UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
For the transition period from to .
Commission file number:
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(State or other jurisdiction | (I.R.S. Employer | |
(Address of principal executive offices) | (Zip Code) |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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The number of shares of common stock outstanding at July 28, 2021, was
CORESITE REALTY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED June 30, 2021
TABLE OF CONTENTS
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3 | ||
Condensed Consolidated Balance Sheets as of June 30, 2021, and December 31, 2020 (unaudited) | 3 | |
4 | ||
5 | ||
6 | ||
7 | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | 8 | |
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 | |
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk | 37 | |
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38 | ||
38 | ||
38 | ||
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds | 38 | |
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39 | ||
40 | ||
Exhibit 31.1 | ||
Exhibit 31.2 | ||
Exhibit 32.1 | ||
Exhibit 32.2 | ||
EX-101 INSTANCE DOCUMENT | ||
EX-101 SCHEMA DOCUMENT | ||
EX-101 CALCULATION LINKBASE DOCUMENT | ||
EX-101 LABELS LINKBASE DOCUMENT | ||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands except share and per share data)
June 30, | December 31, | ||||||
| 2021 |
| 2020 |
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ASSETS | |||||||
Investments in real estate: | |||||||
Land | $ | | $ | | |||
Buildings and improvements | | | |||||
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Less: Accumulated depreciation and amortization | ( | ( | |||||
Net investment in operating properties | | | |||||
Construction in progress | | | |||||
Net investments in real estate | | | |||||
Operating lease right-of-use assets, net | | | |||||
Cash and cash equivalents | | | |||||
Accounts and other receivables, net of allowance for doubtful accounts of $ | | | |||||
Lease intangibles, net of accumulated amortization of $ | | | |||||
Goodwill | | | |||||
Other assets, net | | | |||||
Total assets | $ | | $ | | |||
LIABILITIES AND EQUITY | |||||||
Liabilities: | |||||||
Debt, net of unamortized deferred financing costs of $ | $ | | $ | | |||
Operating lease liabilities | | | |||||
Accounts payable and accrued expenses | | | |||||
Accrued dividends and distributions | | | |||||
Acquired below-market lease contracts, net of accumulated amortization of $ | | | |||||
Unearned revenue, prepaid rent and other liabilities | | | |||||
Total liabilities | | | |||||
Stockholders' equity: | |||||||
Common Stock, par value $ | | | |||||
Additional paid-in capital | | | |||||
Accumulated other comprehensive loss | ( | ( | |||||
Distributions in excess of net income | ( | ( | |||||
Total stockholders' equity | | | |||||
Noncontrolling interests | | | |||||
Total equity | | | |||||
Total liabilities and equity | $ | | $ | |
See accompanying notes to condensed consolidated financial statements.
3
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except share and per share data)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
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Operating revenues: | |||||||||||||
Data center revenue: | |||||||||||||
Rental, power, and related revenue | $ | | $ | | $ | | $ | | |||||
Interconnection revenue | | | | | |||||||||
Office, light-industrial and other revenue | | | | | |||||||||
Total operating revenues | | | | | |||||||||
Operating expenses: | |||||||||||||
Property operating and maintenance | | | | | |||||||||
Real estate taxes and insurance | | | | | |||||||||
Depreciation and amortization | | | | | |||||||||
Sales and marketing | | | | | |||||||||
General and administrative | | | | | |||||||||
Rent | | | | | |||||||||
Total operating expenses | | | | | |||||||||
Operating income | | | | | |||||||||
Other income | | — | | — | |||||||||
Interest expense | ( | ( | ( | ( | |||||||||
Income before income taxes | | | | | |||||||||
Income tax expense | ( | ( | ( | ( | |||||||||
Net income | $ | | $ | | $ | | $ | | |||||
Net income attributable to noncontrolling interests | | | | | |||||||||
Net income attributable to common shares | $ | | $ | | $ | | $ | | |||||
Net income per share attributable to common shares: | |||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||
Diluted | $ | | $ | | $ | | $ | | |||||
Weighted average common shares outstanding | |||||||||||||
Basic | | | | | |||||||||
Diluted | | | | |
See accompanying notes to condensed consolidated financial statements.
