratio (defined as adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.5 to 1.0, which, as of March 31, 2019, was 6.6 to 1.0.

 

The Amended and Restated Credit Agreement ranks pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, and the 2024 Notes (each as defined herein) and contains the same financial covenants and other customary restrictive covenants as those debt instruments. In connection with the Amended and Restated Credit Agreement, the revolving credit facility and senior unsecured term loans were amended to remove or change certain financial covenants and other customary restrictive covenants, including removal of covenants limiting distributions (except upon an event of default), incurrence of unhedged variable rate debt, and increases or decreases, as applicable to a number of ratios and other figures in the Amended and Restated Credit Agreement resulting in increased flexibility for our Operating Partnership. As of March 31, 2019, we were in compliance with all of the financial covenants under the Amended and Restated Credit Agreement.

 

2020 Senior Unsecured Term Loan

 

Pursuant to the terms of the Amended and Restated Credit Agreement, our Operating Partnership and certain subsidiaries are party to a $150 million senior unsecured term loan (the “2020 Term Loan”), which was originally entered into on June 24, 2015. The 2020 Term Loan has a five-year term maturing on June 24, 2020. The 2020 Term Loan ranks pari passu with the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes and the Amended and Restated Credit Agreement and contains the same financial covenants and other customary restrictive covenants as those debt instruments. As of March 31, 2019, we were in compliance with all of the financial covenants under the 2020 Term Loan.

 

Borrowings under the 2020 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 140 basis points to 200 basis points, or (ii) a base rate plus 40 basis points to 100 basis points, each depending on our

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Operating Partnership's leverage ratio. At March 31, 2019, the Operating Partnership’s leverage ratio was 26.3% and the interest rate was LIBOR plus 140 basis points.

 

2021 Senior Unsecured Term Loan

 

On February 2, 2016, our Operating Partnership and certain subsidiaries partially exercised the accordion feature on our term loans under the Amended and Restated Credit Agreement and entered into a $100 million senior unsecured term loan (the “2021 Term Loan”). The 2021 Term Loan is governed by the terms of the Amended and Restated Credit Agreement. The 2021 Term Loan has a five-year term maturing on February 2, 2021. The 2021 Term Loan ranks pari passu with the 2020 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes and the Amended and Restated Credit Agreement and contains the same financial covenants and other customary restrictive covenants as those debt instruments. As of March 31, 2019, we were in compliance with all of the financial covenants under the 2021 Term Loan.

 

Borrowings under the 2021 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 140 basis points to 200 basis points, or (ii) a base rate plus 40 basis points to 100 basis points, each depending on our Operating Partnership’s leverage ratio. At March 31, 2019, our Operating Partnership’s leverage ratio was 26.3% and the interest rate was LIBOR plus 140 basis points.

 

2022 Senior Unsecured Term Loan

 

On April 19, 2017, our Operating Partnership and certain subsidiaries entered into an Amended and Restated Term Loan Agreement (as amended and restated, the “Term Loan Agreement”), which amended and restated the $100 million senior unsecured term loan, originally entered into on January 31, 2014. The Term Loan Agreement was amended and restated to, among other things, (i) exercise the accordion feature to increase the total commitments to $200 million, (ii) extend the maturity of the term loan from January 31, 2019, to April 19, 2022, (iii) amend the accordion feature to allow an increase in total commitments from $200 million to $300 million, under specified circumstances, including securing capital from new or existing lenders, and (iv) explicitly permit the issuance of the 2024 Notes defined below (the “2024 Notes”).

 

The 2022 Term Loan ranks pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes and the Amended and Restated Credit Agreement and contains the same financial covenants and other customary restrictive covenants as those debt instruments. As of March 31, 2019, we were in compliance with all of the financial covenants under the 2022 Term Loan.

 

Borrowings under the 2022 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 140 basis points to 200 basis points, or (ii) a base rate plus 40 basis points to 100 basis points, each depending on our Operating Partnership's leverage ratio. At March 31, 2019, our Operating Partnership’s leverage ratio was 26.3% and the interest rate was LIBOR plus 140 basis points. 

 

2023 Senior Unsecured Term Loan

 

On April 19, 2018, pursuant to the terms of, the Amended and Restated Credit Agreement, our Operating Partnership and certain subsidiaries entered into a $150 million senior unsecured term loan (the “2023 Term Loan”). The 2023 Term Loan has a five-year term maturing on April 19, 2023. The 2023 Term Loan ranks pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Notes, the 2024 Notes and the Amended and Restated Credit Agreement and contains the same financial covenants and other customary restrictive covenants as those debt instruments. As of March 31, 2019, we were in compliance with all of the financial covenants under the 2023 Term Loan.

 

Borrowings under the 2023 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 140 basis points to 200 basis points, or (ii) a base rate plus 40 basis points to 100 basis points, each depending on our Operating Partnership’s leverage ratio. At March 31, 2019, our Operating Partnership’s leverage ratio was 26.3% and the interest rate was LIBOR plus 140 basis points. 

 

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Table of Contents

2023 Senior Unsecured Notes

 

On June 15, 2016, our Operating Partnership issued an aggregate principal amount of $150 million, 4.19% senior unsecured notes due June 15, 2023 (the “2023 Notes”), in a private placement to certain accredited investors. The terms of the 2023 Notes are governed by a note purchase agreement, dated June 15, 2016 (the “2023 Note Purchase Agreement”), by and among our Operating Partnership, the Company and the purchasers of the 2023 Notes.

 

Interest is payable semiannually, on the 15th day of June and December of each year, commencing on December 15, 2016. The 2023 Notes are senior unsecured obligations of our Operating Partnership and are jointly and severally guaranteed by the Company and each of our Operating Partnership’s subsidiaries that guarantees indebtedness under our Amended and Restated Credit Agreement (the “Subsidiary Guarantors”).

