Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2013.

 

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.)

 

 

 

1050 17th Street, Suite 800
Denver, CO

(Address of principal executive offices)

 

80265

(Zip Code)

 

(866) 777-2673

(Registrant’s telephone number, including area code)

 

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

 

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 x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

The number of shares of common stock outstanding at April 23, 2013 was 21,381,336.

 

 

 



Table of Contents

 

CORESITE REALTY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2013
TABLE OF CONTENTS

 

 

 

PAGE

 

 

NO.

 

 

 

PART I. FINANCIAL INFORMATION

 

3

 

 

 

ITEM 1. Financial Statements

 

3

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2013, and December 31, 2012 (unaudited)

 

3

 

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2013, and 2012 (unaudited)

 

4

 

 

 

Condensed Consolidated Statement of Equity for the three months ended March 31, 2013 (unaudited)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013, and 2012 (unaudited)

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

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

 

17

 

 

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

24

 

 

 

ITEM 4. Controls and Procedures

 

25

 

 

 

PART II. OTHER INFORMATION

 

25

 

 

 

ITEM 1. Legal Proceedings

 

25

 

 

 

ITEM 1A. Risk Factors

 

25

 

 

 

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

 

25

 

 

 

ITEM 3. Defaults Upon Senior Securities

 

26

 

 

 

ITEM 4. Mine Safety Disclosures

 

26

 

 

 

ITEM 5. Other Information

 

26

 

 

 

ITEM 6. Exhibits

 

26

 

 

 

Signatures

 

28

 

 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 data)

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

Land

 

$

76,227

 

$

85,868

 

Building and building improvements

 

618,593

 

593,020

 

Leasehold improvements

 

89,306

 

85,907

 

 

 

784,126

 

764,795

 

Less: Accumulated depreciation and amortization

 

(115,435

)

(104,490

)

Net investment in operating properties

 

668,691

 

660,305

 

Construction in progress

 

98,957

 

61,328

 

Net investments in real estate

 

767,648

 

721,633

 

Cash and cash equivalents

 

8,487

 

8,130

 

Restricted cash

 

200

 

468

 

Accounts and other receivables, net of allowance for doubtful accounts of $570 and $625 as of March 31, 2013 and December 31, 2012, respectively

 

10,108

 

9,901

 

Lease intangibles, net of accumulated amortization of $30,899 and $33,050 as of March 31, 2013 and December 31, 2012, respectively

 

16,260

 

19,453

 

Goodwill

 

41,191

 

41,191

 

Other assets

 

47,695

 

44,556

 

Total assets

 

$

891,589

 

$

845,332

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Revolving credit facility

 

$

52,000

 

$

 

Mortgage loans payable

 

59,375

 

59,750

 

Accounts payable and accrued expenses

 

49,903

 

50,624

 

Deferred rent payable

 

5,642

 

4,329

 

Acquired below-market lease contracts, net of accumulated amortization of $6,297 and $10,062 as of March 31, 2013 and December 2012, respectively

 

7,988

 

8,539

 

Prepaid rent and other liabilities

 

12,177

 

11,317

 

Total liabilities

 

187,085

 

134,559

 

Stockholders’ equity:

 

 

 

 

 

Series A Cumulative Preferred Stock 7.25%, $115,000 liquidation preference ($25.00 per share, $0.01 par value), 4,600,000 shares issued and oustanding as of March 31, 2013 and December 31, 2012

 

115,000

 

115,000

 

Common Stock, par value $0.01, 100,000,000 shares authorized and 21,381,336 and 21,202,673 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively

 

207

 

207

 

Additional paid-in capital

 

261,249

 

259,009

 

Accumulated deficit

 

(39,911

)

(35,987

)

Total stockholders’ equity

 

336,545

 

338,229

 

Noncontrolling interests

 

367,959

 

372,544

 

Total equity

 

704,504

 

710,773

 

Total liabilities and equity

 

$

891,589

 

$

845,332

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

CORESITE REALTY CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Operating revenues:

 

 

 

 

 

Rental revenue

 

$

33,102

 

$

29,630

 

Power revenue

 

13,529

 

12,374

 

Interconnection revenue

 

6,572

 

3,655

 

Tenant reimbursement and other

 

1,888

 

1,625

 

Total operating revenues

 

55,091

 

47,284

 

Operating expenses:

 

 

 

 

 

Property operating and maintenance

 

14,527

 

14,395

 

