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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)    

ý

 

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

For The Fiscal Year Ended December 31, 2014

or

o

 

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
(State or other jurisdiction
of incorporation or organization)
  27-1925611
(I.R.S. Employer
Identification No.)

1001 17th Street, Suite 500
Denver, CO

(Address of principal executive offices)

 

80202
(Zip Code)

(866) 777-2673
(Registrant's telephone number, including area code)

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

Title of Class   Name of Exchange On Which Registered
Common Stock, $0.01 par value per share   New York Stock Exchange
7.25% Series A Cumulative Redeemable   New York Stock Exchange
Preferred Stock, $0.01 par value per share    

          Securities registered pursuant to Section 12(g) of the Act: None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

          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 ý    No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 ý    No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K.    ý

          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 o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

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

          The aggregate market value of common equity held by non-affiliates of the registrant was approximately $538.0 million as of June 30, 2014, the last business day of the registrant's most recently completed second fiscal quarter. For purposes of the foregoing calculation, all directors and executive officers of the registrant and holders of more than 10% of the registrant's common equity are assumed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

          As of February 11, 2015, there were 21,766,106 shares of the registrant's Common Stock, $0.01 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the registrant's definitive proxy statement to be filed in conjunction with the registrant's 2015 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the registrant's fiscal year ended December 31, 2014, are incorporated by reference in Part III of this report.

   


Table of Contents


Table of Contents

 
  Page

PART I

   

ITEM 1. BUSINESS

  4

ITEM 1A. RISK FACTORS

  17

ITEM 1B. UNRESOLVED STAFF COMMENTS

  40

ITEM 2. PROPERTIES

  40

ITEM 3. LEGAL PROCEEDINGS

  40

ITEM 4. MINE SAFETY DISCLOSURES

  40

PART II

 
 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

  41

ITEM 6. SELECTED FINANCIAL DATA

  43

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  45

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  57

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

  58

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

  93

ITEM 9A. CONTROLS AND PROCEDURES

  93

ITEM 9B. OTHER INFORMATION

  94

PART III

   

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

  95

ITEM 11. EXECUTIVE COMPENSATION

  95

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

  95

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

  95

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

  95

PART IV

 
 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

  96

SIGNATURES

 
100

Exhibit 12.1

   

Exhibit 12.2

   

Exhibit 21.1

   

Exhibit 23.1

   

Exhibit 31.1

   

Exhibit 31.2

   

Exhibit 32.1

   

Exhibit 32.2

   

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Cautionary Note Regarding Forward-Looking Statements

        This Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (this "Annual Report"), together with other statements and information publicly disseminated by our company, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 ("PSLRA"), namely Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the PSLRA and include this statement for purposes of complying with these safe harbor provisions.

        In particular, statements pertaining to our capital resources, portfolio performance, business strategies and results of operations contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "pro forma" or "anticipates" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) the geographic concentration of our data centers in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets; (ii) fluctuations in interest rates and increased operating costs; (iii) difficulties in identifying properties to acquire and completing acquisitions; (iv) the significant competition in our industry and an inability to lease vacant space, renew existing leases or release space as leases expire; (v) lack of sufficient customer demand to realize expected returns on our investments to expand our property portfolio; (vi) decreased revenue from costs and disruptions associated with any failure of our physical infrastructure or services; (vii) our ability to lease available space to existing or new customers; (viii) our failure to obtain necessary outside financing; (ix) our failure to qualify or maintain our status as a Real Estate Investment Trust ("REIT"); (x) financial market fluctuations; (xi) changes in real estate and zoning laws and increases in real property tax rates; (xii) delays or disruptions in third-party network connectivity; (xiii) service failures or price increases by third party power suppliers; (xiv) inability to renew net leases on the data center properties we lease; and (xv) other factors affecting the real estate industry generally.

        In addition, important factors that could cause actual results to differ materially from the forward-looking statements include the risk factors in Item 1A. "Risk Factors" and elsewhere in this Annual Report. New risks and uncertainties arise from time to time, and we cannot predict those events or how they might affect us. We assume no obligation to update any forward-looking statements after the date of this Annual Report, except as required by applicable law. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

        When we use the terms "we," "us," "our," the "Company," "CoreSite" and "our company" in this Annual Report, we are referring to CoreSite Realty Corporation, a Maryland corporation, together with our consolidated subsidiaries, including CoreSite, L.P., a Delaware limited partnership of which we are the sole general partner and which we refer to as "our Operating Partnership."

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PART I

ITEM 1.    BUSINESS

The Company

        We deliver secure, reliable, high-performance data center solutions across eight key North American markets. We connect, protect and optimize performance-sensitive data, applications and computing workloads for more than 800 of the world's leading enterprises, network operators, cloud providers and supporting service providers. We completed our initial public offering of common stock on September 23, 2010 ("IPO"). We operate as a real estate investment trust ("REIT") for federal income tax purposes and conduct certain activities through our taxable REIT subsidiaries.

Our Business

        We are a fully integrated, self-administered, and self-managed REIT. Through our controlling interest in CoreSite, L.P., a Delaware limited partnership, our "Operating Partnership," we are engaged in the business of ownership, acquisition, construction and management of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including the New York, Northern Virginia (including Washington D.C.) and San Francisco Bay areas, Los Angeles, Chicago, Boston, Miami and Denver.

        Data centers are highly specialized and secure buildings that house networking, storage and communications technology infrastructure, including servers, storage devices, switches, routers and fiber optic transmission equipment. These buildings are designed to provide the power, cooling and network connectivity necessary to efficiently operate this mission-critical equipment. Data centers located at points where many communications networks converge can also function as interconnection hubs where customers are able to connect to multiple networks and exchange traffic with each other. Our data centers feature advanced reliable and efficient power, cooling and security systems, including twenty-four-hours-a-day, seven-days-a-week security staffing, and many are points of network interconnection that provide the ecosystems our customers need to meet their own competitive challenges and business goals. We believe we have the flexibility and scalability to satisfy the full spectrum of our customers' growth requirements and corresponding data center needs by providing data center space ranging in size from an entire building or large dedicated suite to a cage or cabinet.

        The first data center in our portfolio was purchased in 2000 by certain real estate funds (the "Funds") affiliated with The Carlyle Group, our Predecessor, and since then we have continued to acquire, develop and operate these types of data center facilities. Our properties are self-managed, including with respect to construction project management in connection with our development initiatives. As of December 31, 2014, our property portfolio included 16 operating data center facilities, multiple development projects and space and land held for development, which collectively comprise over 2.7 million net rentable square feet ("NRSF"), of which approximately 1.5 million NRSF is existing data center space, 0.9 million is data center space available for development on entitled land and in existing facilities and 0.3 million is office and light-industrial space.

2014 and Recent Developments

        On January 31, 2014, our Operating Partnership and certain subsidiaries entered into a $100 million senior unsecured term loan. The senior unsecured term loan has a five-year term and contains an accordion feature, which allows our Operating Partnership to increase the total commitments by $100 million, to $200 million, under specified circumstances. The senior unsecured term loan ranks pari passu with our revolving credit facility and contains the same financial covenants and other customary restrictive covenants as our revolving credit facility. The borrowings bear interest at a rate per annum equal to LIBOR plus 175 basis points to 265 basis points, depending on our

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Operating Partnership's leverage ratio. Our Operating Partnership used the proceeds from the senior unsecured term loan to repay the SV1 mortgage loan in its entirety and pay down a portion of its outstanding revolving credit balance.

        On February 3, 2014, we entered into a $100 million interest rate swap agreement to protect against adverse fluctuations in interest rates by reducing our exposure to variability in cash flow relating to interest payments on $100 million of one-month LIBOR variable rate debt, which includes the senior unsecured term loan or the revolving credit facility. The interest rate swap has a five-year term and at CoreSite's current leverage ratio, effectively fixes the senior unsecured term loan interest rate at 3.23%.

        During the first quarter of 2014, we completed development of two computer rooms at our newly developed NY2 data center, comprised of 34,589 NRSF. Including these two computer rooms and one computer room developed in 2013, we have 52,692 NRSF of data center space operating at NY2 that is 51.9% occupied as of December 31, 2014.

        The first two computer rooms at our newly developed VA2 data center, which comprised 44,036 NRSF were substantially complete as of December 31, 2014. Both computer rooms are 100% pre-leased to a single customer as of December 31, 2014, and the customer's lease commences on April 1, 2015.

Our Competitive Strengths

        We believe the following key competitive strengths position us to efficiently scale our business, capitalize on the demand for data center space and interconnection services, and thereby grow our cash flow.

        Reliable, Secure, and Compliant.    We help businesses protect mission-critical data, performance sensitive applications and IT infrastructure by delivering secure and reliable data center solutions. Our data centers feature advanced efficient power and cooling infrastructure to support our customer's IT infrastructure with additional power capacity to support continued growth. We provide twenty-four-hours-a-day, seven-days-a-week security guard monitoring with customizable security features. We also provide the infrastructure and physical security required to support many of our customers' compliance needs.

        High Performance.    We offer cloud-enabled, network-rich data center campuses with over 15,000 interconnections across our portfolio and direct access to over 275 carriers and ISPs, over 250 leading cloud and IT service providers and inter-site connectivity. Our offerings include the CoreSite Open Cloud Exchange, the CoreSite Open Internet Exchange Hub and the Any2 Internet Exchange. We believe that the diverse network connectivity options at many of our data centers provide us with a competitive advantage because network-dense facilities offering high levels of connectivity typically take many years to establish. Many providers in our data center facilities can leverage our sites as revenue opportunities by offering their services directly to other customers within our data centers, while enterprises, can reduce their total cost of operations by directly connecting to service providers in the same data center in a cost effective manner.

        Scalable.    Across 16 operating data centers in eight key North American markets, we lease space to enterprises through multiple sub-verticals such as financial, healthcare, educational institutions, government agencies, manufacturing, and professional services. We believe our ability to be both flexible and scalable is a key differentiator. We offer many space, power, and interconnection options that allow customers to select products and services that meet their needs. We believe we have a compelling combination of presence in most of the top data center markets in the U.S. with the ability to meet customers' growing capacity requirements within those markets.

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        At December 31, 2014, our data center facilities have approximately 257,000 NRSF of unoccupied space. We have the ability to expand our data center square footage by approximately 908,000 NRSF, or 62%, through the development of approximately 170,000 NRSF space under construction as of December 31, 2014, and approximately 738,000 NRSF at multiple facilities that is available for future development based on market supply and demand.

        Best-in-Class Customer Experience.    We believe our approximately 350 professionals deliver best-in-class service by placing customer needs first in supporting the planning, implementation and operating requirements of customers. We provide dedicated implementation resources to ensure a seamless onboarding process for customers. Our leasing and sales professionals can develop complex data center solutions for the most demanding customer requirements and our experienced and committed operations and facility personnel are available for extensive management support.

        Facilities in Key Markets.    Our portfolio is concentrated in some of the largest and most important U.S. metropolitan markets and we expect to continue benefitting from this concentration as customers seek new, high-quality data center space and interconnections within our markets, which are many of the key North American network, financial, cloud and commercial hubs. Our data centers are located in the New York, Northern Virginia (including Washington D.C.) and San Francisco Bay areas, Los Angeles, Chicago, Boston, Miami and Denver. These locations offer access to the power required to effectively run the facilities. Many of our facilities are also situated in close proximity to a concentration of key businesses and corporations, driving demand for our data center space and interconnection services.

        Diversified Customer Base.    We have a diverse, global customer base, which we believe is a reflection of our strong reputation and proven track record, as well as our customers' trust in our ability to house their mission-critical applications and vital communications technology. Our diverse customer base spans many industries across eight North America markets. In addition to geographic markets, we group our customers into the following five verticals:

Business and Growth Strategies

        Our business objective is to continue growing our position as a provider of strategically located data center space in North America. Key components of our strategy include the following:

        Increase Cash Flow of In-Place Data Center Space.    We actively manage and lease our properties to increase cash flow by:

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        Capitalize on Embedded Expansion Opportunities.    We plan to grow by developing new secure high-performance data center space. Our development opportunities include ground-up construction on vacant parcels of land that we currently own and leveraging existing in-place infrastructure and entitlements in currently operating properties or campuses. In many cases, we are able to strategically deploy capital by developing space in incremental phases to meet customer demand. Including the space currently under construction at December 31, 2014, vacant space and land targeted for future development, we own land and buildings sufficient to develop approximately 908,000 NRSF of data center space.

        The following table summarizes the NRSF under construction and NRSF held for development throughout our portfolio, each as of December 31, 2014:

 
  Development Opportunities (in NRSF)  
Facilities
  Under
Construction(1)
  Held for
Development(2)
  Total  

Los Angeles

                   

One Wilshire Campus

                   

LA2

        199,978     199,978  

San Francisco Bay

                   

Santa Clara Campus(3)

        210,000     210,000  

Northern Virginia

                   

VA2

    92,173     96,274     188,447  

Boston

                   

BO1

    15,149     72,501     87,650  

Chicago

                   

CH1

    11,704         11,704  

New York

                   

NY2(4)

    49,050     146,036     195,086  

Miami

                   

MI1

        13,154     13,154  

Denver

                   

DE1

    1,734         1,734  

Total Facilities

    169,810     737,943     907,753  

(1)
Represents NRSF for which substantial activities are ongoing to prepare the property for its intended use following development. The NRSF reflects management's estimate of engineering drawings and required support space and is subject to change based on final demising of space.

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(2)
Represents incremental data center capacity currently vacant in existing facilities and entitled land in our portfolio that requires significant capital investment in order to develop into data center facilities.

(3)
We may develop up to 382,000 NRSF at this campus. This includes 210,000 NRSF set forth in the table above that has been entitled. In addition to this 210,000 NRSF, we have 34,000 NRSF of office and light industrial space that we may develop into data center space, and an additional 138,000 NRSF that we may develop into data center space upon our receipt of the necessary entitlements.

(4)
We may develop up to 295,086 NRSF at NY2. This includes the undeveloped existing shell building of 195,086 NRSF set forth in the table above and an additional 100,000 NRSF of data center space that we may develop upon our receipt of the necessary entitlements.

        Selectively Pursue Acquisition and Development Opportunities in New and Existing Markets.    We evaluate opportunities to acquire or develop data center space with abundant power and/or dense points of interconnection in key markets that will expand our customer base and broaden our geographic footprint. Such acquisitions may entail subsequent development, which requires significant capital expenditures. We also intend to continue to implement the "hub-and-spoke strategy" that we have deployed in our four largest markets, namely the Los Angeles, New York, San Francisco Bay and Northern Virginia areas. In these markets, we have extended our data center footprint by connecting our newer facilities, the spokes, to our established data centers, our hubs, which allows our customers leasing space at the spokes to leverage the significant interconnection capabilities of our hubs. In order to deploy our "hub-and-spoke strategy," we typically rely on third-party providers of network connectivity to establish highly reliable network connectivity within and between facilities.