 

Our Operating Partnership may prepay all or a portion of the 2023 Notes upon notice to the holders for 100% of the principal amount so prepaid plus a make-whole premium as set forth in the 2023 Note Purchase Agreement. Upon the occurrence of certain change of control events, holders of the 2023 Notes have the right to require our Operating Partnership to purchase 100% of such holder’s 2023 Notes in cash at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.

 

The 2023 Notes rank pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2024 Notes and the Amended and Restated Credit Agreement. On June 12, 2018, the 2023 Note Purchase Agreement was amended to, among other things, conform to the same financial covenants as the Amended and Restated Credit Agreement, as described above. In addition, certain additional financial covenants in the Amended and Restated Credit Agreement were automatically incorporated into the 2023 Note Purchase Agreement, and, subject to certain conditions, these additional financial covenants will be deleted, removed, amended or otherwise modified to be more or less restrictive if the analogous covenant in the Credit Agreement is so deleted, removed, amended or otherwise modified. These covenants are subject to a number of exceptions and qualifications set forth in the 2023 Note Purchase Agreement. As of March 31, 2019, we were in compliance with all of the financial covenants under the 2023 Note Purchase Agreement. 

 

2024 Senior Unsecured Notes

 

On April 20, 2017, our Operating Partnership issued an aggregate principal amount of $175 million, 3.91% senior unsecured notes due April 20, 2024 (the “2024 Notes”), in a private placement to certain accredited investors. The terms of the 2024 Notes are governed by a note purchase agreement, dated April 20, 2017 (the “2024 Note Purchase Agreement”), by and among our Operating Partnership, the Company and the purchasers of the 2024 Notes.

 

Interest is payable semiannually, on the 15th day of June and December of each year, commencing on December 15, 2017. The 2024 Notes are senior unsecured obligations of our Operating Partnership and are jointly and severally guaranteed by the Company and each of the Subsidiary Guarantors.

 

Our Operating Partnership may prepay all or a portion of the 2024 Notes upon notice to the holders for 100% of the principal amount so prepaid plus a make-whole premium as set forth in the 2024 Note Purchase Agreement. Upon the occurrence of certain change of control events, holders of the 2024 Notes will have the right to require our Operating Partnership to purchase 100% of such holders’ 2024 Notes in cash at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.

 

The 2024 Notes rank pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes and the Amended and Restated Credit Agreement. On June 12, 2018, the 2024 Note Purchase Agreement was amended to, among other things, conform to the same financial covenants as the Amended and Restated Credit Agreement, as described above. In addition, certain additional financial covenants in the Amended and Restated Credit Agreement were automatically incorporated into the 2024 Note Purchase Agreement, and, subject to certain conditions, these additional financial covenants will be deleted, removed, amended or otherwise modified to be more or less restrictive if the analogous covenant in the Amended and Restated Credit Agreement is so deleted, removed, amended or otherwise modified. These covenants are subject to a number of exceptions and qualifications set forth in the 2024 Note Purchase Agreement. As of March 31, 2019, we were in compliance with all of the financial covenants under the 2024 Note Purchase Agreement. 

 

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Debt Maturities

 

The following table summarizes when our debt currently becomes due, adjusted for the April 2019 debt financing transactions discussed below, and the subsequent payment of outstanding amounts on the revolving credit facility (in thousands):

 

 

 

 

 

 

Year Ending December 31,

    

 

 

 

2019

 

$

 —

 

2020

 

 

150,000

 

2021

 

 

100,000

 

2022

 

 

200,000

 

2023

 

 

300,000

 

Thereafter

 

 

466,000

 

Total principal outstanding

 

 

1,216,000

 

Unamortized deferred financing costs

 

 

(5,284)

 

Total debt, net

 

$

1,210,716

 

 

 

 

Subsequent Debt Financing

 

On April 17, 2019, our Operating Partnership entered into a note purchase agreement (the “Note Purchase Agreement”) pursuant to which the Operating Partnership agreed to issue and sell an aggregate principal amount of $200 million of the Operating Partnership’s 4.11% Series A Senior Notes (the “Series A Notes”) due April 17, 2026, and $200 million of its 4.31% Series B Senior Notes (the “Series B Notes” and, together with the Series A Notes, the “Notes”) due April 17, 2029. In connection with the issuance of the Notes, on April 3, 2019, we settled our $175 million forward-starting seven-year interest rate swap. After giving effect to cancellation costs incurred in connection with the termination of this swap agreement entered into in anticipation of the issuance of the Notes, the Series A Notes will bear an effective interest rate of 4.52% per annum. An aggregate principal amount of $200 million of the Series A Notes and $125 million of the Series B Notes were issued on April 17, 2019. The Operating Partnership expects to issue $75 million aggregate principal amount of the Series B Notes prior to July 17, 2019. Interest on the Notes is payable semiannually on the 15th day of August and February in each year, commencing on February 15, 2020.

 

The Notes rank pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes and the Amended and Restated Credit Agreement. The Notes are senior unsecured obligations of the Operating Partnership and are jointly and severally guaranteed by the Company and each of the Operating Partnership’s subsidiaries that guarantees indebtedness under its senior unsecured credit facilities. The Operating Partnership used the proceeds from the Notes to pay down outstanding amounts on the revolving portion of its senior unsecured credit facilities, and it will use the remaining proceeds for general corporate purposes.

 

 

8. Derivatives and Hedging Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional Amount

 

 

 

 

 

 

 

 

 

 

Fair Value (Level 2) (1)

March 31,

 

December 31,

 

Type of

 

Strike Rate

 

 

Effective

 

Expiration

 

March 31,

 

December 31,

2019

 

2018

 

Derivative

 

as of 3/31/19