Real estate taxes and insurance

 

2,220

 

2,014

 

Depreciation and amortization

 

15,949

 

15,461

 

Sales and marketing

 

3,789

 

2,129

 

General and administrative

 

7,003

 

6,352

 

Rent

 

4,793

 

4,577

 

Transaction costs

 

5

 

122

 

Total operating expenses

 

48,286

 

45,050

 

Operating income

 

6,805

 

2,234

 

Interest income

 

2

 

2

 

Interest expense

 

(439

)

(1,018

)

Income before income taxes

 

6,368

 

1,218

 

Income tax (expense) benefit

 

(173

)

125

 

Net income

 

6,195

 

1,343

 

Net income attributable to noncontrolling interests

 

2,262

 

743

 

Net income attributable to CoreSite Realty Corporation

 

3,933

 

600

 

Preferred stock dividends

 

(2,084

)

 

Net income attributable to common shares

 

$

1,849

 

$

600

 

Net income per share attributable to common shares:

 

 

 

 

 

Basic

 

$

0.09

 

$

0.03

 

Diluted

 

$

0.09

 

$

0.03

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

20,673,896

 

20,455,875

 

Diluted

 

21,314,779

 

20,694,855

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

CORESITE REALTY CORPORATION

 

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(unaudited and in thousands except share data)

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Total

 

 

 

 

 

 

 

Preferred

 

Common Shares

 

Paid-in

 

Accumulated

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Stock

 

Number

 

Amount

 

Capital

 

Deficit

 

Equity

 

Interests

 

Equity

 

Balance at January 1, 2013

 

115,000

 

21,202,673

 

207

 

259,009

 

(35,987

)

338,229

 

372,544

 

710,773

 

Issuance of restricted stock awards, net of forfeitures

 

 

170,305

 

 

 

 

 

 

 

Exercise of stock options

 

 

8,358

 

 

131

 

 

131

 

 

131

 

Amortization of deferred compensation

 

 

 

 

2,109

 

 

2,109

 

 

2,109

 

Dividends declared on preferred stock

 

 

 

 

 

(2,084

)

(2,084

)

 

(2,084

)

Dividends and distributions

 

 

 

 

 

(5,773

)

(5,773

)

(6,847

)

(12,620

)

Net income

 

 

 

 

 

3,933

 

3,933

 

2,262

 

6,195

 

Balance at March 31, 2013

 

$

115,000

 

21,381,336

 

$

207

 

$

261,249

 

$

(39,911

)

$

336,545

 

$

367,959

 

$

704,504

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

 

CORESITE REALTY CORPORATION

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

6,195

 

$

1,343

 

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

 

 

 

 

 

Depreciation and amortization

 

15,949

 

15,461

 

Amortization of above/below market leases

 

(232

)

(396

)

Amortization of deferred financing costs

 

420

 

436

 

Amortization of share-based compensation

 

1,895

 

747

 

Bad debt expense

 

274

 

142

 

Changes in operating assets and liabilities:

 

 

 

 

 

Restricted cash

 

268

 

427

 

Accounts receivable

 

(481

)

(983

)

Deferred rent receivable

 

(196

)

(1,568

)

Deferred leasing costs

 

(1,978

)

(1,982

)

Other assets

 

(2,295

)

(1,608

)

Accounts payable and accrued expenses

 

(3,782

)

1,969

 

Prepaid rent and other liabilities

 

860

 

(1,054

)

Deferred rent payable

 

1,313

 

250

 

Net cash provided by operating activities

 

18,210

 

13,184

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Tenant improvements

 

(1,381

)

(2,239

)

Real estate improvements

 

(31,563

)

(15,922

)

Acquisition of NY2

 

(21,889

)

 

Changes in reserves for capital improvements

 

 

152

 

Net cash used in investing activities

 

(54,833

)

(18,009

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from exercise of stock options

 

131

 

408

 

Proceeds from revolving credit facility

 

52,000

 

35,250

 

Principal payments on mortgage loans

 

(375

)

(25,082

)

Payments of loan fees and costs

 

(2,258

)

(109

)

Dividends and distributions

 

(12,518

)

(8,272

)

Net cash provided by financing activities

 

36,980

 

2,195

 

Net change in cash and cash equivalents

 

357

 

(2,630

)

Cash and cash equivalents, beginning of period

 

8,130

 

6,628

 

Cash and cash equivalents, end of period

 

$

8,487

 

$

3,998

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

Cash paid for interest

 

$

653

 

$

1,481

 

NON-CASH INVESTING AND FINANCING ACTIVITY

 

 

 

 

 

Construction costs payable capitalized to real estate

 

$

12,435

 

$

3,841

 

Accrual of dividends and distributions

 

$

15,564

 

$

8,489

 

 

See accompanying notes to condensed consolidated financial statements.