4
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||
Net income | $ | | $ | | $ | | $ | | |||||
Other comprehensive (loss) income: | |||||||||||||
Unrealized gain (loss) on derivative contracts | ( | ( | | ( | |||||||||
Reclassification of other comprehensive loss to interest expense | | | | | |||||||||
Comprehensive income | | | | | |||||||||
Comprehensive income attributable to noncontrolling interests | | | | | |||||||||
Comprehensive income attributable to CoreSite Realty Corporation | $ | | $ | | $ | | $ | | |||||
See accompanying notes to condensed consolidated financial statements.
5
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited and in thousands except share data)
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| Net Income |
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Balance at January 1, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||||
Redemption and reallocation of noncontrolling interests | | | ( | ( | — | ( | | — | ||||||||||||||||
Issuance of stock awards, net of forfeitures | | — | — | — | — | — | — | — | ||||||||||||||||
Exercise of stock options | | — | | — | — | | — | | ||||||||||||||||
Share-based compensation | — | | | — | — | | — | | ||||||||||||||||
Dividends and distributions | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||
Net income | — | — | — | — | | | | | ||||||||||||||||
Other comprehensive income | — | — | — | | — | | | | ||||||||||||||||
Balance at March 31, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||||
Redemption and reallocation of noncontrolling interests | | | | ( | — | | ( | — | ||||||||||||||||
Issuance of stock awards, net of forfeitures | | — | — | — | — | — | — | — | ||||||||||||||||
Exercise of stock options | | — | | — | — | | — | | ||||||||||||||||
Share-based compensation | — | — | | — | — | | — | | ||||||||||||||||
Dividends and distributions | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||
Net income | — | — | — | — | | | | | ||||||||||||||||
Other comprehensive income | — | — | — | | — | | | | ||||||||||||||||
Balance at June 30, 2021 | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | |
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| in Excess of |
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| Total | |||||||||||
| Number |
| Amount |
| Capital |
| Income (Loss) |
| Net Income |
| Equity |
| Interests |
| Equity | |||||||||
Balance at January 1, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||||
Redemption of noncontrolling interests | | — | | — | — | | ( | — | ||||||||||||||||
Issuance of stock awards, net of forfeitures | | — | — | — | — | — | — | — | ||||||||||||||||
Exercise of stock options | | — | | — | — | | — | | ||||||||||||||||
Share-based compensation | — | | | — | — | | — | | ||||||||||||||||
Dividends and distributions | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||
Net income | — | — | — | — | | | | | ||||||||||||||||
Other comprehensive loss | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||
Balance at March 31, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | | |||||||||
Redemption of noncontrolling interests | | | | ( | — | | ( | — | ||||||||||||||||
Issuance of stock awards, net of forfeitures | ( | — | — | — | — | — | — | — | ||||||||||||||||
Exercise of stock options | | — | | — | — | | — | | ||||||||||||||||
Share-based compensation | — | — | | — | — | | — | | ||||||||||||||||
Dividends and distributions | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||
Net income | — | — | — | — | | | | | ||||||||||||||||
Other comprehensive loss | — | — | — | ( | — | ( | ( | ( | ||||||||||||||||
Balance at June 30, 2020 | | $ | | $ | | $ | ( | $ | ( | $ | | $ | | $ | |
See accompanying notes to condensed consolidated financial statements.
6
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
Six Months Ended June 30, | |||||||
| 2021 |
| 2020 |
| |||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income | $ | | $ | | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | | | |||||
Amortization of above/below market leases | ( | ( | |||||
Amortization of deferred financing costs and hedge amortization | | | |||||
Share-based compensation | | | |||||
Bad debt expense (recovery) | ( | | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | ( | ( | |||||
Deferred rent receivable | ( | ( | |||||
Initial direct costs | ( | ( | |||||
Other assets | ( | | |||||
Accounts payable and accrued expenses | ( | | |||||
Unearned revenue, prepaid rent and other liabilities | | | |||||
Operating leases | | | |||||
Net cash provided by operating activities | | | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Tenant improvements | ( | ( | |||||
Real estate improvements | ( | ( | |||||
Net cash used in investing activities | ( | ( | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Proceeds from exercise of stock options | | | |||||
Proceeds from revolving credit facility | | | |||||
Payments on revolving credit facility | ( | ( | |||||
Proceeds from unsecured debt | — | | |||||
Payments of loan fees and costs | ( | ( | |||||
Dividends and distributions | ( | ( | |||||
Net cash (used in) provided by financing activities | ( | | |||||
Net change in cash and cash equivalents | ( | ( | |||||
Cash and cash equivalents, beginning of period | | | |||||
Cash and cash equivalents, end of period | $ | | $ | | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||
Cash paid for interest, net of capitalized amounts | $ | | $ | | |||
Cash paid for operating lease liabilities | $ | | $ | | |||
NON-CASH INVESTING AND FINANCING ACTIVITY | |||||||
Construction costs payable capitalized to real estate | $ | | $ | | |||
Accrual of dividends and distributions | $ | | $ | | |||
NON-CASH OPERATING ACTIVITY | |||||||
Lease liabilities arising from obtaining right-of-use assets | $ | | $ | |
See accompanying notes to condensed consolidated financial statements.
