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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 September 30, 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)

(866777-2673

(Registrant’s telephone number, including area code)

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

Title of Each Class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 par value per share

COR

New York Stock Exchange

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.

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 October 30, 2019, was 37,687,013.

Table of Contents

CORESITE REALTY CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED September 30, 2019

TABLE OF CONTENTS

six

 

    

PAGE

 

NO.

PART I. FINANCIAL INFORMATION

3

ITEM 1. Financial Statements

3

Condensed Consolidated Balance Sheets as of September 30, 2019, and December 31, 2018 (unaudited)

3

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019, and 2018 (unaudited)

4

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019, and 2018 (unaudited)

5

Condensed Consolidated Statements of Equity for the three months ended March 31, June 30, and September 30, 2019, and 2018 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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

27

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

43

ITEM 4. Controls and Procedures

43

PART II. OTHER INFORMATION

44

ITEM 1. Legal Proceedings

44

ITEM 1A. Risk Factors

44

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

44

ITEM 3. Defaults Upon Senior Securities

44

ITEM 4. Mine Safety Disclosures

44

ITEM 5. Other Information

44

ITEM 6. Exhibits

45

Signatures

46

Exhibit 10.1

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

2

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)

September 30,

December 31,

    

2019

    

2018

ASSETS

Investments in real estate:

Land

$

90,300

$

86,955

Buildings and improvements

1,896,820

1,730,329

1,987,120

1,817,284

Less: Accumulated depreciation and amortization

(686,026)

(590,784)

Net investment in operating properties

1,301,094

1,226,500

Construction in progress

389,174

265,921

Net investments in real estate

1,690,268

1,492,421

Operating lease right-of-use assets, net

177,535

190,304

Cash and cash equivalents

4,703

2,599

Accounts and other receivables, net of allowance for doubtful accounts of $214 and $417 as of September 30, 2019, and December 31, 2018, respectively

26,330

18,464

Lease intangibles, net of accumulated amortization of $4,938 and $7,756 as of September 30, 2019, and December 31, 2018, respectively

4,328

6,943

Goodwill

40,646

40,646

Other assets, net

102,932

102,290

Total assets

$

2,046,742

$

1,853,667

LIABILITIES AND EQUITY

Liabilities:

Debt, net of unamortized deferred financing costs of $6,709 and $5,677 as of September 30, 2019, and December 31, 2018, respectively

$

1,380,541

$

1,130,823

Operating lease liabilities

191,725

202,699

Accounts payable and accrued expenses

132,739

89,315

Accrued dividends and distributions

61,783

55,679

Acquired below-market lease contracts, net of accumulated amortization of $1,460 and $3,840 as of September 30, 2019, and December 31, 2018, respectively

2,562

2,846

Unearned revenue, prepaid rent and other liabilities

34,066

37,672

Total liabilities

1,803,416

1,519,034

Stockholders' equity:

Common Stock, par value $0.01, 100,000,000 shares authorized and 37,688,382 and 36,708,691 shares issued and outstanding at September 30, 2019, and December 31, 2018, respectively

373

363

Additional paid-in capital

508,209

491,314

Accumulated other comprehensive loss

(6,666)

(2,193)

Distributions in excess of net income

(321,720)

(246,929)

Total stockholders' equity

180,196

242,555

Noncontrolling interests

63,130

92,078

Total equity

243,326

334,633

Total liabilities and equity

$

2,046,742

$

1,853,667

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three Months Ended September 30,

Nine Months Ended September 30,

    

2019

    

2018

    

2019

    

2018

    

Operating revenues:

Data center revenue:

Rental, power, and related revenue

$

122,598

$

118,590

$

361,534

$

344,745

Interconnection revenue

19,082

17,701

56,274

51,683

Office, light-industrial and other revenue

3,211

2,889

8,884

8,818

Total operating revenues

144,891

139,180

426,692

405,246

Operating expenses:

Property operating and maintenance

41,251

41,161

117,428

112,870

Real estate taxes and insurance

4,973

4,699

17,157

14,329

Depreciation and amortization

40,546

36,264

113,188

105,598

Sales and marketing

5,476

5,180

16,912

15,629

General and administrative

10,671

10,074

33,123

29,556

Rent

8,331

7,329

23,752

20,276

Transaction costs

75

Total operating expenses

111,248

104,707

321,560

298,333

Operating income

33,643

34,473

105,132

106,913

Interest expense

(10,986)

(9,433)

(30,795)

(26,078)

Income before income taxes

22,657

25,040

74,337

80,835

Income tax (expense) benefit

(13)

(20)

(45)

30

Net income

$

22,644

$

25,020

$

74,292

$

80,865

Net income attributable to noncontrolling interests

5,194

6,420

17,646

22,574

Net income attributable to common shares

$

17,450

$

18,600

$

56,646

$

58,291

Net income per share attributable to common shares:

Basic

$

0.47

$

0.52

$

1.55

$

1.69

Diluted

$

0.47

$

0.52

$

1.54

$

1.68

Weighted average common shares outstanding

Basic

36,950,950

35,512,091

36,589,593

34,504,790

Diluted

37,132,155

35,721,478

36,763,241

34,693,835

See accompanying notes to condensed consolidated financial statements.