        Leverage Existing Customer Relationships and Reach New Customers.    Our strong customer and industry relationships, combined with our national footprint and sales force, afford us insight into the size, timing and location of customers' planned growth. We historically have been successful in leveraging this market visibility to expand our footprint and customer base in existing and new markets. We intend to continue to strengthen and expand our relationships with existing customers and to further grow and diversify our customer base by targeting growing customers and segments, such as domestic and international telecommunications carriers, content and media entertainment providers, cloud providers and other enterprise customers, including financial, health care, educational institutions and government agencies.

Our Portfolio

        As of December 31, 2014, our property portfolio included 16 operating data center facilities and multiple development projects which collectively comprise over 2.7 million NRSF, of which approximately 1.5 million NRSF is existing data center space. The 0.9 million NRSF of development projects includes entitled land and space available for development and construction of new facilities. We expect that this development potential plus any potential expansion into new markets will enable us to accommodate existing and future customer demand and position us to continue to increase our

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operating cash flows. The following table provides an overview of our properties as of December 31, 2014:

 
  Data Center Operating NRSF(1)    
   
 
 
   
  Total
NRSF
 
 
   
  Stabilized   Pre-Stabilized(2)   Total   Development
NRSF(3)
 
 
  Annualized
Rent ($000)(4)
   
  Percent
Occupied(5)
   
  Percent
Occupied(5)
   
  Percent
Occupied(5)
  Total
Portfolio
 
Market/Facilities
  Total   Total   Total   Total  

Los Angeles

                                                       

One Wilshire Campus

                                                       

LA1*

  $ 25,007     139,053     82.2             139,053     82.2         139,053  

LA2

    18,296     161,911     84.0     63,002     34.9     224,913     70.2     199,978     424,891  

Los Angeles Total

    43,303     300,964     83.1     63,002     34.9     363,966     74.8     199,978     563,944  

San Francisco Bay

                                                       

SV1

    6,731     84,045     83.5             84,045     83.5         84,045  

SV2

    8,142     76,676     88.2             76,676     88.2         76,676  

Santa Clara Campus

    27,128     237,316     96.3     14,857     37.1     252,173     92.8     210,000     462,173  

San Francisco Bay Total

    42,001     398,037     92.1     14,857     37.1     412,894     90.1     210,000     622,894  

Northern Virginia

                                                     

VA1

    23,589     201,719     81.4             201,719     81.4         201,719  

VA2

                                188,447     188,447  

DC1*

    3,023     22,137     88.8             22,137     88.8         22,137  

Northern Virginia Total

    26,612     223,856     82.1             223,856     82.1     188,447     412,303  

Boston

                                                       

BO1

    13,791     166,026     98.2             166,026     98.2     87,650     253,676  

Chicago

                                                       

CH1

    12,857     146,463     87.3     20,240     28.1     166,703     80.1     11,704     178,407  

New York

                                                       

NY1*

    5,475     48,404     68.7             48,404     68.7         48,404  

NY2

    2,561             52,692     51.9     52,692     51.9     195,086     247,778  

New York Total

    8,036     48,404     68.7     52,692     51.9     101,096     59.9     195,086     296,182  

Miami

                                                       

MI1

    1,807     30,176     81.2             30,176     81.2     13,154     43,330  

Denver

                                                       

DE1*

    994     4,144     100.0             4,144     100.0     1,734     5,878  

DE2*

    306     5,140     65.3             5,140     65.3         5,140  

Denver Total

    1,300     9,284     80.8             9,284     80.8     1,734     11,018  

Total Facilities

  $ 149,707     1,323,210     87.4 %   150,791     40.1 %   1,474,001     82.6 %   907,753     2,381,754  

Office and Light-Industrial(6)

    6,939     347,120     77.5             347,120     77.5         347,120  

Total Portfolio

  $ 156,646     1,670,330     85.3 %   150,791     40.1 %   1,821,121     81.6 %   907,753     2,728,874  

*
Indicates properties in which we hold a leasehold interest.

(1)
Represents the NRSF at each operating facility that is currently occupied or readily available for lease as data center space and pre-stabilized data center space. Both occupied and available data center NRSF includes a factor to account for a customer's proportionate share of the required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas, which may be updated on a periodic basis to reflect the most current build-out of our properties.

(2)
Pre-stabilized NRSF represents projects/facilities which recently have been developed and are in the initial lease-up phase. Pre-stabilized projects/facilities become stabilized operating properties at the earlier of achievement of 85% occupancy or 24 months after development completion.

(3)
Represents incremental data center capacity currently vacant in existing facilities and entitled land in our portfolio that requires significant capital investment in order to develop into data center facilities. Includes NRSF under construction for which substantial activities are ongoing to prepare the property for its intended use following development. The NRSF reflects management's estimate of engineering drawings and required support space and is subject to change based on final demising of space. In addition to the amounts above, we may develop an additional 138,000 NRSF at the Santa Clara Campus and 100,000 NRSF at NY2 upon receipt of the necessary entitlements.

(4)
Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2014, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement. On a gross basis, our total portfolio annualized rent was approximately $161.8 million as of December 31, 2014, which reflects the addition of $5.2 million in operating expense reimbursements to contractual net rent under modified gross and triple-net leases.

(5)
Includes customer leases that have commenced and are occupied as of December 31, 2014. The percent occupied is determined based on leased square feet as a proportion of total operating NRSF as of December 31, 2014. The percent occupied for data center stabilized space would have been 89.7%, rather than 87.4%, if all leases signed in the current and prior periods had commenced. The percent occupied for our total portfolio, including data center stabilized space, pre-stabilized space and office and light-industrial space, would have been 84.4%, rather than 81.6%, if all leases signed in current and prior periods had commenced.

(6)
Represents space that is currently occupied or readily available for lease as space other than data center space, which is typically space offered for office or light-industrial uses.

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        The following table shows the December 31, 2014, Same Store operating statistics for space within each data center facility that was leased or available to be leased as of December 31, 2012, and excludes space for which development was completed and became available to be leased after December 31, 2012. We track same store space leased or available to be leased at the computer room level within each data center facility. For comparison purposes, the operating activity totals as of December 31, 2013, and 2012, for this space are provided at the bottom of this table.

 
  Same Store Property Portfolio (in NRSF)  
 
   
  Data Center   Office and
Light-Industrial
  Total  
Market/Facilities
  Annualized
Rent ($000)(1)
  Total   Percent
Occupied(2)
  Total   Percent
Occupied(2)
  Total   Percent
Occupied(2)
 

Los Angeles

                                           

One Wilshire Campus

                                           

LA1

  $ 25,153     139,053     82.2     4,373     82.8     143,426     82.2 %

LA2

    16,249     159,617     83.7     5,147     97.3     164,764     84.2  

Los Angeles Total

    41,402     298,670     83.0     9,520     90.7     308,190     83.3  

San Francisco Bay

                                           

SV1

    11,457     84,045     83.5 %   206,255     79.4 %   290,300     80.6  

SV2

    8,142     76,676     88.2             76,676     88.2  

Santa Clara Campus

    21,631     118,955     92.7     34,548     82.8     153,503     90.5  

San Francisco Bay Total

    41,230     279,676     88.7     240,803     79.9     520,479     84.6  

Northern Virginia

                                           

VA1

    24,630     201,719     81.4     61,050     80.7     262,769     81.2  

DC1*

    3,023     22,137     88.8             22,137     88.8  

Northern Virginia Total

    27,653     223,856     82.1     61,050     80.7     284,906     81.8  

Boston

                                           

BO1

    11,670     148,795     98.0     13,063     42.7     161,858     93.5  

Chicago

                                           

CH1

    12,246     146,463     87.3     4,946     65.8     151,409     86.6  

New York

                                           

NY1*

    5,475     48,404     68.7             48,404     68.7  

Miami

                                           

MI1

    1,827     30,176     81.2     1,934     57.1     32,110     79.7  

Denver

                                           

DE1*

    994     4,144     100.0             4,144     100.0  

DE2*

    306     5,140     65.3             5,140     65.3  

Denver Total

    1,300     9,284     80.8             9,284     80.8  

Total Facilities at December 31, 2014(3)

  $ 142,803     1,185,324     86.0 %   331,316     78.5 %   1,516,640     84.3 %

Total Facilities at December 31, 2013

  $ 129,387           80.2 %         79.3 %         80.0 %

Total Facilities at December 31, 2012

  $ 119,602           77.2 %         79.1 %         77.7 %

*
Indicates properties in which we hold a leasehold interest.

(1)
Represents the monthly contractual rent under existing commenced customer leases as of each respective period, multiplied by 12. This amount reflects total annualized base rent before any

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    one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement.

(2)
Includes customer leases that have commenced and are occupied as of each respective period. The percent occupied is determined based on leased square feet as a proportion of total operating NRSF.

(3)
The percent occupied for data center space, office and light-industrial space, and total space would have been 88.5%, 79.1% and 86.5% respectively, if all leases signed in current and prior periods had commenced.

        Same store annualized rent increased to $142.8 million at December 31, 2014, compared to $129.4 million at December 31, 2013. The $13.4 million annualized rent increase is due primarily to a 5.8% increase in data center same store occupancy resulting in a $3.2 million increase to annualized rent in the Northern Virginia area, a $4.0 million increase to annualized rent in the San Francisco Bay Area and a $2.9 million increase to annualized rent in the Los Angeles area.

Capital Expenditures

        The following table sets forth information regarding capital expenditures during the year ended December 31, 2014 (in thousands):

 
  Year Ended
December 31, 2014
 

Data center expansion

  $ 84,312  

Non-recurring investments

    12,527  

Tenant improvements

    4,512  

Recurring capital expenditures

    4,429  

Total capital expenditures

  $ 105,780  

        During the year ended December 31, 2014, we incurred approximately $105.8 million of capital expenditures, of which approximately $84.3 million related to new data center expansion activities, including new data center construction, the development of capacity within existing data centers and other revenue generating investments.

        Of the $84.3 million of capital expenditures related to new data center expansion activities, we incurred approximately $61.1 million on our two largest development projects, NY2 and VA2. During the year ended December 31, 2014, we placed into service 34,589 NRSF at NY2. We also incurred an additional $23.2 million of capital expenditures to add capacity in new computer rooms at BO1, the Santa Clara Campus and other properties during the year ended December 31, 2014.

        During the year ended December 31, 2014, we incurred approximately $12.5 million in non-recurring investments of which $4.4 million is a result of internal IT system development and the remaining $8.1 million is a result of other non-recurring investments, such as remodel or upgrade projects and corporate office leasehold improvements.

        We also incurred approximately $4.5 million in tenant improvements, of which $0.9 million relates to an office lease at our SV1 property.

        We incurred approximately $4.4 million of recurring capital expenditures within our portfolio for required equipment upgrades that have a future economic benefit.

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Customer Diversification

        The following table sets forth information regarding the ten largest customers in our portfolio based on total portfolio annualized rent as of December 31, 2014:

 
  Industry   CoreSite Vertical   Number of
Locations
  Total
Occupied
NRSF(1)
  Percentage
of Total
Operating
NRSF(2)
  Annualized
Rent
($000)(3)
  Percentage
of Total
Annualized
Rent(4)
  Weighted
Average
Remaining
Lease
Term in
Months(5)
 
  1   Technology   Enterprise: Digital Content     4     41,811     2.3 % $ 10,692     6.8 %   22  
  2   Technology   Cloud     8     142,687     7.8     10,089     6.4     55  
  3   Technology   Enterprise: SI & MSP     3     53,014     2.9     6,758     4.3     32  
  4   Technology   Enterprise: Digital Content     10     65,687     3.6     5,932     3.8     10  
  5   Government*   Enterprise: Other     1     130,960     7.2     3,906     2.5     84  
  6   Technology   Cloud     1     28,923     1.6     3,884     2.5     46  
  7   Financial(6)   Enterprise: Other     2     12,188     0.7     3,130     2.0     116  
  8   Technology   Enterprise: SI & MSP     1     6,417     0.4     2,646     1.7     25  
  9   Managed Services   Enterprise: SI & MSP     1     23,663     1.3     2,381     1.5     99  
  10   Government   Enterprise: Other     2     16,769     0.9     2,373     1.6     54  
      Total/Weighted Average           522,119     28.7 % $ 51,791     33.1 %   46  

*
Denotes customer using space for general office purposes.

(1)
Total occupied NRSF is determined based on contractually leased square feet for leases that have commenced on or before December 31, 2014. We calculate occupancy based on factors in addition to contractually leased square feet, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.

(2)
Represents the customer's total occupied square feet divided by the total operating NRSF in the portfolio (both data center and office and light-industrial) which, as of December 31, 2014, consisted of 1,821,121 NRSF.

(3)
Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2014, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement.

(4)
Represents the customer's total annualized rent divided by the total portfolio annualized rent in the portfolio as of December 31, 2014, which was approximately $156.6 million.

(5)
Weighted average based on percentage of total portfolio annualized rent expiring calculated as of December 31, 2014.

(6)
Customer's lease term includes auto renewal provisions at the end of years 4 and 6 which the customer may opt out of by paying a termination fee of $0.4 million and $0.3 million, respectively.

Lease Expirations

        The following table sets forth a summary schedule of the expirations for leases in place as of December 31, 2014, plus unoccupied space for each of the five full calendar years beginning January 1, 2015, at the properties in our portfolio (excluding space held for development or under construction).

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The information set forth in the table assumes that customers exercise no renewal options or early termination rights.

Year of Lease Expiration
  Number of
Leases
Expiring(1)
  Total
Operating
NRSF of
Expiring
Leases
  Percentage
of Total
Operating
NRSF
  Annualized
Rent
($000)(2)
  Percentage
of Total
Annualized
Rent
  Annualized
Rent Per
Leased
NRSF
  Annualized
Rent at
Expiration
($000)(3)
  Annualized
Rent Per
Leased
NRSF at
Expiration(4)
 

Unoccupied colocation

        256,753     14.1   $       $   $   $  

Unoccupied office and light-industrial

          78,226     4.3                                

2015

    599     231,820     12.7     35,858     22.9     154.68     37,042     159.79  

2016

    382     223,197     12.3     32,537     20.8     145.78     35,253     157.95  

2017

    334     219,839     12.1     37,466     23.9     170.42     41,159     187.22  

2018

    82     172,418     9.5     18,405     11.7     106.75     21,511     124.76  

2019

    70     142,020     7.8     9,982     6.4     70.29     16,132     113.59  

2020—Thereafter

    36     227,954     12.5     15,459     9.9     67.82     22,846     100.22  

Office and light-industrial(5)

    94     268,894     14.7     6,939     4.4     25.81     6,945     25.83  

Portfolio Total / Weighted Average

    1,597     1,821,121     100.0 % $ 156,646     100.0 % $ 105.40   $ 180,888   $ 121.72  

(1)
Includes leases that upon expiration will automatically be renewed, primarily on a month-to-month basis. Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.

(2)
Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2014, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement.