 

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CORESITE REALTY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2013

(unaudited)

 

1. Organization and Description of Business

 

CoreSite Realty Corporation, through its controlling interest in CoreSite, L.P. (the “Operating Partnership”) and the subsidiaries of the Operating Partnership (collectively, the “Company,” “we,” or “our”), is a fully-integrated, self-administered, and self-managed real estate investment trust (“REIT”). The Company was organized in the State of Maryland on February 17, 2010, completed its initial public offering of common stock (the “IPO”) on September 28, 2010, and is the sole general partner of the Operating Partnership. As of March 31, 2013, the Company owns a 45.0% common interest in the Operating Partnership.

 

We are engaged in the business of owning, acquiring, constructing and managing technology-related real estate and as of March 31, 2013, our property portfolio included 14 operating data center facilities and multiple development projects located in some of the largest and fastest growing data center markets in the United States, including Los Angeles, the San Francisco Bay and Northern Virginia, Chicago, Boston, New York City, Miami and Denver. The development projects include construction of new facilities in the San Francisco Bay, Northern Virginia, and New York.

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidation and Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by 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 United States Securities and Exchange Commission. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2013, are not necessarily indicative of the expected results for the year ending December 31, 2013. These 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, 2012. Intercompany balances and transactions have been eliminated.

 

Use of Estimates

 

The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the 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 the carrying values of our real estate properties, accrued liabilities, and performance-based equity compensation plans. 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.

 

Adjustments and Reclassifications

 

Cash used for tenant improvement investing activities, included in the accompanying condensed consolidated statement of cash flows for 2012 have been reclassified to conform to the 2013 presentation. In addition, certain other amounts included in the condensed consolidated financial statements for 2012 have been reclassified to conform to the 2013 financial statement presentation.

 

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 the 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 the land development and construction periods, we capitalize construction costs, legal fees, financing costs, real estate taxes and insurance and internal costs of personnel performing development, if such costs are incremental and identifiable to a specific development project. Capitalization begins upon commencement of development efforts and ceases when the property 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 $0.9 million and $0.7 million for the three months ended March 31, 2013, and 2012, respectively.

 

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Table of Contents

 

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 15 years

Leasehold improvements

 

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

 

Depreciation expense was $11.9 million and $9.4 million for the three months ended March 31, 2013, and 2012, respectively.

 

Acquisition of Investment in Real Estate

 

Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and 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 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” 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 fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. Lease origination costs include estimates of costs avoided associated with leasing the property, including tenant allowances and improvements and leasing commissions. Customer relationship intangibles relate to the additional revenue opportunities expected to be generated through interconnection services and utility services to be provided to the in-place lease tenants.

 

The capitalized values for above and below-market lease intangibles, lease origination costs, and customer relationships are amortized over the term of the underlying leases or the expected customer relationship. Amortization related to above-market and below-market leases where the Company is the lessor is recorded as either a reduction of or an increase to rental income, 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 and amortization for lease origination costs and customer relationships are recorded as amortization 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 was recognized for the three months ended March 31, 2013.

 

The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. As of March 31, 2013, and December 31, 2012, we had approximately $41.2 million of goodwill at each date. The Company’s goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. No impairment loss was recognized for the three months ended March 31, 2013.

 

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.

 

Deferred Costs

 

Deferred leasing costs include commissions and other direct and incremental costs incurred to obtain new customer leases, which are capitalized and amortized over the terms of the related leases using the straight-line method. If a lease terminates prior to the expiration of its initial term, any unamortized costs related to the lease are written off to amortization expense.

 

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 loan and are included as a component of interest expense.

 

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Recoverability of Long-Lived Assets

 

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the assets. The estimation of expected future net cash flows is inherently uncertain and relies, to a considerable extent, on assumptions regarding current and future economics and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the assets. To the extent that an impairment has occurred, the excess of the carrying amount of long-lived assets over its estimated fair value would be charged to income. For the three months ended March 31, 2013, and 2012, no impairment was recognized.