4

Table of Contents

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,

 

2019

 

2018

 

2019

 

2018

 

Net income

$

22,644

$

25,020

$

74,292

$

80,865

Other comprehensive (loss) income:

Unrealized (loss) gain on derivative contracts

(463)

523

(5,608)

1,356

Reclassification of other comprehensive income (loss) to interest expense

137

(69)

(44)

(145)

Comprehensive income

22,318

25,474

68,640

82,076

Comprehensive income attributable to noncontrolling interests

5,125

6,534

16,293

22,907

Comprehensive income attributable to common shares

$

17,193

$

18,940

$

52,347

$

59,169

See accompanying notes to condensed consolidated financial statements.

5

Table of Contents

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 loss

(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

Redemption of noncontrolling interests

2,770

20

20

(20)

Issuance of stock awards, net of forfeitures

(15,567)

Exercise of stock options

1,339

21

21

21

Share-based compensation

3,864

3,864

3,864

Dividends and distributions

(44,895)

(44,895)

(14,118)

(59,013)

Net income

19,535

19,535

6,208

25,743

Other comprehensive loss

(502)

(502)

(160)

(662)

Balance at June 30, 2019

36,890,371

$

364

$

498,828

$

(6,235)

$

(293,209)

$

199,748

$

76,375

$

276,123

Redemption of noncontrolling interests

800,840

8

5,394

(174)

5,228

(5,228)

Issuance of stock awards, net of forfeitures

(3,983)

Exercise of stock options

1,154

28

28

28

Share-based compensation

1

3,959

3,960

3,960

Dividends and distributions

(45,961)

(45,961)

(13,142)

(59,103)

Net income

17,450

17,450

5,194

22,644

Other comprehensive loss

(257)

(257)

(69)

(326)

Balance at September 30, 2019

37,688,382

$

373

$

508,209

$

(6,666)

$

(321,720)

$

180,196

$

63,130

$

243,326

   

   

   

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

Issuance of stock awards, net of forfeitures

(2,205)

Exercise of stock options

7,720

119

119

119

Share-based compensation

3,364

3,364

3,364

Dividends and distributions

(35,424)

(35,424)

(14,244)

(49,668)

Net income

19,389

19,389

7,890

27,279

Other comprehensive income

128

128

52

180

Balance at June 30, 2018

34,459,728

$

340

$

463,887

$

1,291

$

(207,048)

$

258,470

$

126,130

$

384,600

Redemption of noncontrolling interests

2,250,000

23

20,747

127

20,897

(20,897)

Issuance of stock awards, net of forfeitures

(11,308)

Share-based compensation

3,214

3,214

3,214

Dividends and distributions

(37,736)

(37,736)

(11,927)

(49,663)

Net income

18,600

18,600

6,420

25,020

Other comprehensive income

340

340

114

454

Balance at September 30, 2018

36,698,420

$

363

$

487,848

$

1,758

$

(226,184)

$

263,785

$

99,840

$

363,625

See accompanying notes to condensed consolidated financial statements.

6

Table of Contents

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

Nine Months Ended September 30,

  

2019

  

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

74,292

$

80,865

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

Depreciation and amortization

113,188

105,598

Amortization of above/below market leases

(219)

(494)

Amortization of deferred financing costs and hedge amortization

2,368

1,756

Share-based compensation

10,781

8,864

Bad debt expense

106

(300)

Changes in operating assets and liabilities:

Accounts receivable

(7,971)

5,001

Deferred rent receivable

4,218

(2,930)

Deferred leasing costs

(9,727)

(9,140)

Other assets

(8,395)

(5,342)

Accounts payable and accrued expenses

15,800

6,274

Unearned revenue, prepaid rent and other liabilities

(8,765)

(1,201)

Operating leases

2,035

(215)

Net cash provided by operating activities

187,711

188,736

CASH FLOWS FROM INVESTING ACTIVITIES

Tenant improvements

(3,167)

(4,191)

Real estate improvements

(239,526)

(160,269)

Business combinations and asset acquisitions

(26,060)

(10,681)

Net cash used in investing activities

(268,753)

(175,141)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercise of stock options

66

219

Proceeds from revolving credit facility

286,250

184,036

Payments on revolving credit facility

(435,500)

(199,036)

Proceeds from unsecured debt

400,000

150,000

Payments of loan fees and costs

(2,344)

(4,986)

Dividends and distributions

(165,326)

(143,769)

Net cash provided by (used in) financing activities

83,146

(13,536)

Net change in cash and cash equivalents

2,104

59

Cash and cash equivalents, beginning of period

2,599

5,247

Cash and cash equivalents, end of period

$

4,703

$

5,306

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest, net of capitalized amounts

$

21,686

$

21,209

Cash paid for operating lease liabilities

$

18,581

$

18,116

NON-CASH INVESTING AND FINANCING ACTIVITY