(3)
Represents the final monthly contractual rent under existing customer leases as of December 31, 2014, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes operating expense reimbursement, power revenue and interconnection revenue.

(4)
Annualized rent at expiration as defined above, divided by the square footage of leases expiring in the given year. This metric reflects the rent growth inherent in the existing base of lease agreements.

(5)
Of the occupied office and light industrial leases, 41,325 NRSF, 60,225 NRSF, 8,649 NRSF, 4,207 NRSF, 4,698 NRSF and 149,790 NRSF are scheduled to expire in 2015, 2016, 2017, 2018, 2019 and 2020 and thereafter, respectively, which accounts for (in thousands) $745, $1,401, $219, $119, $143 and $4,312 of annualized rent scheduled to expire during each respective period.

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Lease Distribution

        The following table sets forth information relating to the distribution of leases in the properties in our portfolio, based on NRSF (excluding space held for development or under construction) under lease as of December 31, 2014:

NRSF Under Lease(1)
  Number of
Leases(2)
  Percentage of
All Leases
  Total
Operating
NRSF of
Leases
  Percentage of
Total
Operating
NRSF
  Annualized
Rent
($000)(3)
  Percentage of
Total
Annualized
Rent
 

Unoccupied colocation

        %   256,753     14.1 % $     %

Unoccupied office and light-industrial

            78,226     4.3          

Colocation NRSF:

                                     

5,000 or less

    1,449     90.8     489,774     26.8     79,557     50.8  

5,001 - 10,000

    24     1.5     163,274     9.0     22,429     14.3  

10,001 - 25,000

    15     0.9     204,975     11.3     29,872     19.1  

Greater than 25,000

    2     0.1     63,545     3.5     7,600     4.9  

Powered shell

    13     0.8     295,680     16.3     10,249     6.5  

Office and light-industrial

    94     5.9     268,894     14.7     6,939     4.4  

Portfolio Total

    1,597     100.0 %   1,821,121     100.0 % $ 156,646     100.0 %

(1)
Represents all leases in our portfolio, including data center and office and light-industrial leases.

(2)
Includes leases that upon expiration will automatically be renewed, primarily on a month-to-month basis. Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.

(3)
Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2014, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement.

Competition

        We compete with numerous developers, owners and operators of technology-related real estate and data centers, many of which own properties similar to ours in the same markets in which our properties are located, including AT&T Inc., CenturyLink Inc., Savvis, Inc., a CenturyLink company, CyrusOne, Inc., Digital Realty Trust, Inc., DuPont Fabros Technology, Inc., Equinix, Inc., Internap Network Services Corporation, Quality Technology Services, RagingWire Data Center, SABEY Corporation, Telx Group Inc., Verizon / Terremark Worldwide, Inc., ViaWest Inc. and Zayo Inc. In addition, we may face competition from new entrants into the data center market. Some of our competitors and potential competitors may have significant advantages over us, including greater name recognition, longer operating histories, pre-existing relationships with current or potential customers, significantly greater financial, marketing and other resources, a greater number of established, interconnection and network-dense, data centers, and access to less expensive power, all of which could allow them to respond more quickly to new or changing opportunities. If our competitors offer space, power and/or interconnection services at rates below current market rates, or below the rates we currently charge our customers, we may lose potential customers and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers when our customers' leases expire.

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        As a developer of data center space and provider of interconnection services, we also compete for the services of key third-party providers of services, including engineers and contractors with expertise in the development of data centers. The competition for the services of specialized contractors and other third-party providers required for the development of data centers is intense, increasing the cost of engaging such providers and the risk of delays in completing our development projects.

        As a provider of high-performance data centers, we compete for high-value network carrier and cloud and IT service provider deployments within our data centers. These high-value deployments attract other customers to the data center, and, therefore, are in high demand among us and our competitors.

        In addition, we face competition from real estate developers in our sector and in other industries for the acquisition of additional properties suitable for the development of data centers. Such competition may reduce the number of properties available for acquisition, increase the price of these properties and reduce the demand for data center space in the markets we seek to serve.

Regulation

General

        Data centers in our markets are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our properties has the necessary permits and approvals to operate our business.

Americans with Disabilities Act

        Our properties must comply with Title III of the American with Disabilities Act, or the ADA, to the extent that such properties are places of "public accommodation" or "commercial facilities" as defined by the ADA. The ADA requires properties that are places of "public accommodation" to, among other things, remove existing barriers to access by persons with disabilities where such removal is readily achievable. The ADA also requires places of "public accommodation" as well as "commercial facilities" undergoing new construction or alterations to conform to the ADA Accessibility Guidelines, which provide design standards that permit accessibility by individuals with disabilities. Further, if entities on our properties offer certain examinations or courses (i.e., those related to applications, licensing, certification, or credentialing for secondary or postsecondary education, professional, or trade purposes), they must be offered in an accessible place and manner or with alternative accessible arrangements. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to those properties to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of monetary damages and civil penalties in lawsuits brought by the Attorney General or an award of attorneys' fees to private litigants. The obligation to make readily achievable accommodations as required by the ADA is an ongoing one, and we will continue to assess our properties and make alterations as appropriate.

Environmental Matters

        Under various federal, state and local laws and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances at that property, and may be required to investigate and clean up such contamination at that property or emanating from that property. Such laws and regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and a party may be liable for all of the cleanup costs, even when more than one person was responsible for the contamination. Previous owners used some of our properties for industrial and retail purposes, so those properties may

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contain some level of environmental contamination. The presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability or materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral. In addition, we could incur costs to comply with such laws and regulations, the violation of which could lead to substantial fines and penalties.

        Environmental laws and regulations also require that asbestos-containing building materials be properly managed and maintained and may impose fines and penalties on building owners or operators for failure to comply with these requirements. Further, third parties could potentially seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

        In addition, certain of our customers, particularly those that lease light-industrial space from us, routinely handle hazardous substances and wastes as part of their operations at our properties. Environmental laws and regulations subject our customers, and potentially us, to liability resulting from these activities or from previous industrial or other uses of those properties. Environmental liabilities could also affect a customer's ability to make rental payments to us. We require our customers to comply with these environmental laws and regulations and to indemnify us for any related liabilities.

        Independent environmental consultants have conducted Phase I or similar environmental site assessments on all owned properties in our portfolio. Each of the site assessments has been either completed or updated since 2005. Site assessments are intended to collect and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil sampling, subsurface investigations or asbestos sampling. Although prior commercial or industrial operations at some of our properties may have released hazardous materials and some of our properties contain or may contain asbestos-containing building materials, none of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, assets or results of operations. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities or compliance concerns may have arisen after the reviews were completed or may arise in the future; and future laws, ordinances or regulations may impose material additional environmental liability. See "Risk Factors—Risks Related to Our Business and Operations—Environmental problems are possible and can be costly."

Insurance

        We carry comprehensive liability, fire, extended coverage, earthquake, business interruption, rental loss, and umbrella liability insurance covering all of the properties in our portfolio augmented by excess liability coverage in an amount that we believe to be appropriate. We select policy specifications and insured limits which we believe to be appropriate given the relative risk of loss, the cost of the coverage and industry practice and, in the opinion of our management, the properties in our portfolio are currently adequately insured. We do not carry insurance for generally uninsured losses such as loss from riots, war or acts of God. In addition, we carry earthquake insurance on our properties in an amount and with deductibles which we believe are commercially reasonable. Certain of the properties in our portfolio are located in areas believed to be seismically active. Potential losses to our properties may not be covered by insurance or may exceed our policy coverage limits. See "Risk Factors—Risks Related to Our Business and Operations—Potential losses to our properties may not be covered by insurance or may exceed our policy coverage limits" in Item 1A. of this Annual Report.

Employees

        As of December 31, 2014, we had 354 full-time and part-time employees, of which 183 employees are salaried with the remainder paid on an hourly basis. None of our employees is a member of a labor union and we believe that our relations with employees are good.

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Offices

        Our corporate offices are located at 1001 17th Street, Suite 500, Denver, CO 80202.

How to Obtain Our SEC Filings

        All reports we file with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we file with the SEC at the SEC's public reference room located at 100 F Street, N.E., Washington, D.C. 20549. We also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy Statement, Annual Report and amendments to those documents at no charge to investors upon request and make electronic copies of such reports available through our website at www.coresite.com as soon as reasonably practicable after filing such material with the SEC. The information found on, or otherwise accessible through, our website is not incorporated by reference into, nor does it form a part of, this Annual Report on Form 10-K, or any other document that we file with the SEC.

Financial Information

        We manage our business as one reportable segment consisting of investments in data centers located in the United States. For required financial information related to our operations and assets, please refer to our consolidated financial statements, including the notes thereto, included in Item 8. "Financial Statements and Supplementary Data" in this Annual Report.

ITEM 1A.    RISK FACTORS

        Any of the following risks could materially and adversely affect our business, results of operations or financial condition. The risks and uncertainties described below are those that we currently believe may materially affect our Company. Additional risks and uncertainties of which we are unaware or that we currently deem immaterial also may become important factors that affect our Company.


Risks Related to Our Business and Operations

Global economic conditions could adversely affect our liquidity and financial condition.

        General economic conditions and the cost and availability of capital may be adversely affected in some or all of the markets in which we own properties and conduct our operations. Instability in the U.S., European and other international financial markets and economies may adversely affect our ability, and the ability of our tenants, to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity and capital expenditure requirements and may result in adverse effects on our, and our tenants', financial condition and results of operations.

        In addition, our access to funds under our revolving credit facility and other lines of credit we may enter into depend on the ability of the lenders that are parties to such facilities to meet their funding commitments to us. We cannot assure you that long-term disruptions in the global economy and the return of tighter credit conditions, and potential failures or nationalizations of, third party financial institutions as a result of such disruptions will not have an adverse effect on our lenders. If our lenders are not able to meet their funding commitments to us, our business, results of operation, cash flows and financial condition could be adversely affected.

        If we do not have sufficient cash flow to continue operating our business and are unable to borrow additional funds, access our existing lines of credit or raise equity or debt capital, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, curtailing development activity, disposing of one or more of our properties possibly on disadvantageous terms or entering into or renewing leases on less favorable terms than we otherwise would.

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Our portfolio of properties consists primarily of data centers geographically concentrated in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets may negatively impact our operating results.

        Our portfolio of properties consists of data centers geographically concentrated in Los Angeles, the San Francisco Bay and Northern Virginia areas (including Washington D.C.), Boston, Chicago, the New York areas, Miami and Denver. These markets comprised 28.9%, 28.0%, 17.8%, 9.2%, 8.6%, 5.4%, 1.2%, and 0.9%, respectively, of our annualized data center rent as of December 31, 2014. As such, we are susceptible to local economic conditions and the supply of and demand for data center space in these markets. If there is a downturn in the economy or an oversupply of or decrease in demand for data centers in these markets, our business could be materially adversely affected to a greater extent than if we owned a real estate portfolio that was more diversified in terms of both geography and industry focus.

The market price of our stock may continue to be highly volatile, and the value of an investment in our common stock may decline.

        During the year ended December 31, 2014, the sale price of our common stock on the New York Stock Exchange ("NYSE") has ranged from $29.26 to $39.98 per share. The market price of the shares of our common stock has been and may continue to be highly volatile. General economic and market conditions, and market conditions for telecommunications and real estate stocks in general, may affect the market price of our common stock.

        Announcements by us or others, or speculations about our future plans, may also have a significant impact on the market price of our common stock. These may relate to:

        The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging telecommunications and real estate companies, and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock.

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We face significant competition and may be unable to lease vacant space, renew existing leases or release space as leases expire, which may have a material adverse effect on our business and results of operations.

        We compete with numerous developers, owners and operators of technology-related real estate and data centers, many of which own properties similar to ours in the same markets. In addition, we may face competition from new entrants into the data center market. Some of our competitors have significant advantages over us, including greater name recognition, longer operating histories, lower operating costs, pre-existing relationships with current or potential customers, greater financial, marketing and other resources, access to better networks and access to less expensive power. These advantages could allow our competitors to respond more quickly or effectively to strategic opportunities or changes in our industries or markets. If our competitors offer data center space that our existing or potential customers perceive to be superior to ours based on numerous factors, including cost and availability of power, security considerations, location or network connectivity, or if they offer rental rates below our current market rates, we may lose existing or potential customers, incur costs to improve our properties or be forced to reduce our rental rates. This risk is compounded by the fact that a significant percentage of our customer leases expire every year. For example, as of December 31, 2014, data center leases representing 22.9%, 20.8% and 23.9% of our total portfolio annualized rent will expire during 2015, 2016, and 2017, respectively. If the rental rates for our properties decrease, our existing customers do not renew their leases or we are unable to lease vacant data center space or re-lease data center space for which leases are scheduled to expire at or above current lease rates, our business and results of operations could be materially adversely affected.

We may be vulnerable to security breaches and cyber-attacks which could disrupt our operations and have a material adverse effect on our financial performance and operating results.

        A party who is able to compromise the security measures on our networks or the security of our infrastructure could misappropriate our proprietary information and the personal information of our customers and cause interruptions or malfunctions in our or our customers' operations. We may be required to expend significant financial resources to protect against such threats or to alleviate problems caused by security breaches. As techniques used to breach security are growing in frequency and sophistication and are generally not recognized until launched against a target, we may not be able to implement security measures in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.

We are continuing to invest in our expansion efforts, but we may not have sufficient customer demand in the future to realize expected returns on these investments.

        As part of our growth strategy, we intend to commit substantial operational and financial resources to develop new data centers and expand existing ones. However, we typically do not require pre-leasing commitments from customers before we develop or expand a data center, and we may not have sufficient customer demand to lease the new data center space when completed. Once development of a data center is complete, we incur a certain amount of operating expenses even if there are no tenants occupying the space. A lack of customer demand for data center space or excess capacity in the data center market could impair our ability to achieve our expected rate of return on our investment, which could have a material adverse effect on our financial condition, operating results and the market price of our common stock.

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Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.

        We periodically review each of our properties for indicators that its carrying amount may not be recoverable. Examples of such indicators may include a significant decrease in the market prices of similar properties, a significant adverse change in the extent or manner in which the property is being used or expected to be used based on the underwriting at the time of acquisition, or a change in its physical condition, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development, or a history of operating or cash flow losses. When such impairment indictors exist, we review an estimate of the future cash flows (excluding interest charges) expected to result from the real estate investment's use and eventual disposition and compare to the carrying value of the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Recording an impairment loss would result in an immediate negative adjustment to net income. The evaluation of estimated future cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our financial condition, results of operations and the market price of our stock.

Our properties depend upon the demand for technology-related real estate.