 

Revenue Recognition

 

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the non-cancellable term of the agreements. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rent receivable. If a lease terminates prior to its stated expiration, the deferred rent receivable relating to that lease is written off as a reduction of rental revenue.

 

When arrangements include both lease and nonlease elements, the revenue associated with separate elements are allocated based on their relative fair values. The revenue associated with each element is then recognized as earned. Interconnection, utility and power services are considered as separate earnings processes that are provided and completed on a month-to-month basis and revenue is recognized in the period that services are performed. Utility and power services are included in power revenue in the accompanying condensed consolidated statements of operations. Set-up charges and utility installation fees are initially deferred and recognized over the term of the arrangement as revenue or the expected period of performance unless management determines a separate earnings process exists related to an installation charge.

 

Tenant reimbursements for real estate taxes, common area maintenance, and other recoverable costs are recognized in the period that the expenses are incurred.

 

Above-market and below-market lease intangibles that were acquired are amortized on a straight-line basis as decreases and increases, respectively, to rental revenue over the remaining non-cancellable term of the underlying leases. For the three months ended March 31, 2013, and 2012, the net effect of amortization of acquired above-market and below-market leases resulted in an increase to rental revenue of $0.2 million and $0.4 million, respectively.

 

A provision for uncollectible accounts is recorded if a receivable balance relating to contractual rent, rent recorded on a straight-line basis, or tenant reimbursements is considered by management to be uncollectible. At March 31, 2013, and December 31, 2012, the allowance for doubtful accounts totaled $0.6 million for each period.

 

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 amortized on a straight-line basis over the vesting period. The fair value of restricted share-based and Operating Partnership unit compensation is based on the market value of our common stock on the date of the grant and is amortized on a straight-line basis over the vesting period.

 

Asset Retirement and Environmental Remediation Obligations

 

We record accruals for estimated retirement and environmental remediation obligations. The obligations relate primarily to the removal of asbestos and contaminated soil during development of the properties as well as the estimated equipment removal costs upon termination of a certain lease where the Company is the lessee. At March 31, 2013, and December 31, 2012, the amount included in other liabilities on the condensed consolidated balance sheets was approximately $2.7 million and $2.6 million, respectively.

 

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Income Taxes

 

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

 

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 financial statements for federal income taxes with regards to activities of the REIT and its subsidiary pass-through entities. Any taxable income prior to the completion of the IPO is the responsibility of the Company’s prior member. The allocable share of income is included in the income tax returns of the members. The Company is subject to the statutory requirements of the locations in which it conducts 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 two of our 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. Relative deferred tax assets and liabilities arising from temporary differences in financial reporting versus tax reporting are also established as determined by management.

 

Deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally 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 not be realized. Any increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in the estimated realizability of the related deferred income tax asset is included in deferred tax expense. As of March 31, 2013, the deferred income taxes were not material.

 

We currently have no liabilities for uncertain tax positions. The earliest tax year for which we are subject to examination is 2010. Prior to their contribution to our Operating Partnership, our subsidiaries were treated as pass-through entities for tax purposes and the earliest year for which our subsidiaries are subject to examination is 2009.

 

Concentration of Credit Risks

 

Our cash and cash equivalents are maintained in various financial institutions, which, at times, may exceed federally insured limits. The Company has 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.

 

For the three months ended March 31, 2013, and 2012, one customer accounted for 7.3% and 10.4%, respectively, of total operating revenues.

 

Segment Information

 

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

 

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3. Investment in Real Estate

 

On February 7, 2013, the Company acquired land and a vacant building, NY2, in Secaucus, NJ, with a total real estate value of $23.0 million.  NY2 is being developed into a data center facility. During the three months ended March 31, 2013, in addition to NY2, the Company commenced development on two other data center facilities, VA2 and SV5. Based on the relative fair values of each data center and the current land balances, land was allocated to each of VA2 and SV5 and was reclassified during the first quarter of 2013 to construction in progress in the condensed consolidated balance sheet. The reclassification equaled $5.2 million and $2.4 million for VA2 and SV5, respectively.