7
CORESITE REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2021
(unaudited)
1. Organization and Description of Business
CoreSite Realty Corporation (the “Company,” “we,” “us,” or “our”) was organized in the State of Maryland on February 17, 2010, and is a fully-integrated, self-administered, and self-managed real estate investment trust (“REIT”). Through our controlling interest in CoreSite, L.P. (our “Operating Partnership”), we are engaged in the business of owning, acquiring, constructing and operating data centers. As of June 30, 2021, the Company owned a
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by our management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2021, are not necessarily indicative of the expected results for the year ending December 31, 2021, or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020.
Our Operating Partnership meets the definition and criteria of a variable interest entity (“VIE”) and we are the primary beneficiary of the VIE. Our sole significant asset is the investment in our Operating Partnership, and consequently, substantially all of our assets and liabilities represent those assets and liabilities of our Operating Partnership. Our debt is an obligation of our Operating Partnership where the creditors also have recourse against the credit of the Company. Intercompany balances and transactions have been eliminated upon consolidation.
Recent Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued guidance codified in ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective for all entities as of March 12, 2020 through December 31, 2022. An entity can elect to apply the amendments either retrospectively as of any date from the beginning of any interim period that includes or is subsequent to March 12, 2020, or prospectively from any date in an interim period that includes or is subsequent to January 7, 2021 up to the date that financial statements are available to be issued. We are currently evaluating the optional expedients and exceptions provided by ASU 2020-04 to determine the impact on our condensed consolidated financial statements.
We determined that all other recently issued accounting pronouncements will either not have a material impact on our condensed consolidated financial statements or do not apply to our operations.
Use of Estimates
The preparation of these unaudited condensed consolidated financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
8
of contingencies at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates, including those related to assessing our standalone selling prices, performance-based equity compensation plans and the carrying values of our real estate properties, goodwill, and accrued liabilities. We base our estimates on historical experience, current market conditions, and various other assumptions that we believe to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could vary under different assumptions or conditions.
Investments in Real Estate
Real estate investments are carried at cost less accumulated depreciation and amortization. The cost of real estate includes the purchase price of property and leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized. During land development and construction periods, we capitalize construction costs, legal fees, financing costs, real estate taxes and insurance, rent expense and internal costs of personnel performing development, if such costs are incremental and identifiable to a specific development project. Capitalization of costs begins upon commencement of development efforts and ceases when the project is ready for its intended use and held available for occupancy. Interest is capitalized during the period of development based upon applying the weighted-average borrowing rate to the actual development costs expended. Capitalized interest costs were $
Depreciation and amortization are calculated using the straight-line method over the following useful lives of the assets:
Buildings |
| |
Building improvements | ||
Leasehold improvements | The shorter of the lease term or useful life of the asset |
Depreciation expense was $
Acquisition of Investment in Real Estate
When accounting for business combinations and asset acquisitions, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and building improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and the value of customer relationships. The primary difference between business combinations and asset acquisitions is that asset acquisitions require cost accumulation and allocation at a relative fair value. Acquisition costs are capitalized for asset acquisitions and are expensed for business combinations.
The fair value of the land and building of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” fair value is then allocated to land and building based on management's determination of the fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.
The fair value of intangibles related to in-place leases includes the value of lease intangibles for above-market and below-market leases, lease origination costs, and customer relationships, determined on a lease-by-lease basis. Above-market and below-market leases are valued based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management's estimate of market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease and, for below-market leases, over a time period equal to the initial term plus any below-market fixed rate renewal periods. Lease origination costs include estimates of costs avoided associated with leasing the property, including tenant allowances and improvements and leasing commissions. Customer relationship intangibles relate to the additional revenue opportunities expected to be generated through rental services, interconnection services, and utility services to be provided to the in-place lease tenants.