        Our portfolio of properties consists primarily of technology-related real estate and data center facilities in particular. A decrease in the demand for data center space, Internet gateway facilities or other technology-related real estate would have a greater adverse effect on our business and financial condition than if we owned a portfolio with a more diversified tenant base or less specialized use. Our substantial development activities make us particularly susceptible to general economic slowdowns, including recessions, as well as adverse developments in the corporate data center, Internet and data communications and broader technology industries. Any such slowdown or adverse development could lead to reduced corporate IT spending or reduced demand for data center space. Reduced demand could also result from business relocations, including to markets that we do not currently serve. Changes in industry practice or in technology, such as virtualization technology, more efficient or miniaturization of computing or networking devices, or devices that require higher power densities than today's devices, could also reduce demand for the physical data center space and infrastructure we provide or make the tenant improvements in our facilities obsolete or in need of significant upgrades to remain viable. The development of new technologies, the adoption of new industry standards or other factors could render many of our customers' current products and services obsolete or unmarketable and contribute to a downturn in their businesses, thereby increasing the likelihood that they default under their leases, become insolvent or file for bankruptcy. In addition, existing initiatives relating to the formation of Internet exchange alternatives could have a negative effect on the demand for and pricing of the subset of our interconnection income relating to Internet exchanges.

Our products and services have a long sales cycle that may harm our revenues and operating results.

        A customer's decision to license space in one of our data centers and to purchase additional services typically involves a significant commitment of resources. In addition, some customers will be reluctant to commit to locating in our data centers until they are confident that the data center has adequate carrier connections. As a result, we have a long sales cycle. Furthermore, we may expend significant time and resources in pursuing a particular sale or customer that ultimately does not result in revenue.

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        An economic downturn may further impact this long sales cycle by making it extremely difficult for customers to accurately forecast and plan future business activities. This could cause customers to slow spending or delay decision-making on our products and services, which would delay and lengthen our sales cycle.

        Delays due to the length of our sales cycle may materially and adversely affect our revenues and operating results, which could harm our ability to meet our financial forecasts for a given quarter and cause volatility in our stock price.

Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our revenues, harm our business reputation and have a material adverse effect on our financial results.

        Our business depends on providing customers with highly reliable service. We may fail to provide such service as a result of numerous factors, including:

        Problems at one or more of our data centers, whether or not within our control, could result in service interruptions or equipment damage. We provide service level commitments to substantially all of our customers. As a result, service interruptions or equipment damage in our data centers could result in billing abatements to these customers. In addition, although we have given such abatements to our customers in the past, there can be no assurance that our customers will accept these abatements as compensation in the future. Service interruptions and equipment failures may also expose us to additional legal liability and damage our brand image and reputation. Significant or frequent service interruptions could cause our customers to terminate or not renew their leases. In addition, we may be unable to attract new customers if we have a reputation for significant or frequent service disruptions in our data centers.

Our properties are not suitable for use other than as data centers, which could make it difficult to sell or reposition them if we are not able to lease available space and could materially adversely affect our business, results of operations and financial condition.

        Our data centers are designed solely to house and run computer servers and related information technology equipment and, therefore, contain extensive electrical and mechanical systems and infrastructure. As a result, they are not suited for use by customers as anything other than as data centers and major renovations and expenditures would be required in order for us to re-lease vacant space for more traditional uses, or for us to sell a property to a buyer for use other than as a data center.

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To fund our growth strategy and refinance our indebtedness, we depend on external sources of capital, which may not be available to us on commercially reasonable terms or at all.

        In order to maintain our qualification as a REIT, we are required under the Internal Revenue Code (the "Code") to distribute at least 90% of our net taxable income annually, determined without regard to the dividends paid deduction and excluding any net capital gains. We will also be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. These distribution requirements may limit our ability to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we intend to rely on third-party sources for debt or equity financing to fund our growth strategy. In addition, we may need external sources of capital to refinance our indebtedness at maturity. We may not be able to obtain such financing or refinancing on favorable terms or at all. Our access to third-party sources of capital depends, in part, on:

        In addition, our ability to access additional capital may be limited by the terms of our existing indebtedness, which restricts our incurrence of additional indebtedness. If we cannot obtain capital when needed, we may not be able to acquire or develop properties when strategic opportunities arise or refinance our debt at maturity, which could have a material adverse effect on our business.

We are currently making significant investments in our back office information technology systems. Any difficulties or disruptions to these efforts may interrupt our normal operations, resulting in an adverse effect to our business, results of operations, financial condition or cash flows.

        Beginning in 2012 and continuing through 2014, we have invested in a significant project to overhaul our back office information technology systems that support the customer experience from initial quote to customer billing through to accounting and financial reporting. Difficulties with our systems may interrupt our ability to accept and deliver customer orders and impact our overall financial operations, including our accounts payable, accounts receivable, general ledger, close processes, internal financial controls, and our ability to otherwise run and track our business. We may need to expend significant attention, time and resources to correct problems or find alternative sources for performing these functions. Such significant investments in our back office systems may take longer to complete and cost more than originally planned. In addition, we may not realize the full benefits we hoped to achieve and we may recognize additional impairment charges if we decide that portions of these information technology system projects will not ultimately benefit the Company or are de-scoped. Any such difficulty, impairment or disruption may adversely affect our business, including our ability to compete for customers, attract and retain employees, and drive efficiencies and economies of scale, results of operations, financial condition or cash flows.

We have government customers, which subjects us to risks including early termination, audits, investigations, sanctions and penalties.

        We derive some revenues from contracts with the U.S. government, state and local governments and their respective agencies. Some of these customers may terminate all or part of their contracts at any time, without cause.

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        There is increased pressure for governments and their agencies to reduce spending. Some of our federal government contracts are subject to the approval of appropriations being made by the U.S. Congress to fund the expenditures under these contracts. Similarly, some of our contracts at the state and local levels are subject to government funding authorizations.

        Additionally, government contracts are generally subject to audits and investigations which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business.

If we are unable to recruit or retain qualified personnel, our business could be harmed.

        We must continue to identify, hire, train, and retain IT professionals, technical engineers, operations employees, and sales, marketing, finance and senior management personnel who maintain relationships with our customers and who can provide the technical, strategic and marketing skills required for our Company to grow. There is a shortage of qualified personnel in these fields, and we compete with other companies for the limited pool of talent. The failure to recruit and retain personnel, including, but not limited to, members of our executive team, could harm our business and our ability to grow our Company.

Our expenses may not decrease if our revenue decreases.

        Most of the expenses associated with our business, such as debt service payments, real estate, personal property and ad valorem taxes, insurance, utilities, employee wages and benefits and corporate expenses are relatively inflexible and do not necessarily decrease in tandem with a reduction in revenue from our business. Our expenses also will be affected by inflationary increases and certain of our costs may exceed the rate of inflation in any given period. As a result, we may not be able to fully offset our costs by higher lease rates, which could have a material adverse effect on our operations and financial performance.

We depend on third parties to provide network connectivity within and between certain of our data centers, and any delays or disruptions in this connectivity may adversely affect our operating results and cash flow.

        We depend upon carriers and other network providers to deliver network connectivity to customers within our data centers as well as the fiber network interconnection between our data centers. Our hub-and-spoke approach makes us dependent on these third parties to provide these services between our data centers. We cannot assure you that any network provider will elect to offer its services within new data centers that we develop or that once a network provider decides to provide connectivity to or between our data centers, it will continue to do so for any period of time. A significant interruption in or loss of these services could impair our ability to attract and retain customers and have a material adverse effect on our business.

        Enabling connectivity within and between our data centers requires construction and operation of a sophisticated redundant fiber network. The construction required to connect our data centers is complex and may involve factors outside of our control, including the availability of construction resources. If highly reliable network connectivity within and between certain of our data centers is not established, is materially delayed, is discontinued or fails, our reputation could be harmed, which could have a material adverse effect on our ability to attract new customers or retain existing ones.

Our data center infrastructure may become obsolete and we may not be able to upgrade our power and cooling systems cost-effectively or at all.

        The markets for the data centers that we own and operate, as well as the industries in which our customers operate, are characterized by rapidly changing technology, evolving industry standards,

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frequent new product introductions and changing customer demands. Our ability to deliver technologically sophisticated power and cooling is a significant factor in our customers' decisions to lease space in our data centers. Our data center infrastructure may become obsolete due to the development of new systems that deliver power to, or eliminate heat from, the servers and other customer equipment that we house. Additionally, our data center infrastructure could become obsolete as a result of the development of new technology that requires levels of power and cooling that our facilities are not designed to provide. Our power and cooling systems are also difficult and expensive to upgrade. Accordingly, we may not be able to efficiently upgrade or change these systems to meet new demands without incurring significant costs that we may not be able to pass on to our customers. The obsolescence of our power and cooling systems would have a material adverse effect on our business. In addition, evolving customer demand could require services or infrastructure improvements that we do not provide or that would be difficult or expensive for us to provide in our current data centers, and we may be unable to adequately adapt our properties or acquire new properties that can compete successfully. We risk losing customers to our competitors if we are unable to adapt to this rapidly evolving marketplace.

        Furthermore, potential future regulations that apply to industries we serve may require customers in those industries to seek specific requirements from their data centers that we are unable to provide. These may include physical security requirements applicable to the defense industry and government contractors and privacy and security regulations applicable to the financial services and health care industries. If such regulations were adopted, we could lose some customers or be unable to attract new customers in certain industries, which would have a material adverse effect on our results of operations.

Potential losses to our properties may not be covered by insurance or may exceed our policy coverage limits.

        We do not carry insurance for generally uninsured losses, such as acts of war. Our properties in our portfolio are subject to risks from earthquakes, tropical storms, hurricanes and floods. While we do carry earthquake, hurricane and flood insurance on our properties, the amount of our insurance coverage may not be sufficient to fully cover such losses. In addition, we may discontinue earthquake, hurricane or flood insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage relative to the risk of loss.

        If we experience a loss which is uninsured or which exceeds our policy coverage limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties.

        In addition, even if damage to our properties is covered by insurance, a disruption of our business caused by a casualty event may result in the loss of business or customers. We carry business interruption insurance, but such insurance may not fully compensate us for the loss of business or customers due to an interruption caused by a casualty event.

        While we monitor the solvency of our insurance carriers, it can be difficult to evaluate the stability and net assets or capitalization of insurance companies, and any insurer's ability to meet its claim payment obligations. A failure of an insurance company to make payments to us upon an event of loss covered by an insurance policy could have a material adverse effect on our business and financial condition.

A small number of customers account for a significant portion of our revenues, and the loss of any of these customers could significantly harm our business, financial condition and results of operations.

        We currently depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our operating revenue. Our top ten customers accounted for an aggregate of approximately 33.1% of our total portfolio annualized rent as of December 31, 2014. Some of our customers may experience a downturn in their businesses or other factors that may

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weaken their financial condition and result in them failing to make timely rental payments, defaulting on their leases, reducing the level of interconnection services they obtain or the amount of space they lease from us or terminating their relationship with us. The loss of one or more of our significant customers or a significant customer exerting significant pricing pressure on us could also have a material adverse effect on our results of operations.

        In addition, our largest customers may choose to develop new data centers or expand existing data centers of their own. In the event that any of our key customers were to do so, it could result in a loss of business to us or increase pricing pressure on us. If we lose a customer, there is no guarantee that we would be able to replace that customer at a comparative rental rate or at all.

        Some of our largest customers may also compete with one another in various aspects of their businesses. The competitive pressures on our customers may have a negative impact on our operations. For instance, one customer could determine that it is not in that customer's interest to house mission-critical servers in a facility operated by the same company that relies on a key competitor for a significant part of its annual revenue. Our loss of a large customer for this or any other reason could have a material adverse effect on our results of operations.

We are dependent upon third-party suppliers for power and certain other services, and we are vulnerable to service failures of our third-party suppliers and to price increases by such suppliers.

        We rely on third parties to provide power to our data centers, and we cannot ensure that these third parties will deliver such power in adequate quantities or on a consistent basis. Since our properties have access to a finite amount of power, it may be inadequate to support our customer requirements and we may be unable to satisfy our obligations to our customers. As current and future customers increase their power usage in our facilities over time, the remaining available power for future customers could limit our ability to grow our business and increase occupancy rates or network density within our existing facilities. At certain of our data centers, our aggregate maximum contractual obligation to provide power and cooling to our customers may exceed the physical capacity at such data centers if customers were to quickly increase their demand for power and cooling. If we are not able to increase the available power and/or cooling or move the customer to another location within our data centers with sufficient power and cooling to meet such demand, we could lose the customer as well as be exposed to liability under our leases. Any such material loss of customers or material liability could adversely affect our results of operations.

        In addition, our data centers are susceptible to power shortages and planned or unplanned power outages caused by these shortages. While we attempt to limit exposure to power shortages by using backup generators and batteries, power outages may last beyond our backup and alternative power arrangements, which would harm our customers and our business. In the past, a limited number of our customers have experienced temporary losses of power and/or cooling. Pursuant to the terms of some of our customer leases, continuous or chronic power or cooling outages may give certain of our tenants the right to terminate their leases or cause us to incur financial obligations in connection with a power or cooling loss. In addition, any loss of services or equipment damage could reduce the confidence of our customers in our services thereby impairing our ability to attract and retain customers, which would adversely affect both our ability to generate revenues and our operating results, and harm our reputation.

        Furthermore, we may be subject to risks and unanticipated costs associated with obtaining power from various utility companies. Municipal utilities in areas experiencing financial distress may increase rates to compensate for financial shortfalls unrelated to either the cost of production or the demand for electricity. Other utilities that serve our data centers may be dependent on, and sensitive to price increases for, a particular type of fuel, such as coal, oil or natural gas. In addition, the price of these fuels and the electricity generated from them could increase as a result of proposed legislative measures related to climate change including efforts to regulate carbon emissions and increase supply from more expensive renewable energy sources. In any of these cases, increases in the cost of power at any of our data centers would put those locations at a competitive disadvantage relative to data centers served by utilities that can provide less expensive power.

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We may be unable to identify and complete acquisitions and successfully operate acquired properties.

        We continually evaluate the market for available properties and may acquire data centers or properties suited for data center development when opportunities exist. Our ability to acquire properties on favorable terms and successfully develop and operate them involves significant risks including, but not limited to:

        In the past we have acquired properties that did not perform to our expectations and there can be no assurance that this will not happen again. If we are unable to successfully acquire, develop and operate data center properties, our ability to grow our business, compete and meet market expectations will be significantly impaired, which would have a material adverse effect on the price of our common stock.

We may be subject to unknown or contingent liabilities related to properties or businesses that we acquire for which we may have limited or no recourse against the sellers.

        Assets and entities that we have acquired or may acquire in the future, including the properties contributed by the Funds or their affiliates, may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for clean-up or remediation of environmental conditions, claims of customers, vendors or other persons dealing with the acquired entities, tax liabilities and other liabilities whether incurred in the ordinary course of business or otherwise. In the future we may enter into transactions with limited representations and warranties or with representations and warranties that do not survive the closing of the transactions, in which event we would have no or limited recourse against the sellers of such properties. While we usually require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification (including the indemnification by the Funds or their affiliates) is often limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses.

