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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2021

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

For the transition period from                      to                     .

Commission file number: 001-34877

CoreSite Realty Corporation

(Exact name of registrant as specified in its charter)

Maryland

27-1925611

(State or other jurisdiction
of incorporation or organization)

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

1001 17th Street, Suite 500
Denver, CO

80202

(Address of principal executive offices)

(Zip Code)

(866777-2673

(Registrant’s telephone number, including area code)

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

Title of Each Class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 par value per share

COR

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No .

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

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

Large Accelerated Filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

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

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

The number of shares of common stock outstanding at July 28, 2021, was 44,205,048.

Table of Contents

CORESITE REALTY CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED June 30, 2021

TABLE OF CONTENTS

six

 

    

PAGE

 

NO.

PART I. FINANCIAL INFORMATION

3

ITEM 1. Financial Statements

3

Condensed Consolidated Balance Sheets as of June 30, 2021, and December 31, 2020 (unaudited)

3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2021, and 2020 (unaudited)

4

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021, and 2020 (unaudited)

5

Condensed Consolidated Statements of Equity for the three months ended March 31, and June 30, 2021, and 2020 (unaudited)

6

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021, and 2020 (unaudited)

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

ITEM 4. Controls and Procedures

37

PART II. OTHER INFORMATION

38

ITEM 1. Legal Proceedings

38

ITEM 1A. Risk Factors

38

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

38

ITEM 3. Defaults Upon Senior Securities

38

ITEM 4. Mine Safety Disclosures

38

ITEM 5. Other Information

38

ITEM 6. Exhibits

39

Signatures

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

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

June 30,

December 31,

    

2021

    

2020

ASSETS

Investments in real estate:

Land

$

109,400

$

104,734

Buildings and improvements

2,289,445

2,273,536

2,398,845

2,378,270

Less: Accumulated depreciation and amortization

(946,668)

(867,975)

Net investment in operating properties

1,452,177

1,510,295

Construction in progress

365,430

319,411

Net investments in real estate

1,817,607

1,829,706

Operating lease right-of-use assets, net

164,282

173,928

Cash and cash equivalents

2,866

5,543

Accounts and other receivables, net of allowance for doubtful accounts of $331 and $511 as of June 30, 2021, and December 31, 2020, respectively

24,804

20,849

Lease intangibles, net of accumulated amortization of $4,808 and $3,913 as of June 30, 2021, and December 31, 2020, respectively

1,612

2,507

Goodwill

40,646

40,646

Other assets, net

105,406

103,094

Total assets

$

2,157,223

$

2,176,273

LIABILITIES AND EQUITY

Liabilities:

Debt, net of unamortized deferred financing costs of $6,495 and $7,589 as of June 30, 2021, and December 31, 2020, respectively

$

1,751,005

$

1,715,911

Operating lease liabilities

180,709

189,404

Accounts payable and accrued expenses

84,599

79,140

Accrued dividends and distributions

65,154

63,878

Acquired below-market lease contracts, net of accumulated amortization of $1,783 and $1,684 as of June 30, 2021, and December 31, 2020, respectively

2,214

2,313

Unearned revenue, prepaid rent and other liabilities

51,907

53,149

Total liabilities

2,135,588

2,103,795

Stockholders' equity:

Common Stock, par value $0.01, 100,000,000 shares authorized and 44,205,520 and 42,768,153 shares issued and outstanding at June 30, 2021, and December 31, 2020, respectively

436

422

Additional paid-in capital

566,370

555,595

Accumulated other comprehensive loss

(13,828)

(20,526)

Distributions in excess of net income

(533,451)

(471,910)

Total stockholders' equity

19,527

63,581

Noncontrolling interests

2,108

8,897

Total equity

21,635

72,478

Total liabilities and equity

$

2,157,223

$

2,176,273

See accompanying notes to condensed consolidated financial statements.