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The capitalized values for above and below-market lease intangibles, lease origination costs, and customer relationships are amortized over the term of the underlying leases or the expected customer relationship. Amortization related to above-market and below-market leases where the Company is the lessor is recorded as either a reduction of or an increase to rental revenue, amortization related to above-market and below-market leases where the Company is the lessee is recorded as either a reduction of or an increase to rent expense. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off.
The carrying value of intangible assets is reviewed for impairment in connection with its respective asset group whenever events or changes in circumstances indicate that the asset group may not be recoverable. An impairment loss is recognized if the carrying amount of the asset group is not recoverable and its carrying amount exceeds its estimated fair value.
The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. As of June 30, 2021, and December 31, 2020, we had $
Cash and Cash Equivalents
Cash and cash equivalents include all non-restricted cash held in financial institutions and other non-restricted highly liquid short-term investments with original maturities at acquisition of three months or less.
Initial Direct Costs
Initial direct costs include commissions paid to third parties, including brokers, leasing and referral agents, and internal sales commissions paid to employees for successful execution of customer lease agreements. Initial direct costs are incremental costs that would not have been incurred if the lease agreement had not been executed. These initial direct costs are capitalized and generally amortized over the term of the related leases using the straight-line method. If a customer lease terminates prior to the expiration of its initial term, any unamortized initial direct costs related to the lease are written off to amortization expense. Amortization of initial direct costs was $
June 30, | December 31, | ||||||
| 2021 |
| 2020 |
| |||
Internal sales commissions | $ | | $ | | |||
Third party commissions | | | |||||
Other | | | |||||
Total | $ | | $ | |
Deferred Financing Costs
Deferred financing costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are capitalized and amortized on a straight-line basis, which approximates the effective-interest method, over the term of the indebtedness and the amortization is included as a component of interest expense. Depending on the type of debt instrument, deferred financing costs are reported either in other assets or as a direct deduction from the carrying amount of the related debt liabilities in our condensed consolidated balance sheets.
Recoverability of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows
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(undiscounted and without interest charges) are less than the carrying amount of the assets. The estimation of expected future net cash flows is inherently uncertain and relies, to a considerable extent, on assumptions regarding current and future economics and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the long-lived assets. To the extent that impairment has occurred, the excess of the carrying amount of long-lived assets over its estimated fair value would be recognized as an impairment loss charged to net income. For the three and six months ended June 30, 2021, and 2020,
Derivative Instruments and Hedging Activities
We reflect all derivative instruments at fair value as either assets or liabilities on the condensed consolidated balance sheets. For those derivative instruments that are designated and qualify as hedging instruments, we record the gain or loss on the hedging instruments as a component of accumulated other comprehensive income or loss. For derivatives that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized within net income. See additional discussion in Note 8, Derivatives and Hedging Activities.
Internal-Use Software
We recognize internal-use software development costs based on the development stage of the project and nature of the cost. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Internal and external costs incurred to develop internal-use software during the application development stage are capitalized. Internal and external training costs and maintenance costs during the post-implementation-operation stage are expensed as incurred. Completed projects are placed into service and amortized over the estimated useful life of the software.
Revenue Recognition
Rental, Power, and Related Revenue
We derive our revenues from leases with customers for data center and office and light-industrial space. Our leases include rental revenue lease components and nonlease revenue components, such as power and tenant reimbursements. We have elected to combine all of our nonlease revenue components that have the same pattern of transfer as the related operating lease component into a single combined lease component.
Our leases with customers are classified as operating leases and rental revenue is recognized on a straight-line basis over the customer lease term. Occasionally, our customer leases include options to extend or terminate the lease agreements. We do not include any of these extension or termination options in a customer’s lease term for lease classification purposes or for recognizing rental revenue unless we are reasonably certain the customer will exercise these extension or termination options. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent receivable within other assets on our condensed consolidated balance sheets.