        As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities associated with acquired properties and

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entities may exceed our expectations, which may adversely affect our operating results and financial condition. Finally, indemnification agreements between us and the sellers typically provide that the sellers will retain certain specified liabilities relating to the assets and entities acquired by us. While the sellers are generally contractually obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements will not require us to incur losses or other expenses as well.

        Under the contribution agreement pursuant to which the Funds or their affiliates contributed the properties that comprise our portfolio to the Operating Partnership, each of the Funds or their affiliates made certain representations and warranties as to certain material matters related to the property being contributed by such fund or affiliate such as title to any owned property, compliance with laws (including environmental laws) and the enforceability of certain material customer contracts and leases. These representations and warranties made by the Funds or their affiliates have since expired without our becoming aware of any breach. Therefore, we have no further recourse against the contributors under the contribution agreement.

Our growth depends on the successful development of our properties and any delays or unexpected costs associated with such projects may harm our growth prospects, future operating results and financial condition.

        As of December 31, 2014, we had the ability to expand our operating data center square footage by approximately 908,000 NRSF, or 62%, as set forth in our development table in Item 1. Our growth depends upon the successful completion of the development of this space and similar projects in the future. Current and future development projects and expansion into new markets will involve substantial planning, allocation of significant company resources and certain risks, including risks related to financing, zoning, regulatory approvals, construction costs and delays. These projects will also require us to carefully select and rely on the experience of one or more general contractors and associated subcontractors during the construction process. Should a general contractor or significant subcontractor experience financial or other problems during the construction process, we could experience significant delays, increased costs to complete the project and other negative impacts to our expected financial returns. Site selection in current and expansion markets is also a critical factor in our expansion plans, and there may not be suitable properties available in our markets at a location that is attractive to our customers and has the necessary combination of access to multiple network providers, a significant supply of electrical power, high ceilings and the ability to sustain heavy floor loading. Furthermore, while we may prefer to locate new data centers adjacent to or in close proximity to our existing data centers, we may be limited by the size and location of suitable properties.

        In addition, we will be subject to risks and, potentially, unanticipated costs associated with obtaining access to a sufficient amount of power from local utilities, including the need, in some cases, to develop utility substations on our properties in order to accommodate our power needs, constraints on the amount of electricity that a particular locality's power grid is capable of providing at any given time, and risks associated with the negotiation of long-term power contracts with utility providers. We cannot assure you that we will be able to successfully negotiate such contracts on acceptable terms or at all. Any inability to negotiate utility contracts on a timely basis or on acceptable financial terms or in volumes sufficient to supply the requisite power for our development properties would have a material negative impact on our growth and future results of operations and financial condition.

        These and other risks could result in delays or increased costs or prevent the completion of our development projects, any of which could have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our common stock and our ability to satisfy our debt service obligations or pay dividends.

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We do not own all of the buildings in which our data centers are located. Instead, we lease certain of our data center space and the ability to renew these leases could be a significant risk to our ongoing operations.

        We do not own the buildings for five of our data centers and our business could be harmed if we are unable to renew the leases for these data centers at favorable terms or at all. The following table summarizes the remaining primary term and renewal rights associated with each of our leased properties:

Property
  NRSF   Current Lease
Term Expiration
  Renewal Rights   Base Rent Increases at Renewal

NY1

    48,613   Apr. 2023   2 × 5 years   FMR(1)

LA1

    157,778   July 2022   3 × 5 years   103% of previous monthly base rent

DC1

    22,137   May 2016   3 × 5 years   Greater of 103% of previous monthly base rent or 95% of FMR(1)

DE1

    5,878   Oct. 2019   1 × 5 years   103% of previous monthly base rent

DE2

    5,140   Dec. 2024   N/A    

(1)
FMR represents "fair market rent" as determined by mutual agreement between landlord and tenant, or in the case of a disagreement, mutual agreement by third party appraisers.

        When the primary terms of our leases expire, we generally have the right to extend the terms of our leases as indicated above. For two of these leases, the rent will be determined based on the fair market value of rental rates for the property and the then prevailing rental rates may be higher than rental rates under the applicable lease. To maintain the operating profitability associated with our present cost structure, we must increase operating revenues within existing data centers to offset any potential increase in lease payments at the end of the original and renewal terms. Failure to increase operating revenues to sufficiently offset these projected higher lease costs would adversely impact our operating income. At the end of our renewal options, we would have to renegotiate our lease terms with the landlord.

        If we are not able to renew the lease at any of our data centers, the costs of relocating the equipment in such data centers and developing a new location into a high-quality data center could be prohibitive. In addition, we could lose customers due to the disruptions in their operations caused by the relocation. We could also lose those customers that choose our data centers based primarily on their locations.

Our level of indebtedness and debt service obligations could have adverse effects on our business.

        As of December 31, 2014, we had total indebtedness of approximately $318.5 million and the ability to borrow up to an additional $179.2 million under our revolving credit facility, subject to satisfying certain financial and covenant tests. While there are limits in our revolving credit facility and senior unsecured term loan on the amount of debt that we may incur, and additional limits on our indebtedness may be imposed by future agreements or by a policy adopted by our Board of Directors, we have the ability to increase our indebtedness over current levels. A substantial increase in our indebtedness may have adverse consequences for our business, results of operations and financial condition because it could, among other things:

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The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks.

        The agreements governing our indebtedness contain covenants that place restrictions on us and our subsidiaries. These covenants may restrict, among other things, our and our subsidiaries' ability to:

        These covenants could impair our ability to grow our business, take advantage of attractive business opportunities or successfully compete. In addition, our revolving credit facility requires us to maintain specified financial ratios and satisfy financial condition tests. Our ability to comply with these ratios or tests may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants or covenants under any other agreements governing our indebtedness could result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders could elect to declare all outstanding debt under such agreements to be immediately due and payable. If we were unable to repay or refinance the accelerated debt, the lenders could proceed against any assets pledged to secure that debt, including foreclosing on or requiring the sale of our data centers, and our assets may not be sufficient to repay such debt in full.

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Fluctuations in interest rates could materially affect our financial results

        Because a significant portion of our debt bears interest at variable rates, increases in interest rates could materially increase our interest expense. Based on our debt outstanding as of December 31, 2014, if interest rates were to increase by 1%, the corresponding increase in interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $2.2 million per year. If the United States Federal Reserve increases short-term interest rates, this would have a significant upward impact on shorter-term interest rates, including the interest rates that our variable rate debt is based upon. Potential future increases in interest rates and credit spreads may increase our interest expense and therefore negatively affect our financial condition and results of operations, and reduce our access to the debt or equity capital markets.

Because we depend on the development and growth of a balanced customer base, including key customers, failure to attract, grow and retain this base of customers could harm our business and operating results.

        Our ability to maximize operating revenues depends on our ability to develop and grow a balanced customer base, consisting of a variety of companies, including enterprises, cloud and IT service providers, digital content and multimedia providers, systems integrators and managed services providers and networks. We consider certain of these customers to be key in that they draw in other customers. The more balanced the customer base within each data center, the better we will be able to generate significant interconnection revenues, which in turn increases our overall operating revenues. Our ability to attract customers to our data centers will depend on a variety of factors, including the presence of multiple network carriers, the mix of products and services offered by us, the overall mix of customers, the presence of key customers attracting business through vertical market ecosystems, the data center's operating reliability and security and our ability to effectively market and sell our services. However, some of our customers may face competitive pressures and may ultimately not be successful or may be consolidated through merger or acquisition. If these customers do not continue to use our data centers it may be disruptive to our business. Finally, the uncertain economic climate may harm our ability to attract and retain customers if customers slow spending, or delay decision-making, on our products and services, or if customers begin to have difficulty paying us and we experience increased churn in our customer base. Any of these factors may hinder the development, growth and retention of a balanced customer base and adversely affect our business, financial condition and results of operations.

Our tax protection agreements could limit our ability to sell or otherwise dispose of certain properties.

        We have agreed with each of the Funds or their affiliates that have directly or indirectly contributed their interests in the properties in our portfolio to our Operating Partnership that if we directly or indirectly sell, convey, transfer or otherwise dispose of all or any portion of these interests in a taxable transaction, we will make an interest-free loan to the contributors in an amount equal to the contributor's tax liabilities, based on an assumed tax rate, with respect to built-in gains generated from the initial contribution. Any such loan would be repayable out of the after tax-proceeds (based on an assumed tax rate) of any distribution from the Operating Partnership to, or any sale of common Operating Partnership units (or common stock issued by us in exchange for such units) by, the recipient of such loan, and would be non-recourse to the borrower other than with respect to such proceeds. These tax protection provisions apply for a period expiring on the earliest of (i) the seventh anniversary of the completion of our IPO and (ii) the date on which these contributors (or certain transferees) dispose in certain taxable transactions of 90% of the Operating Partnership units that were issued to them in connection with the contribution of these properties.

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Increases in our property and other state and local taxes could adversely affect our ability to make distributions to our stockholders if they cannot be passed on to our customers.

        We are subject to a variety of state and local taxes, including real and personal property taxes and sales and use taxes that may increase materially due to factors outside our control. In particular, real estate taxes on our properties may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. We expect to be notified by local taxing authorities that the assessed values of certain of our properties have increased. We plan to appeal these increased assessments, but we may not be successful in our efforts. Our leases with our customers generally do not allow us to increase their rent as a result of an increase in real estate or other taxes. If real estate or other taxes increase and we cannot pass these increases on to our customers through increased rent for new leases or upon lease renewals, our result of operations, cash flow and ability to make distributions to our stockholders would be adversely affected.

The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties.

        If any tenant becomes a debtor in a case under the federal Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. In either case, our claim for unpaid rent would likely not be paid in full. As of December 31, 2014, we had no material tenants in bankruptcy. Our revenue and cash available for distribution could be materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a downturn in its business, or fail to renew its lease or renew on terms less favorable to us than its current terms.

We are exposed to potential risks from errors in our financial reporting systems and controls, including the potential for material misstatements in our consolidated financial statements.

        Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to evaluate their internal control over financial reporting. We performed our evaluation as of December 31, 2014, and concluded internal control over financial reporting is operating effectively. Although we believe our internal control over financial reporting is operating effectively, in the course of our internal audit program we have identified certain areas for ongoing improvement and we are in the process of evaluating and designing enhanced business processes and internal controls to address such areas, none of which we believe constitutes a material change. However, we cannot be certain that our efforts will be effective or sufficient for us, or our independent registered public accounting firm, to issue unqualified audit reports in the future, especially as our business continues to grow and evolve and as we acquire other businesses.

        Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement improvements to our internal reporting systems and controls in an efficient and timely manner and have in the past, and may in the future, discover deficiencies in existing systems and controls. In addition, internal reporting systems and controls are subject to human error. Any such deficiencies could result in material misstatements in our consolidated financial statements, which might involve restating previously issued financial statements. Additionally, as we expand, we will need to implement new systems to support our financial reporting business processes and controls. We may not be able to implement these systems such that errors would be identified in a timely manner, which could result in material misstatements in our consolidated financial statements.

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Illiquidity of real estate investments, particularly our data centers, could significantly impede our ability to respond to adverse changes in the performance of our properties, which could harm our financial condition.

        Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response to adverse changes in the real estate market or in the performance of such properties may be limited, thus harming our financial condition. The real estate market is affected by many factors that are beyond our control, including:

        The risks associated with the illiquidity of real estate investments are even greater for our data center properties. Our data centers are highly specialized real estate assets containing extensive electrical and mechanical systems that are uniquely designed to house and maintain our customers' equipment and, as such, have little, if any, traditional office space. As a result, most of our data centers are not suited for use by customers as anything other than as data centers and major renovations and expenditures would be required in order for us to re-lease data center space for more traditional commercial or industrial uses, or for us to sell a property to a buyer for use other than as a data center.

Environmental problems are possible and can be costly.

        Environmental liabilities could arise and have a material adverse effect on our financial condition and performance. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and remediate hazardous or toxic substances or petroleum product releases at or from the property. In addition, we could incur costs to comply with such laws and regulations, the violation of which could lead to substantial fines and penalties.

        We may have to pay governmental entities or third parties for property damage and for investigation and remediation costs that they incurred in connection with any contamination at our current and former properties without regard to whether we knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by these environmental laws may be held responsible for all of the clean-up costs incurred.

        Some of our properties contain or may contain asbestos-containing building materials. Environmental laws may impose fines and penalties on building owners or operators who fail to properly manage and maintain these materials, notify and train persons who may come into contact with asbestos and undertake special precautions, and third parties could potentially seek recovery from owners or operators for any personal injury associated with exposure to asbestos-containing building materials.

        Some of our properties may also contain or develop harmful mold or suffer from other air quality issues. As a result, the presence of significant mold or other airborne contaminants at any of our

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properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our customers, employees of our customers and others if property damage or health concerns arise.

We may incur significant costs complying with the Americans with Disabilities Act, or ADA, and similar laws, which could materially adversely affect our financial condition and operating results.

        Under the ADA, all places of public accommodation must meet federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws may also require modifications to our properties. We have not conducted an audit or investigation of all of our properties to determine our compliance with the ADA. If one of our properties is not in compliance with the ADA, we would be required to incur additional costs to bring the property into compliance. Additional federal, state and local laws may require modifications to our properties, or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA and any other similar legislation, our financial condition and results of operations could be materially adversely affected.

We may incur significant costs complying with other regulations.

        Our properties are subject to various federal, state and local regulations, such as state and local fire and life safety regulations. If one of our properties is not in compliance with these various regulations, we may be required to pay fines or private damage awards. We do not know whether existing regulations will change or whether future regulations will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flow and ability to make distributions to our stockholders.

We may be subject to securities class action and other litigation, which may harm our business and operating results.

        We may be subject to securities class action or other litigation from time to time. Companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and/or damages, and divert management's attention from other business concerns, which could seriously harm our business, results of operations, financial condition or cash flows.

        We may also be called on to defend ourselves against lawsuits relating to our business operations. Some of these claims may seek significant damage amounts due to the nature of our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such current or future proceedings. A future unfavorable outcome in a legal proceeding could have an adverse impact on our business, financial condition and results of operations. In addition, current and future litigation, regardless of its merits, could result in substantial legal fees, settlement or judgment costs and a diversion of management's attention and resources that are needed to successfully run our business.

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We may be adversely affected by regulations related to climate change.

        Climate change regulation is a rapidly developing area. New laws relating to climate change, including potential cap-and-trade systems, carbon taxes and other requirements relating to reduction of carbon footprints and/or greenhouse gas emissions all could negatively affect our business operations, results of operations and cash flow. Other countries have enacted climate change laws and regulations and the United States has been involved in discussions regarding international climate change treaties. The U.S. Environmental Protection Agency, or EPA, and some of the states and localities in which we operate, have also enacted certain climate change laws and regulations and/or have begun regulating carbon footprints and greenhouse gas emissions. Our data centers consume significant amounts of power. These laws and regulations could limit our ability to develop new facilities or result in substantial compliance costs, retrofit costs and construction costs, including capital expenditures for environmental control facilities and other new equipment. We could also face a negative impact on our reputation with the public if we violate climate change laws or regulations.