3

Table of Contents

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

Three Months Ended June 30,

Six Months Ended June 30,

    

2021

    

2020

    

2021

    

2020

Operating revenues:

Data center revenue:

Rental, power, and related revenue

$

136,793

$

127,108

$

269,769

$

251,613

Interconnection revenue

22,606

20,897

44,766

40,982

Office, light-industrial and other revenue

2,725

2,538

5,231

5,310

Total operating revenues

162,124

150,543

319,766

297,905

Operating expenses:

Property operating and maintenance

45,964

41,037

88,596

81,220

Real estate taxes and insurance

7,006

5,599

13,741

11,789

Depreciation and amortization

45,367

41,779

89,995

82,770

Sales and marketing

5,804

5,837

11,666

11,981

General and administrative

11,781

11,603

23,298

22,870

Rent

8,839

8,995

18,060

17,394

Total operating expenses

124,761

114,850

245,356

228,024

Operating income

37,363

35,693

74,410

69,881

Other income

3,098

3,098

Interest expense

(11,982)

(10,586)

(24,105)

(21,769)

Income before income taxes

28,479

25,107

53,403

48,112

Income tax expense

(4)

(19)

(13)

(36)

Net income

$

28,475

$

25,088

$

53,390

$

48,076

Net income attributable to noncontrolling interests

3,226

4,417

6,273

9,557

Net income attributable to common shares

$

25,249

$

20,671

$

47,117

$

38,519

Net income per share attributable to common shares:

Basic

$

0.59

$

0.52

$

1.11

$

1.00

Diluted

$

0.59

$

0.52

$

1.10

$

0.99

Weighted average common shares outstanding

Basic

42,785,761

39,873,260

42,582,809

38,604,576

Diluted

42,938,775

39,993,011

42,780,856

38,759,072

See accompanying notes to condensed consolidated financial statements.

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CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

 

2021

 

2020

 

2021

 

2020

 

Net income

$

28,475

$

25,088

$

53,390

$

48,076

Other comprehensive (loss) income:

Unrealized gain (loss) on derivative contracts

(768)

(4,369)

4,286

(21,397)

Reclassification of other comprehensive loss to interest expense

1,925

1,198

3,793

1,312

Comprehensive income

29,632

21,917

61,469

27,991

Comprehensive income attributable to noncontrolling interests

3,339

3,334

7,233

4,692

Comprehensive income attributable to CoreSite Realty Corporation

$

26,293

$

18,583

$

54,236

$

23,299

See accompanying notes to condensed consolidated financial statements.

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CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(unaudited and in thousands except share data)

   

   

   

Accumulated

   

   

   

   

   

   

   

Additional

   

Other

   

Distributions

   

Total

   

   

   

   

Common Shares

   

Paid-in

   

Comprehensive

   

in Excess of

   

Stockholders'

   

Noncontrolling

   

Total

   

   

Number

    

Amount

   

Capital

   

Income (Loss)

   

Net Income

   

Equity

   

Interests

   

Equity

   

Balance at January 1, 2021

42,768,153

$

422

$

555,595

$

(20,526)

$

(471,910)

$

63,581

$

8,897

$

72,478

Redemption and reallocation of noncontrolling interests

1,300

1

(447)

(12)

(458)

458

Issuance of stock awards, net of forfeitures

212,419

Exercise of stock options

2,694

41

41

41

Share-based compensation

1

4,588

4,589

4,589

Dividends and distributions

(52,852)

(52,852)

(7,276)

(60,128)

Net income

21,868

21,868

3,047

24,915

Other comprehensive income

6,075

6,075

847

6,922

Balance at March 31, 2021

42,984,566

$

424

$

559,777

$

(14,463)

$

(502,894)

$

42,844

$

5,973

$

48,817

Redemption and reallocation of noncontrolling interests

1,200,000

12

1,612

(409)

1,215

(1,215)

Issuance of stock awards, net of forfeitures

18,066

Exercise of stock options

2,888

69

69

69

Share-based compensation

4,912

4,912

4,912

Dividends and distributions

(55,806)

(55,806)

(5,989)

(61,795)

Net income

25,249

25,249

3,226

28,475

Other comprehensive income

1,044

1,044

113

1,157

Balance at June 30, 2021

44,205,520

$

436

$

566,370

$

(13,828)

$

(533,451)

$

19,527

$

2,108

$

21,635

   

   