In general, we provide two power products for our data center leased space, consisting of a fixed (breakered-amperage) and a variable (sub-metered) model. Customer power arrangements are coterminous with the customer’s underlying lease and have the same pattern of transfer over the lease term and are therefore combined with lease revenue within our condensed consolidated statements of operations. For fixed power arrangements, a customer pays us a fixed monthly fee for a committed available amount of power. We recognize the fixed power revenue each month over the term of the lease. For variable power arrangements, a customer pays us variable monthly fees for the specific amount of power utilized at the current utility rates. We recognize variable power revenue each month as the uncertainty related to the consideration is resolved, as power is provided to our customers, and as our customers utilize the power.
Some of our leases contain provisions under which our customers reimburse us for common area maintenance and other executory costs. These customer reimbursements are variable and are recognized in the period that the expenses are recognized. These services have the same pattern of transfer over the lease term and are also combined with lease revenue within our condensed consolidated statements of operations.
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Interconnection Revenue
We also derive revenue from interconnection services, which are generally contracted on a month-to-month basis cancellable by us or the customer at any time. Interconnection services are accounted for as separate contracts and are not combined with lease and power arrangements. We recognize interconnection revenue each month as these services are delivered to, and utilized by, our customers.
Allowance for Doubtful Accounts
A provision for uncollectible accounts is recorded if the collectability of a receivable balance relating to contractual rent, rental revenue recorded on a straight-line basis, tenant reimbursements or other billed amounts is considered by management to not be probable. At June 30, 2021, and December 31, 2020, the allowance for doubtful accounts totaled $
Lessee Accounting
We determine if an arrangement is a lease at inception. Our operating lease agreements are primarily for real estate space and are included within operating lease right-of-use (“ROU”) assets and operating lease liabilities on the condensed consolidated balance sheets. We elected the practical expedient to combine our lease and related nonlease components for our lessee building leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Our variable lease payments consist of nonlease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets also include any lease payments made and exclude lease incentives. Many of our lessee agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Share-Based Compensation
We account for share-based compensation using the fair value method of accounting. The estimated fair value of the stock options granted by us is calculated based on the Black-Scholes option-pricing model. The fair value of restricted share-based and Operating Partnership unit compensation is based on the fair value of our common stock on the date of the grant. The fair value of performance share awards, which have a market condition, is based on a Monte Carlo simulation. The fair value for all share-based compensation is amortized on a straight-line basis over the vesting period. We have elected to account for forfeitures as they occur.
Asset Retirement and Environmental Remediation Obligations
We record accruals for estimated asset retirement and environmental remediation obligations. The obligations relate primarily to the removal of asbestos during development of properties as well as the estimated equipment removal costs upon termination of a certain lease where we are the lessee. At June 30, 2021, and December 31, 2020, the amount included in unearned revenue, prepaid rent and other liabilities on the condensed consolidated balance sheets was approximately $
Income Taxes
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2010. To qualify as a REIT, we are required to distribute at least
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provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates.
To maintain REIT status, we must distribute a minimum of
We have elected to treat certain subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as services for our tenants that could be considered otherwise impermissible for us to perform and holding assets that we cannot hold directly. A TRS is subject to corporate level federal and state income taxes.
Deferred income taxes are recognized in certain taxable entities. Deferred income tax generally is a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior years that previously had been recognized as deferred income tax assets and the reversal of any previously recorded deferred income tax liabilities. A valuation allowance for deferred income tax assets is provided if we believe all or some portion of the deferred income tax asset may more likely than not be realized. Any increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in the estimated realizability of the related deferred income tax asset is included in deferred tax expense. As of June 30, 2021, and December 31, 2020, the gross deferred income taxes were not material.
We currently have
Concentration of Credit Risks
Our cash and cash equivalents are maintained in various financial institutions, which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts, and management believes that the Company is not exposed to any significant credit risk in this area. We have no off-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts, or foreign currency hedging arrangements.
Segment Information
We manage our business as
Risks and Uncertainties
The full impact of the ongoing COVID-19 pandemic to our business and our customers’ ability to comply with rent obligations remains dependent on future developments, including, among other factors, the duration of the pandemic, along with related government-mandated business shutdowns, travel advisories and restrictions on movement, the effectiveness of efforts to vaccinate in the United States and globally, the recovery time of general employment levels, disrupted supply chains, potentially material staffing shortages, construction and development delays, and uncertainty with respect to accessibility of additional funding sources. As of June 30, 2021, we have not recognized a material loss, impairment, or contingency within our condensed consolidated financial statements as a result of the COVID-19 pandemic.
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