Risks Related to Our Organizational Structure

Our Board of Directors may change our major corporate, investment and financing policies without stockholder approval and those changes may adversely affect our business.

        Our Board of Directors will determine our major corporate policies, including our acquisition, investment, financing, growth, operations and level of indebtedness and distribution policies and whether to maintain our status as a REIT. Our Board of Directors may alter or eliminate our current corporate policies, including our policy on borrowing at any time without stockholder approval. Accordingly, while our stockholders have the power to elect or remove directors, our stockholders will have limited direct control over changes in our policies and those changes could adversely affect our business, financial condition, results of operations, the market price of our common and preferred stock and our ability to make distributions to our stockholders.

While the Funds and their affiliates do not control our Company, they own a majority of our Operating Partnership and have the right initially to nominate two directors, and their interests may differ from or conflict with the interests of our stockholders.

        As of December 31, 2014, the Funds or their affiliates had an aggregate beneficial common ownership interest in our Operating Partnership of approximately 54.2% which, if exchanged for our common stock, would represent approximately 53.7% of our outstanding common stock. In addition, the operating agreement for our Operating Partnership grants the Funds and their affiliates the right to initially nominate two of the seven directors to our Board of Directors. As a result, the Funds and their affiliates have the ability to exercise substantial influence over our Company, including with respect to decisions relating to our capital structure, issuing additional shares of our common stock or other equity securities, paying dividends, incurring additional debt, making acquisitions, selling properties or other assets, merging with other companies and undertaking other extraordinary transactions. In any of these matters, the interests of the Funds and their affiliates may differ from or conflict with the interests of our other stockholders. In addition, the Funds and their affiliates are in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. The Funds and their affiliates may acquire or seek to acquire assets that we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue.

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Our charter and bylaws contain provisions that may delay, defer or prevent an acquisition of our common stock or a change in control, which may not be in the best interests of our stockholders.

        Our charter and bylaws contain a number of provisions, the exercise or existence of which could delay, defer or prevent a transaction or a change in control that might involve a premium price for our stockholders or otherwise be in their best interests, including the following:

Certain provisions of Maryland law may limit the ability of a third party to acquire control of us.

        Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under

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circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

        We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by resolution of our Board of Directors and, in the case of the control share provisions of the MGCL, by a provision in our bylaws. However, our Board of Directors may elect to opt into these provisions, if approved by our stockholders by the affirmative vote of a majority of votes cast and with the consent of the Funds or their affiliates, provided that the consent of the Funds will not be required unless, in the case of the control share provisions, such provisions would apply to the Funds and their affiliates or in either case at such time they own less than 10% of our outstanding common stock (assuming all common Operating Partnership units are exchanged into common stock).

        Additionally, the MGCL permits our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which we do not yet have.

The Company's rights and the rights of its stockholders to take action against its directors and officers are limited.

        According to Maryland law, our Board of Directors have no liability in their capacities as directors if they perform their duties in good faith, in a manner they reasonably believe to be in the Company's best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. As permitted by the MGCL, the Company's charter limits the liability of its directors and officers to the Company and its stockholders for money damages, except for liability resulting from:

        Additionally, the charter authorizes the Company to obligate itself, and the bylaws require it, to indemnify the Company's directors and officers for actions taken by them in those capacities and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the maximum extent permitted by Maryland law and we have entered into indemnification agreements with the Company's officers and directors. As a result, the Company and its stockholders may have more limited rights against its directors and officers than might otherwise exist under common law. Accordingly, in

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the event that actions taken in good faith by any of the Company's directors or officers impede the performance of the Company, a stockholders' ability to recover damages from that director or officer will be limited.

Preferred stock is senior to our common stock upon liquidation and for the purpose of distributions and may cause the market price of our common stock to decline.

        In December 2012, we sold 4.6 million shares of 7.25% Series A Cumulative Redeemable Preferred Stock in an underwritten public offering. Upon liquidation, holders of our shares of preferred stock will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. As data center acquisition or development opportunities arise from time to time, we may issue additional shares of common stock or preferred stock to raise the capital necessary to finance these acquisitions or developments or may issue common stock or preferred stock or common Operating Partnership units, which are redeemable for, at our option, cash or our common stock on a one-to-one basis, to acquire such properties. Such issuances could result in dilution of stockholders' equity. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interest.

The conversion rights of preferred stock holders may be detrimental to holders of our common stock.

        The holders of our preferred stock may convert their shares into a defined number of the Company's common stock upon the occurrence of specified changes in control. The conversion of series A preferred stock for our common stock would dilute stockholder and unitholder ownership, and could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities.

Failure to qualify as a REIT would have material adverse consequences to us and the value of our stock.

        We have elected to be taxed and to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes under the Code. However, we cannot assure you that we will remain qualified as a REIT. If, in any taxable year, we lose our REIT status, we will face serious tax consequences that would substantially reduce our cash available for distribution to our stockholders for each of the years involved because:

        Our failure to qualify as a REIT could also impair our ability to expand our business and raise capital, and would materially adversely affect the value of our common stock and preferred stock.

Failure to qualify as a domestically controlled REIT could subject our non-U.S. stockholders to adverse federal income tax consequences.

        We will remain a domestically controlled REIT if, at all times during a specified testing period, less than 50% in value of our shares is held directly or indirectly by non-U.S. stockholders. However, because our shares are publicly traded, we cannot guarantee that we will maintain the qualifications to be a domestically-controlled REIT. If we fail to qualify as a domestically-controlled REIT, our non-U.S.

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stockholders that otherwise would not be subject to federal income tax on the gain attributable to a sale of our shares of common stock would be subject to taxation upon such a sale if either (1) the shares of common stock were not considered to be regularly traded under applicable Treasury Regulations on an established securities market, such as the NYSE, or (2) the selling non-U.S. stockholder owned, actually or constructively, more than 5% in value of the outstanding shares of common stock being sold during specified testing periods. If gain on the sale or exchange of our shares of common stock was subject to taxation for these reasons, the non-U.S. stockholder would be subject to regular U.S. income tax with respect to any gain on a net basis in a manner similar to the taxation of a taxable U.S. stockholder, subject to any applicable alternative minimum tax and special alternative minimum tax in the case of nonresident alien individuals, and corporate non-U.S. stockholders may be subject to an additional branch profits tax.

Our cash available for distribution to stockholders may not be sufficient to pay distributions at expected levels or at all, and we may be required to borrow funds on a short-term basis during unfavorable market conditions.

        In order to maintain our qualification as a REIT, we are required under the Code to distribute at least 90% of our net taxable income annually to our stockholders. In any period our net taxable income may be greater than our cash flow from operations, requiring us to fund such distributions from other sources, including borrowed funds, even if the market conditions are not favorable for these borrowings. In addition, we may become party to debt agreements that include cash management or similar provisions, pursuant to which revenues generated by properties subject to such indebtedness are immediately, or upon the occurrence of certain events, swept into an account for the benefit of the lenders under such debt agreements, which revenues would typically only become available to us after the funding of reserve accounts for, among other things, debt service, taxes, insurance and leasing commissions. In any event, if our properties do not generate sufficient distributable cash flow to satisfy our REIT distribution obligations, we may be required to fund distributions from working capital, borrowings under our revolving credit facility, the sale of assets or debt or equity financing, some or all of which may not be available or may not be available on favorable market conditions. As a result, any failure to generate cash greater than our REIT distribution obligation could have a material adverse effect on the price of our common stock.

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

        For taxable years beginning on or after January 1, 2013, the maximum tax rate applicable to "qualified dividends" paid to U.S. shareholders that are individuals, trusts and estates is 23.8% (taking into account the 3.8% Medicare tax applicable to net investment income). Dividends payable by REITs, however, generally are not eligible for the reduced rates and will continue to be subject to tax at rates applicable to ordinary income, which will be as high as 43.4% (taking into account the 3.8% Medicare tax applicable to net investment income). The more favorable tax rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common shares.

Legislative or other actions affecting REITs could have a negative effect on us.

        The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect CoreSite Realty Corporation's stockholders, Operating Partnership unit holders and/or us. We cannot predict how changes in the tax laws might affect our investors and/or us. New legislation, Treasury Regulations,

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administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

Applicable REIT laws may restrict certain business activities.

        As a REIT we are subject to various restrictions on our income, assets and activities. These include restrictions on our ability to pursue certain strategic acquisitions or business combinations and our ability to enter into other lines of business. Due to these restrictions, we anticipate that we will conduct certain business activities in one or more taxable REIT subsidiaries. Our taxable REIT subsidiaries are taxable as regular C corporations and are subject to federal, state, local and, if applicable, foreign taxation on their taxable income at applicable corporate income tax rates. However, we may still be limited in the business activities we can pursue.

Despite our REIT status, we remain subject to various taxes.

        Notwithstanding our status as a REIT, we will be subject to certain federal, state and local taxes on our income and property. For example, we will pay tax on certain types of income that we do not distribute and we will incur a 100% excise tax on transactions with our TRS entities that are not conducted on an arm's length basis. Moreover, our TRS entities are taxable as a regular C corporation and will pay federal, state and local income tax on their net taxable income at the applicable corporate rates.

If the structural components of our properties were not treated as real property for purposes of the REIT qualification requirements, we would fail to qualify as a REIT.

        A significant portion of the value of our properties is attributable to structural components related to the provision of electricity, heating, ventilation and air conditioning, humidification regulation, security and fire protection, and telecommunication services. We have received a private letter ruling from the Internal Revenue Service (the "IRS"), holding, among other things, that our buildings, including the structural components, constitute real property for purposes of the REIT qualification requirements. We are entitled to rely upon that private letter ruling only to the extent that we did not misstate or omit a material fact in the ruling request we submitted to the IRS and that we operate in the future in accordance with the material facts described in that request. Moreover, the IRS, in its sole discretion, may revoke the private letter ruling. If our structural components are subsequently determined not to constitute real property for purposes of the REIT qualification requirements, including as a result of our being unable to rely upon the private letter ruling or the IRS revoking that ruling, we would fail to qualify as a REIT, which could have a material adverse effect on the value of our common stock.

If interconnection services were not treated as qualifying income for purposes of the REIT qualification requirements, we may fail to qualify as a REIT.

        Interconnection services are a fundamental and growing part of our business. Based on representations we have made to the IRS that this activity is ordinary, necessary, usual, and customary in connection with the operation of our data center properties and those properties with similar character to ours, we have received a private letter ruling, holding, among other things, that amounts received from our customers for interconnection services will not be treated as other than "rents from real property" under the Code. We are entitled to rely upon that private letter ruling only to the extent that we did not misstate or omit a material fact in the ruling request we submitted to the IRS and that we operate in the future in accordance with the material facts described in that request. Moreover, the IRS, in its sole discretion, may revoke the private letter ruling. If the revenue associated with our interconnection activity was determined to be non-qualifying REIT income, including as a result of our being unable to rely upon the private letter ruling or the IRS revoking that ruling, there would be

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significant risk to our ability to qualify as a REIT, which could have a material adverse effect on the value of our common stock.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        The information set forth under the caption "Our Portfolio" in Item 1 of this Annual Report is incorporated by reference herein.

ITEM 3.    LEGAL PROCEEDINGS

        From time to time, we are party to a variety of legal proceedings arising in the ordinary course of business. We believe that, with respect to any such matters to which we currently are a party, the ultimate disposition of any such matter will not result in a material adverse effect on our business, financial condition, cash flows or results of operations.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holders

        Our common stock has been listed and is traded on the New York Stock Exchange ("NYSE") under the symbol "COR" since September 23, 2010. As of February 11, 2015, we had six holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name. The following table sets forth, for the periods indicated, the high and low sale prices in dollars on the NYSE for our common stock and the dividends we declared with respect to the periods indicated.

 
  Price Range    
 
 
  Dividends
Declared
 
 
  High   Low  

2014:

                   

Fourth Quarter

  $ 39.98   $ 32.24   $ 0.42  

Third Quarter

  $ 36.47   $ 32.03   $ 0.35  

Second Quarter

  $ 34.08   $ 29.75   $ 0.35  

First Quarter

  $ 33.74   $ 29.26   $ 0.35  

2013:

                   

Fourth Quarter

  $ 34.82   $ 27.51   $ 0.35  

Third Quarter

  $ 36.00   $ 29.92   $ 0.27  

Second Quarter

  $ 38.57   $ 28.84   $ 0.27  

First Quarter

  $ 35.38   $ 28.11   $ 0.27  

Distributions and Dividends

        In order to comply with the REIT requirements of the Code, we generally are required to make annual distributions to our shareholders of at least 90% of our net taxable income. Our common stock distribution policy is to distribute as dividends a percentage of our cash flow that ensures that we will meet the distribution requirements of the Code and that allows us to maximize the cash retained for meeting other cash needs, such as capital improvements and other investment activities.

        We have made distributions in the form of dividends in every quarter since the completion of our IPO. While we plan to continue to make quarterly distributions, no assurances can be made as to the frequency or amounts of any future distributions. The payment of common share distributions is dependent upon our financial condition, operating results and REIT distribution requirements and may be adjusted at the discretion of our Board of Directors during the year. Dividends declared in the past two fiscal years are noted in the chart above.

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Performance Graph

        The following line graph sets forth, for the period from September 23, 2010 (our first day of trading on the NYSE), through December 31, 2014, a comparison of the percentage change in the cumulative total stockholder return on our common stock compared to the cumulative total return of the S&P 500 Market Index and the MSCI US REIT Index ("RMS"). The graph assumes that $100 was invested on September 23, 2010, in shares of our common stock and each of the aforementioned indices and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of our shares will continue in line with the same or similar trends depicted in the graph below.

GRAPHIC

Pricing Date
  COR   S&P 500   MSCI US REIT  

September 23, 2010

  $ 100   $ 100   $ 100  

December 31, 2010

  $ 86   $ 112   $ 109  

December 31, 2011

  $ 116   $ 115   $ 119  

December 31, 2012

  $ 186   $ 133   $ 140  

December 31, 2013

  $ 225   $ 176   $ 143  

December 31, 2014

  $ 285   $ 200   $ 187  

Sales of Unregistered Equity Securities

        None.

Repurchases of Equity Securities

        None.

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ITEM 6.    SELECTED FINANCIAL DATA

        On September 28, 2010, we closed our IPO and completed the acquisition of our Predecessor and other data centers properties and buildings leasing office and light-industrial space under common arrangement. As such, the financial condition and results of operations for the entities acquired by our Predecessor in connection with the IPO and related formation transactions are only included in the condensed consolidated financial statements since the date of the transactions. Prior to September 28, 2010, the date of these transactions, the condensed consolidated financial statements include only the activities and capital structure of our Predecessor.