   

Accumulated

   

   

   

   

   

   

Additional

   

Other

   

Distributions

   

Total

   

   

   

Common Shares

   

Paid-in

   

Comprehensive

   

in Excess of

   

Stockholders'

   

Noncontrolling

   

Total

   

Number

    

Amount

   

Capital

   

Income (Loss)

   

Net Income

   

Equity

   

Interests

   

Equity

Balance at January 1, 2020

37,701,042

$

373

$

512,324

$

(6,026)

$

(348,509)

$

158,162

$

55,726

$

213,888

Redemption of noncontrolling interests

2,140

11

11

(11)

Issuance of stock awards, net of forfeitures

199,541

Exercise of stock options

3,210

73

73

73

Share-based compensation

1

3,725

3,726

3,726

Dividends and distributions

(46,174)

(46,174)

(13,139)

(59,313)

Net income

17,848

17,848

5,140

22,988

Other comprehensive loss

(13,132)

(13,132)

(3,782)

(16,914)

Balance at March 31, 2020

37,905,933

$

374

$

516,133

$

(19,158)

$

(376,835)

$

120,514

$

43,934

$

164,448

Redemption of noncontrolling interests

4,620,000

46

25,105

(2,594)

22,557

(22,557)

Issuance of stock awards, net of forfeitures

(1,185)

Exercise of stock options

8,672

99

99

99

Share-based compensation

4,477

4,477

4,477

Dividends and distributions

(51,857)

(51,857)

(7,502)

(59,359)

Net income

20,671

20,671

4,417

25,088

Other comprehensive loss

(2,088)

(2,088)

(1,083)

(3,171)

Balance at June 30, 2020

42,533,420

$

420

$

545,814

$

(23,840)

$

(408,021)

$

114,373

$

17,209

$

131,582

See accompanying notes to condensed consolidated financial statements.

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CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

Six Months Ended June 30,

  

2021

  

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

53,390

$

48,076

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

Depreciation and amortization

89,995

82,770

Amortization of above/below market leases

(75)

(68)

Amortization of deferred financing costs and hedge amortization

1,947

2,072

Share-based compensation

9,073

7,654

Bad debt expense (recovery)

(95)

993

Changes in operating assets and liabilities:

Accounts receivable

(3,860)

(2,045)

Deferred rent receivable

(3,770)

(760)

Initial direct costs

(6,868)

(9,349)

Other assets

(1,483)

1,153

Accounts payable and accrued expenses

(387)

5,643

Unearned revenue, prepaid rent and other liabilities

6,425

766

Operating leases

965

599

Net cash provided by operating activities

145,257

137,504

CASH FLOWS FROM INVESTING ACTIVITIES

Tenant improvements

(4,427)

(3,351)

Real estate improvements

(56,917)

(151,331)

Net cash used in investing activities

(61,344)

(154,682)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from exercise of stock options

110

172

Proceeds from revolving credit facility

136,000

166,000

Payments on revolving credit facility

(102,000)

(129,500)

Proceeds from unsecured debt

100,000

Payments of loan fees and costs

(53)

(1,078)

Dividends and distributions

(120,647)

(118,778)

Net cash (used in) provided by financing activities

(86,590)

16,816

Net change in cash and cash equivalents

(2,677)

(362)

Cash and cash equivalents, beginning of period

5,543

3,048

Cash and cash equivalents, end of period

$

2,866

$

2,686

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for interest, net of capitalized amounts

$

22,531

$

23,586

Cash paid for operating lease liabilities

$

13,556

$

13,318

NON-CASH INVESTING AND FINANCING ACTIVITY

Construction costs payable capitalized to real estate

$

20,452

$

53,125

Accrual of dividends and distributions

$

65,154

$

62,227

NON-CASH OPERATING ACTIVITY

Lease liabilities arising from obtaining right-of-use assets

$

498

$

7,935

See accompanying notes to condensed consolidated financial statements.

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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 90.3% common interest in our Operating Partnership, and affiliates of The Carlyle Group and others owned a 9.7% interest in our Operating Partnership. See additional discussion in Note 10, Noncontrolling Interests – Operating Partnership.