 
  The Company   Historical
Predecessor
 
 
   
   
   
   
  For the period
September 28,
2010, through
December 31,
2010
  For the period
January 1,
2010, through
September 27,
2010
 
 
  Year ended December 31,  
(in thousands except share and per share data)
  2014   2013   2012   2011  

Statement of Operations Data

                                     

Operating revenues

  $ 272,420   $ 234,833   $ 206,934   $ 172,846   $ 38,352   $ 35,557  

Operating expenses

    228,233     200,163     189,891     179,936     47,049     35,524  

Operating income (loss)

    44,187     34,670     17,043     (7,090 )   (8,697 )   33  

Gain on land disposal

    1,208                      

Interest expense

    (5,311 )   (2,689 )   (5,236 )   (5,275 )   (2,325 )   (1,590 )

Net income (loss)

    40,052     31,612     10,716     (10,779 )   (10,722 )   (1,555 )

Net income (loss) attributable to noncontrolling interests

    17,287     12,771     5,668     (6,168 )   (7,371 )    

Net income (loss) attributable to CoreSite Realty Corporation

  $ 22,765   $ 18,841   $ 5,048   $ (4,611 ) $ (3,351 ) $ (1,555 )

Preferred stock dividends

    (8,338 )   (8,338 )   (440 )            

Net income (loss) attributable to common shares

  $ 14,427   $ 10,503   $ 4,608   $ (4,611 ) $ (3,351 ) $ (1,555 )

Earnings Per Share

                                     

Net income (loss) per share attributable to common shares

                                     

Basic

  $ 0.68   $ 0.50   $ 0.22   $ (0.24 ) $ (0.17 )      

Diluted

    0.66     0.49     0.22     (0.24 )   (0.17 )      

Dividends declared per common share

    1.47     1.16     0.81     0.57     0.13        

Balance Sheet Data

                                     

Net investments in real estate

  $ 930,570   $ 892,821   $ 724,075   $ 677,553   $ 591,179        

Total assets

    1,075,425     1,016,494     845,332     808,226     833,026        

Outstanding indebtedness

    318,500     232,500     59,750     121,864     124,873        

Funds from Operations ("FFO")

                                     

Net income (loss)

  $ 40,052   $ 31,612   $ 10,716   $ (10,779 ) $ (10,722 ) $ (1,555 )

Real estate depreciation and amortization

    73,955     62,040     61,700     67,673     18,936     11,748  

Gain on land disposal

    (1,208 )                    

FFO

    112,799     93,652     72,416     56,894     8,214     10,193  

Preferred stock dividends

    (8,338 )   (8,338 )   (440 )            

FFO attributable to common shares and units

  $ 104,461   $ 85,314   $ 71,976   $ 56,894   $ 8,214   $ 10,193  

        We consider funds from operations ("FFO"), a non-GAAP measure, to be a supplemental measure of our performance which should be considered along with, but not as an alternative to, net income and cash provided by operating activities as a measure of operating performance and liquidity. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property and undepreciated land and impairment write-downs of depreciable real estate, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. FFO attributable to common shares and units represents FFO less preferred stock dividends declared during the period.

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        Our management uses FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs.

        We offer this measure because we recognize that FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes real estate related depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited. FFO is a non-GAAP measure and should not be considered a measure of liquidity, an alternative to net income, cash provided by operating activities or any other performance measure determined in accordance with GAAP, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. In addition, our calculations of FFO are not necessarily comparable to FFO as calculated by other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us. Investors in our securities should not rely on these measures as a substitute for any GAAP measure, including net income.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        You should read the following discussion and analysis of our results of operations, financial condition and liquidity in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual report, including information with respect to our plans and strategies for our business, statements regarding the industry outlook, our expectations regarding the future performance of our business and the other non-historical statements contained herein are forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements." You should also review the "Risk Factors" in Item 1A. of this annual report for a discussion of important factors that could cause actual results to differ materially from the results described herein or implied by such forward-looking statements.

Overview

        We are engaged in the business of ownership, acquisition, construction and management of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including the New York, Northern Virginia and San Francisco Bay areas, Los Angeles, Chicago, Boston, Miami and Denver.

        We deliver secure, reliable, high-performance data center solutions across eight key North American markets. We connect, protect and deliver a reliable performance environment and continued operation of mission-critical data and information technology infrastructure for more than 800 of the world's leading enterprises, network operators, cloud providers, and supporting service providers.

        Our focus is to bring together a strong network and cloud community to support the needs of enterprises, and create a highly diverse customer ecosystem. Our growth strategy includes i) increase cash flow of in-place data center space, ii) capitalize on embedded expansion opportunities, iii) selectively pursue acquisition and development opportunities in new and existing markets and iv) leverage existing customer relationships and reach new customers. We believe our strategies will enable us to maximize sustainable long-term growth in earnings and funds from operations and maximize dividend and distribution and financial returns to our stockholders and our partnership's unit holders.

Factors which May Influence our Results of Operations

        Market and economic conditions.    We are impacted by general business and economic conditions in the United States and globally. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets and broad trends in industry and finance, all of which are beyond our control. Macro-economic conditions that affect the economy and the economic outlook of the United States and the rest of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition.

        Operating revenue.    The amount of operating revenue generated by the properties in our portfolio depends on several factors, including our ability to maintain or improve the occupancy rates of currently leased space and to lease currently available space. Excluding space held for development, as of December 31, 2014, the occupancy rate of the data center properties in our portfolio, stabilized and pre-stabilized, was 82.6% of NRSF compared to 77.4% as of December 31, 2013. During the twelve months ended December 31, 2014, new and expansion leases totaling approximately 167,735 NRSF

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commenced. The following table summarizes our leasing activity during the year ended December 31, 2014:

 
  Leasing Acitivty Period   Number
of
Leases(1)
  Total
Leased
NRSF(2)
  Rental
Rates(3)
  Rent
Growth(4)
 

New/expansion leases commenced

  Year ended December 31, 2014     466     167,735   $ 137        

  Three months ended December 31, 2014     106     34,009   $ 145        

  The months ended September 30, 2014     115     45,014     135        

  Three months ended June 30, 2014     126     60,587     135        

  Three months ended March 31, 2014     119     28,125     134        

New/expansion leases signed

  Year ended December 31, 2014     466     244,477   $ 136        

  Three months ended December 31, 2014     96     91,662     121        

  The months ended September 30, 2014     118     54,123     141        

  Three months ended June 30, 2014     121     58,909     159        

  Three months ended March 31, 2014     131     39,783     129        

Renewal leases signed

  Year ended December 31, 2014     352     163,306   $ 180     8.6 %

  Three months ended December 31, 2014     78     43,863     153     5.2 %

  The months ended September 30, 2014     123     55,262     219     10.6 %

  Three months ended June 30, 2014     77     41,890     167     8.1 %

  Three months ended March 31, 2014     74     22,291     159     9.4 %

(1)
Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.

(2)
Total leased NRSF is determined based on contractually leased square feet for leases that have been signed or commenced on or before December 31, 2014. We calculate occupancy based on factors in addition to contractually leased square feet, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.

(3)
Rental rates represent annual contractual rent per NRSF adjusted for straight-line rents in accordance with GAAP.

(4)
Rent growth represents the increase in GAAP rental rates on renewed leases commencing during the period, as compared with the previous GAAP rental rates for the same space.

        Operating expenses.    Our operating expenses primarily consist of utility costs, including power, site maintenance, real estate taxes and insurance, personnel salaries and benefits, including stock based compensation, depreciation, as well as rental expenses on our properties in which we hold a leasehold interest. A substantial majority of our operating expenses is fixed in nature and should not vary significantly from period to period, unless we expand our existing data centers or acquire new data centers, which would entail additional operations, security and facility personnel, as well as utility, operating and maintenance expenses. Our buildings require significant power to support data center operations. We expect the cost of power will generally increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by our customers. In addition, the cost of power is generally higher in summer months as compared to other times of the year. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change; such increased costs could materially impact our financial condition, results of operations and cash flows.

        Substantially all of our data center NRSF is subject to the breakered-amp or sub-metered (branch circuit monitoring) power pricing models. We recover all or substantially all of our electricity costs for

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our leased data center space under either model. Under the sub-metered model, a customer pays us monthly for the power attributable to its equipment in the data center as well as for its ratable allocation of the power used to provide the cooling, lighting, security and other requirements supporting the data center, in each case, at a rate substantially equivalent to our then current utility cost. Under the breakered-amp model, a customer pays a fixed monthly fee per committed available ampere of connected power. The extent to which this fixed monthly fee correlates to the monthly amount we pay to our utility provider for electricity at each data center facility varies depending upon the amount of power each customer utilizes each month relative to the amount of committed power and related infrastructure purchased.

        Scheduled Lease Expirations.    Our ability to re-lease expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. In addition to approximately 335,000 NRSF of unoccupied space in our portfolio, data center leases representing approximately 12.7% and 12.3% of the NRSF in our stabilized operating portfolio, with annualized rental rates of $155 per NRSF and $146 per NRSF are scheduled to expire during the year ending December 31, 2015, and 2016, respectively. For the year ended December 31, 2014, rents on renewed space increased by an average of 8.6% on a GAAP basis compared to the expiring rents. Our past performance may not be indicative of future results, and we cannot assure that leases will be renewed or that our properties will be re-leased at all or at rental rate equal to or above the current average rental rates. Further, re-leased/renewed rental rates in a particular market may not be consistent with rental rates across our portfolio as a whole and may fluctuate from one period to another due to a number of factors, including local real estate conditions, local supply and demand for datacenter space, competition from other datacenter developers or operators, the condition of a particular property and whether a property, or space within a property, has been developed.

        Acquisitions, Development and Financing.    Our ability to grow rental and operating revenue depends on our ability to acquire, develop and lease data center space at favorable rental rates. As of December 31, 2014, we had approximately 908,000 NRSF of space available for future development and space currently under development, or approximately 33% of the total space in our portfolio. We may encounter development delays, excess development costs, or delays in leasing developed space to customers. We generally fund the cost of data center development from additional capital, which, for future developments, we would expect to obtain through our revolving credit facility and other unsecured and secured borrowings, construction financings and the issuance of additional equity and debt securities if needed and when market conditions permit. We will require additional capital to finance future development activities, which capital may not be available or may not be available on terms acceptable to us.

        Conditions in Significant Markets.    Our operating properties are located in Los Angeles, the San Francisco Bay and Northern Virginia areas (including Washington D.C.), Boston, Chicago, the New York area, Miami and Denver. These markets comprised 28.9%, 28.0%, 17.8%, 9.2%, 8.6%, 5.4%, 1.2%, and 0.9%, respectively, of our annualized data center rent as of December 31, 2014. Positive or negative changes in conditions including supply and demand, rental rates, utility costs, and general economic conditions in these markets could impact our overall performance.

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Results of Operations

Year Ended December 31, 2014, Compared to Year Ended December 31, 2013

        The discussion below relates to our financial condition and results of operations for the years ended December 31, 2014, and 2013. A summary of our operating results for the years ended December 31, 2014, and 2013, is as follows (in thousands).

 
  Year Ended
December 31,
   
   
 
 
  2014   2013   $ Change   % Change  

Operating revenue

  $ 272,420   $ 234,833   $ 37,587     16.0 %

Operating expense

    228,233     200,163     28,070     14.0 %

Operating income

    44,187     34,670     9,517     27.5 %

Interest expense

    5,311     2,689     2,622     97.5 %

Net income

    40,052     31,612     8,440     26.7 %

Operating Revenue

        Operating revenue during the years ended December 31, 2014, and 2013, was as follows (in thousands):

 
  Year Ended
December 31,
   
   
 
 
  2014   2013   $ Change   % Change  

Data center revenue:

                         

Rental revenue

  $ 149,294   $ 131,080   $ 18,214     13.9 %

Power revenue

    71,227     59,663     11,564     19.4 %

Interconnection revenue

    35,355     28,932     6,423     22.2 %

Tenant reimbursement and other

    8,702     7,317     1,385     18.9 %

Total data center revenue

    264,578     226,992     37,586     16.6 %

Office, light-industrial and other revenue

    7,842     7,841     1     0.0 %

Total operating revenues

  $ 272,420   $ 234,833   $ 37,587     16.0 %

        The increase in total operating revenues was due primarily to an $18.2 million increase in data center rental revenue during the year ended December 31, 2014, compared to 2013. The increase in data center rental revenue for the year ended December 31, 2014, compared to 2013, is due primarily to the commencement of 168,000 NRSF of new and expansion leases during the year ended December 31, 2014, and 196,000 NRSF of new and expansion leases during the year ended December 31, 2013, that did not result in a full year of rental revenue during the 2013 period. Commenced leases that contributed to the increase in rental revenue include a 101,721 NRSF built-to-suit lease at SV5, which commenced in November 2013, a 7,711 NRSF lease at SV4, which commenced in September 2013, a 23,663 NRSF lease at BO1, which commenced in April 2013, a 5,694 NRSF lease at CH1, which commenced in April 2014, a 12,600 NRSF lease at SV3, which commenced in May 2014, and 27,347 NRSF of multiple leases at our newly developed NY2 data center which commenced throughout the year ended December 31, 2014. These five leases and the NY2 leases increased data center rental revenue by $8.4 million during the year ended December 31, 2014, compared to the 2013 period, which represented 46% of the total increase in data center rental revenue. The increase was partially offset by expiring leases that were not renewed, which resulted in a data center rental revenue churn rate of 5.6%, or $7.7 million of annualized data center rent, during the year ended December 31, 2014.

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        Data center power revenue increased $11.6 million during the year ended December 31, 2014, compared to the 2013 period, as a result of the new and expansion leases entered into and the overall increase in occupied NRSF and data center rental revenue. In addition, interconnection revenue increased $6.4 million during the year ended December 31, 2014, compared to the 2013 period, as a result of an increase in the volume of cross connects from new and existing customers.

Operating Expenses

        Operating expenses during the years ended December 31, 2014, and 2013, were as follows (in thousands):

 
  Year Ended
December 31,
   
   
 
 
  2014   2013   $ Change   % Change  

Property operating and maintenance

  $ 75,119   $ 64,260   $ 10,859     16.9 %

Real estate taxes and insurance

    7,578     8,458     (880 )   –10.4 %

Depreciation and amortization

    80,722     65,785     14,937     22.7 %

Sales and marketing

    14,554     14,405     149     1.0 %

General and adminstrative

    27,842     27,317     525     1.9 %

Rent

    20,397     19,659     738     3.8 %

Impairment of internal-use software

    1,959         1,959      

Transaction costs

    62     279     (217 )   –77.8 %

Total operating expenses

  $ 228,233   $ 200,163   $ 28,070     14.0 %

        Property operating and maintenance expense increased $10.9 million as a result of an increase in payroll and benefits expense due to an increase in facilities and operations headcount associated with data center expansion. In addition, power expense increased due to the commencement of new and expansion leases during the year ended December 31, 2014, and the overall increase in data center occupancy from 77.4% as of December 31, 2013, to 82.6% as of December 31, 2014.

        Real estate taxes and insurance decreased $0.9 million during the year ended December 31, 2014, compared to the 2013 period, as a result of a true-up of accrued real estate tax liabilities associated with estimated amounts from 2010 due to the change in ownership of our acquired properties at IPO located in California. The final tax assessments for two properties acquired at IPO became known in the second quarter 2014 and, therefore, the estimated real estate tax accruals were reconciled to the actual tax liabilities, resulting in a $3.7 million reduction in expense. This decrease was partially offset by an increase in real estate taxes and insurance due to increases in assessed property values and taxes on newly developed data centers at NY2 and SV5. Insurance premiums increased as a result of the completion of newly developed data centers, including NY2 and SV5, and a corresponding increase in the insured values of these properties. We capitalize a portion of real estate taxes and insurance costs that are identifiable to data center projects under construction.

        Depreciation and amortization expense increased $14.9 million as a result of the placement into service of approximately 68,300 NRSF of new operating space during the year ended December 31, 2014.

        During the year ended December 31, 2014, we recognized a $2.0 million impairment charge as a result of internal-use software previously under development that was discontinued during the period and will not be placed into service.

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Interest Expense

        The $2.6 million increase in total interest expense was primarily a result of additional outstanding debt of $318.5 million as of December 31, 2014, compared to $232.5 million of outstanding debt as of December 31, 2013. A summary of interest expense for the year ended December 31, 2014, and 2013, is as follows (in thousands):

 
  Year Ended
December 31,
   
   
 
 
  2014   2013   $ Change   % Change  

Interest expense and fees

  $ 8,047   $ 5,312   $ 2,735     51.5 %

Amortization of deferred financing costs

    1,897     1,739     158     9.1 %

Capitalized interest

    (4,633 )   (4,362 )   (271 )   6.2 %

Total interest expense

    5,311     2,689     2,622     97.5 %

Percent capitalized

    46.6 %   61.9 %            

        The Company recognized a $1.2 million gain on land disposal in the consolidated statements of operations as a result of the Massachusetts Bay Transportation Authority acquiring 52,248 square feet of land at BO1 pursuant to an order of taking.

Year Ended December 31, 2013, Compared to Year Ended December 31, 2012

        The discussion below relates to our financial condition and results of operations for the year ended December 31, 2013, and 2012. A summary of our operating results for the year ended December 31, 2013, and 2012 is as follows (in thousands).

 
  Year Ended
December 31,
   
   
 
 
  2013   2012   $ Change   % Change  

Operating revenue

  $ 234,833   $ 206,934   $ 27,899     13.5 %

Operating expense

    200,163     189,891     10,272     5.4 %

Operating income

    34,670     17,043     17,627     103.4 %

Interest expense

    2,689     5,236     (2,547 )   –48.6 %

Net income

    31,612     10,716     20,896     195.0 %

Operating Revenue

        Operating revenue during the year ended December 31, 2013, and 2012, was as follows (in thousands):

 
  Year Ended
December 31,
   
   
 
 
  2013   2012   $ Change   % Change  

Data center revenue:

                         

Rental revenue

  $ 131,080   $ 116,146   $ 14,934     12.9 %

Power revenue

    59,663     53,672     5,991     11.2 %

Interconnection revenue

    28,932     21,637     7,295     33.7 %

Tenant reimbursement and other

    7,317     7,088     229     3.2 %

Total data center revenue

    226,992     198,543     28,449     14.3 %

Office, light-industrial and other revenue

    7,841     8,391     (550 )   –6.6 %

Total operating revenues

  $ 234,833   $ 206,934   $ 27,899     13.5 %

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        The operating revenue increase was primarily due to a $14.9 million increase in data center rental revenue during the year ended December 31, 2013, compared to 2012. The increase in data center rental revenue for the year ended December 31, 2013, compared to 2012, is due primarily to the commencement of 235,000 NRSF of new and expansion leases during the year ended December 31, 2013, and 78,000 NRSF of new and expansion leases during the year ended December 31, 2012, that did not result in a full year of rental revenue during the 2012 period. Commenced leases that contributed to the increase in rental revenue include a 19,103 NRSF built-to-suit lease at SV4, which commenced on January 1, 2013, and a 23,663 NRSF lease at BO1, which commenced on April 1, 2013. These two leases increased data center rental revenue by $4.9 million, which represented 33% of the total increase in data center rental revenue. The increase was partially offset by lease expirations that were not renewed, which resulted in a data center rental revenue churn rate of 7.8%, or $9.4 million of annualized data center rent, during the year ended December 31, 2013.

        Interconnection revenue increased $7.3 million due to an increase in the volume and pricing of cross connects from new and existing customers during the year ended December 31, 2013, compared to 2012. In addition, power revenue increased $6.0 million during the year ended December 31, 2013, compared to 2012, as a result of the new and expansion leases entered into and the overall increase in occupied NRSF and data center rental revenue.

Operating Expenses

        Operating expenses during the year ended December 31, 2013, and 2012, were as follows (in thousands):

 
  Year Ended
December 31,
   
   
 
 
  2013   2012   $ Change   % Change  

Property operating and maintenance

  $ 64,260   $ 61,235   $ 3,025     4.9 %

Real estate taxes and insurance

    8,458     8,765     (307 )   –3.5 %

Depreciation and amortization

    65,785     64,327     1,458     2.3 %

Sales and marketing

    14,405     10,330     4,075     39.4 %

General and adminstrative

    27,317     25,910     1,407     5.4 %

Rent

    19,659     18,711     948     5.1 %

Transaction costs

    279     613     (334 )   –54.5 %

Total operating expenses

  $ 200,163   $ 189,891   $ 10,272     5.4 %

        The overall increase in operating expenses was primarily due to additional sales and marketing expense of $4.1 million as a result of an increase in the number of sales and marketing employees. During the year ended December 31, 2013, we increased our sales and marketing team to better support our diversified customer base, as well as increase our penetration and deepen our resources in the eight markets where we operate.

        Property operating and maintenance expense increased $3.0 million as a result of an increase in payroll and benefits expense due to the increase in headcount of facilities personnel resulting from of data center expansion. In addition, power expense increased due to an overall increase in occupancy and customer power draw reflected by the commencement of new and expansion leases during the years ended December 31, 2013.

        Real estate taxes and insurance decreased as a result of a reduction of accrued real estate taxes associated with estimated amounts from 2010 associated with a change in ownership in California. The final tax amounts for certain, but not all, properties became known in the fourth quarter 2013 and, therefore, the estimated accruals were reconciled to actual expenses, resulting in a $0.3 million reduction in the expense.

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        Depreciation and amortization increased $1.5 million as a result of the placement into service of approximately 226,000 NRSF of new operating space during the year ended December 31, 2013.

        General and administrative expense increased $1.4 million primarily due to additional payroll and benefits expense as a result of an increase in corporate headcount during the year ended December 31, 2013, compared to 2012. The increases were partially offset by a litigation settlement expense of $1.8 million during the year ended December 31, 2012.

Interest Expense

        The decrease in total interest expense was primarily due to an additional $2.5 million of capitalized interest during the year ended December 31, 2013, compared to 2012, primarily due to the data center developments at NY2, SV5, VA2 and LA2 during the year ended December 31, 2013. A summary of interest expense for the year ended December 31, 2013, and 2012, is as follows (in thousands):

 
  Year Ended
December 31,
   
   
 
 
  2013   2012   $ Change   % Change  

Interest expense and fees

  $ 5,312   $ 5,392   $ (80 )   –1.5 %

Amortization of deferred financing costs

    1,739     1,681     58     3.5 %

Capitalized interest

    (4,362 )   (1,837 )   (2,525 )   137.5 %

Total interest expense

  $ 2,689   $ 5,236   $ (2,547 )   –48.6 %

Percent capitalized

    61.9 %   26.0 %            

Liquidity and Capital Resources

Discussion of Cash Flows

Year Ended December 31, 2014, Compared to Year Ended December 31, 2013

        Net cash provided by operating activities was $99.5 million for the year ended December 31, 2014, compared to $97.7 million for the year ended December 31, 2013. The increase in cash provided by operating activities of $1.8 million was due primarily to growth in data center rental, power and interconnection revenue from existing customers and completion and subsequent leasing of new data center space at several properties and an increase in unearned revenue, prepaid rent and other liabilities. The increase was partially offset by a $14.5 million increase in deferred leasing costs paid during the year ended December 31, 2014, compared to 2013.

        Net cash used in investing activities decreased to $106.2 million for the year ended December 31, 2014, compared to $214.5 million for the year ended December 31, 2013. This decrease was primarily a result of the acquisition during 2013 of NY2 for $21.9 million and cash expended on real estate improvements of $85.2 million, primarily related to our SV5 and NY2 properties.

        Net cash provided by financing activities was $12.0 million for the year ended December 31, 2014, compared to $113.9 million for the year ended December 31, 2013. The decrease of $101.9 million in cash provided by financing activities was primarily a result of $86.8 million less net cash proceeds from debt instruments during the year ended December 31, 2014, as the acquisition of NY2 and development activities during the year ended December 31, 2013, resulted in higher financing requirements during the 2013 period. The decrease was also due to an increase of $16.7 million in dividends and distributions paid on our common stock and common Operating Partnership units and dividends paid on preferred stock during the year ended December 31, 2014.

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Analysis of Liquidity and Capital Resources

        We have an effective shelf registration statement that allows us to offer for sale unspecified various classes of equity and debt securities. As circumstances warrant, we may issue debt and/or equity from time to time on an opportunistic basis, dependent upon market conditions and available pricing.

        Our short-term liquidity requirements primarily consist of funds needed for interest expense, operating costs including utilities, site maintenance costs, real estate and personal property taxes, insurance, rental expenses and selling, general and administrative expenses, certain capital expenditures, including for the development of data center space and future distributions to common and preferred stockholders and holders of our common Operating Partnership units during the next twelve months. As of December 31, 2014, we had $10.7 million of cash and equivalents. Subject to our ability to obtain capital upon favorable terms, we estimate our anticipated development activity over the next twelve months will require approximately $85.0 million to $115.0 million of capital investment to expand our operating data center portfolio.

        We expect to meet our short-term liquidity requirements through net cash provided by operations and by incurring additional indebtedness, including drawing on our revolving credit facility or other debt instruments. The Credit Agreement for our revolving credit facility contains an accordion feature, which allows our Operating Partnership to increase the total commitment from $405.0 million to $500.0 million, under specified circumstances. The total amount available for borrowings under our revolving credit facility is subject to the lesser of the facility amount or the availability calculated on our unencumbered asset pool. As of December 31, 2014, $218.5 million of borrowings were outstanding and up to $179.2 million of borrowing capacity remained available under our revolving credit facility.

        In order to increase our liquidity requirements and access to capital and meet the needs of our development plans, our Operating Partnership and certain subsidiaries entered into a $100.0 million senior unsecured term loan on January 31, 2014. The senior unsecured term loan has a five-year term and contains an accordion feature, which allows our Operating Partnership to increase the total commitments by $100.0 million, to $200.0 million, under specified circumstances.

        Our long-term liquidity requirements primarily consist of the costs to fund additional phases of our current projects under development, including the Santa Clara Campus, the One Wilshire Campus, VA2, BO1, CH1 and NY2, future development of other space in our portfolio not currently scheduled, property acquisitions, future distributions to common and preferred stockholders and holders of our common Operating Partnership units, scheduled debt maturities and other capital expenditures. We expect to meet our long-term liquidity requirements through net cash provided by operations, after payment of dividends, and by incurring long-term indebtedness, such as drawing on our revolving credit facility or exercising our senior unsecured term loan accordion feature. We also may raise capital in the future through the issuance of additional equity or debt securities, subject to prevailing market conditions, and/or through the issuance of common Operating Partnership units. However, there is no assurance that we will be able to successfully raise additional capital on acceptable terms or at all.

Inflation

        Substantially all of our leases contain annual rent increases and our leases have an average lease term of three to four years. As a result, we believe that we are largely insulated from the effects of inflation. However, any increases in the costs of development of our data center properties will generally result in increased cash requirements to develop our data center properties and increased depreciation expense in future periods, and, in some circumstances, we may not be able to directly pass along the increase in these development costs to our customers in the form of higher rents.

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Indebtedness

        A summary of outstanding indebtedness as of December 31, 2014, and 2013, is as follows (in thousands):

 
  Interest Rate   Maturity
Date
  December 31,
2014
  December 31,
2013
 

Revolving credit facility

  2.17% and 2.17% at December 31, 2014, and December 31, 2013, respectively   January 3, 2017   $ 218,500   $ 174,250  

Senior unsecured term loan

  3.23% at December 31, 2014   January 31, 2019     100,000      

SV1—Mortgage loan

  Repaid on January 31, 2014, and 3.67% at December 31, 2013   N/A         58,250  

Total principal outstanding

          $ 318,500   $ 232,500  

        As of December 31, 2014, we were in compliance with the covenants under our revolving credit facility and senior unsecured term loan. For additional information with respect to our outstanding indebtedness as of December 31, 2014, and December 31, 2013, as well as the available credit under our existing revolving credit facility, debt covenant requirements, and future debt maturities, refer to Item 8—Note 8—Debt in "Financial Statements and Supplementary Data" included in the Annual Report.

Contractual Obligations

        The following table summarizes our contractual obligations as of December 31, 2014, including the maturities and scheduled principal repayments of indebtedness (in thousands):

Obligation
  2015   2016   2017   2018   2019   Thereafter   Total  

Operating leases

  $ 19,319   $ 19,064   $ 17,534   $ 16,009   $ 16,412   $ 49,326   $ 137,664  

Revolving credit facility(1)

    4,741     4,741     218,500               $ 227,982  

Senior unsecured term loan(2)

    3,230     3,230     3,230     3,230     100,269       $ 113,189  

Construction contracts(3)

    28,973                       $ 28,973  

Other(4)

    1,991     1,643     1,394     908     434     5,491   $ 11,861  

Total

  $ 58,254   $ 28,678   $ 240,658   $ 20,147   $ 117,115   $ 54,817   $ 519,669  

(1)
Includes $218.5 million outstanding and estimated annual interest payments assuming no draws or payments on the revolving credit facility through the maturity date of January 3, 2017. The revolving credit facility is subject to variable rates and we estimated interest payments based on the interest rate as of December 31, 2014.

(2)
Includes $100.0 million outstanding and estimated annual interest payments through the maturity date of January 31, 2019. We estimated interest payments based on our $100 million interest rate swap agreement, which effectively fixes the interest rate at 3.23%.

(3)
Obligations for construction contracts for properties under construction, tenant related capital expenditures, and other capital improvements.

(4)
Obligations for power contracts and telecommunications leases.

Off-Balance Sheet Arrangements

        As of December 31, 2014, the Company did not have any off-balance sheet arrangements.

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Critical Accounting Policies

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Our actual results may differ from these estimates. We have provided a summary of our significant accounting policies in Note 2 "Summary of Significant Accounting Policies in Item 8 "Financial Statements and Supplementary Data" of in this Annual Report. We describe below those accounting policies that require material subjecti