2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by our management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three 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

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

Investments in Real Estate

Real estate investments are carried at cost less accumulated depreciation and amortization. The cost of real estate includes the purchase price of property and leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized. During land development and construction periods, we capitalize construction costs, legal fees, financing costs, real estate taxes and insurance, rent expense and internal costs of personnel performing development, if such costs are incremental and identifiable to a specific development project. Capitalization of costs begins upon commencement of development efforts and ceases when the project is ready for its intended use and held available for occupancy. Interest is capitalized during the period of development based upon applying the weighted-average borrowing rate to the actual development costs expended. Capitalized interest costs were $2.7 million and $3.3 million for the three months ended June 30, 2021, and 2020, respectively. Capitalized interest costs were $5.3 million and $6.7 million for the six months ended June 30, 2021, and 2020, respectively.

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

Buildings

    

27 to 40 years

Building improvements

1 to 10 years

Leasehold improvements

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

Depreciation expense was $40.9 million and $37.7 million for the three months ended June 30, 2021, and 2020, respectively. Depreciation expense was $81.7 million and $74.6 million for the six months ended June 30, 2021, and 2020, respectively.

Acquisition of Investment in Real Estate

When accounting for business combinations and asset acquisitions, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and building improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and the value of customer relationships. The primary difference between business combinations and asset acquisitions is that asset acquisitions require cost accumulation and allocation at a relative fair value. Acquisition costs are capitalized for asset acquisitions and 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. No impairment loss related to these intangible assets was recognized for the three or six months ended June 30, 2021, or 2020.

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 $40.6 million of goodwill at each date. The Company’s goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. No impairment loss was recognized for the three or six months ended June 30, 2021, or 2020.

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 $3.3 million and $3.6 million for the three months ended June 30, 2021, and 2020, respectively. Amortization of initial direct costs was $6.6 million and $6.9 million for the six months ended June 30, 2021, and 2020, respectively. Initial direct costs are included within other assets in the condensed consolidated balance sheets and consisted of the following, net of amortization, as of June 30, 2021, and December 31, 2020 (in thousands):

June 30,

December 31,

    

2021

    

2020

 

Internal sales commissions

$

16,570

$

16,453

Third party commissions

13,801

13,316

Other

305

357

Total

$

30,676

$

30,126

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, no impairment of long-lived assets was recognized in the condensed consolidated financial statements.

Derivative Instruments and Hedging Activities

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

Internal-Use Software

We recognize internal-use software development costs based on the development stage of the project and nature of the cost. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Internal and external costs incurred to develop internal-use software during the application development stage are capitalized. Internal and external training costs and maintenance costs during the post-implementation-operation stage are expensed as incurred. Completed projects are placed into service and amortized over the estimated useful life of the software. No impairment of internal-use software was recognized in the condensed consolidated financial statements for the three or six months ended June 30, 2021, and 2020.

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 $0.3 million and $0.5 million, respectively, on the condensed consolidated balance sheets.

Lessee Accounting

We determine if an arrangement is a lease at inception. Our operating lease agreements are primarily for real estate space and are included within operating lease 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 $1.9 million and $1.8 million, respectively.

Income Taxes

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

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

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

Deferred income taxes are recognized in certain taxable entities. Deferred income tax generally is a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior years that previously had been recognized as deferred income tax assets and the reversal of any previously recorded deferred income tax liabilities. A valuation allowance for deferred income tax assets is provided if we believe all or some portion of the deferred income tax asset may more likely than not be realized. Any increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in the estimated realizability of the related deferred income tax asset is included in deferred tax expense. As of June 30, 2021, and December 31, 2020, the gross deferred income taxes were not material.

We currently have no liabilities for uncertain income tax positions. As of June 30, 2021, the earliest tax year for which we are subject to examination is 2018.

Concentration of Credit Risks

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

Segment Information

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

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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3. Investment in Real Estate

The following is a summary of the properties owned or leased by market at June 30, 2021 (in thousands):

Buildings and

Construction in

Market

    

Land

    

Improvements

    

Progress

    

Total Cost

 

Boston

$

5,154

$

131,672