 

The following is a summary of the properties owned and leased at March 31, 2013 (in thousands):

 

Property Name

 

Location

 

Land

 

Buildings and
Improvements

 

Leasehold
Improvements

 

Construction
in Progress

 

Total Cost

 

SV1

 

San Jose, CA

 

$

6,863

 

$

102,979

 

$

 

$

10,869

 

$

120,711

 

SV2

 

Milpitas, CA

 

5,086

 

22,471

 

 

241

 

27,798

 

SV3

 

Santa Clara, CA

 

3,972

 

45,206

 

 

17

 

49,195

 

SV4

 

Santa Clara, CA

 

4,442

 

71,346

 

 

13,284

 

89,072

 

SV5

 

Santa Clara, CA

 

 

 

 

7,629

 

7,629

 

Santa Clara Campus

 

Santa Clara, CA

 

8,173

 

8,221

 

 

4,908

 

21,302

 

BO1

 

Somerville, MA

 

6,100

 

68,584

 

 

8,681

 

83,365

 

NY1

 

New York, NY

 

 

 

31,685

 

55

 

31,740

 

NY2

 

Secaucus, NJ

 

 

 

 

29,369

 

29,369

 

VA1

 

Reston, VA

 

6,903

 

102,698

 

 

4,787

 

114,388

 

VA2

 

Reston, VA

 

 

 

 

8,454

 

8,454

 

DC1

 

Washington, DC

 

 

 

6,524

 

530

 

7,054

 

CH1

 

Chicago, IL

 

5,493

 

69,397

 

 

7,451

 

82,341

 

LA1

 

Los Angeles, CA

 

 

 

50,884

 

1,829

 

52,713

 

LA2

 

Los Angeles, CA

 

28,467

 

117,909

 

 

476

 

146,852

 

MI1

 

Miami, FL

 

728

 

9,782

 

 

28

 

10,538

 

DE1

 

Denver, CO

 

 

 

204

 

94

 

298

 

DE2

 

Denver, CO

 

 

 

9

 

255

 

264

 

Total

 

 

 

$

76,227

 

$

618,593

 

$

89,306

 

$

98,957

 

$

883,083

 

 

4. Other Assets

 

Our other assets consisted of the following, net of amortization and depreciation, if applicable, as of March 31, 2013, and December 31, 2012 (in thousands):

 

 

 

2013

 

2012

 

Deferred leasing costs

 

$

15,019

 

$

14,886

 

Deferred rent receivable

 

15,213

 

15,017

 

Deferred financing costs

 

4,303

 

2,520

 

Leasehold interests in corporate headquarters

 

4,151

 

4,152

 

Other

 

9,009

 

7,981

 

Total

 

$

47,695

 

$

44,556

 

 

Deferred leasing costs are amortized as amortization expense on a straight-line basis over the remaining life of the underlying leases.  The estimated amortization of deferred leasing costs for each of the five succeeding fiscal years is as follows (in thousands):

 

Year Ending December 31, 

 

 

 

Remaining 2013

 

$

2,760

 

2014

 

3,332

 

2015

 

2,308

 

2016

 

1,702

 

2017

 

1,148

 

Thereafter

 

3,769

 

Total

 

$

15,019

 

 

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5. Debt

 

A summary of outstanding indebtedness as of March 31, 2013, and December 31, 2012 is as follows (in thousands):

 

 

 

Interest Rate

 

Maturity
Date

 

March 31,
2013

 

December 31,
2012

 

SV1 - Mortgage loan

 

3.70% and 3.71% at March 31, 2013 and December 31, 2012, respectively

 

October 9, 2014

 

$

59,375

 

$

59,750

 

Revolving credit facility

 

2.20% and 2.46% at March 31, 2013 and December 31, 2012, respectively

 

January 3, 2017

 

52,000

 

 

Total principal outstanding

 

 

 

 

 

$

111,375

 

$

59,750

 

 

Revolving Credit Facility

 

On January 3, 2013, our Operating Partnership and certain subsidiary co-borrowers entered into a second amended and restated senior unsecured revolving credit facility (the “Second Amended and Restated Credit Agreement”) with a group of lenders for which KeyBank National Association acts as administrative agent. The Second Amended and Restated Credit Agreement amended the Operating Partnership’s senior secured revolving credit facility, dated December 15, 2011 (the “Prior Facility”), and provides for the release of the properties owned by the Operating Partnership’s wholly-owned subsidiaries from the existing liens in favor of the credit facility lenders, with the facility continuing on an unsecured basis and unconditionally guaranteed on a senior unsecured basis by the Company. Our Operating Partnership acts as the parent borrower, and our subsidiaries that own or lease real estate properties, are co-borrowers under the Second Amended and Restated Credit Agreement.

 

The Second Amended and Restated Credit Agreement increased the commitment from the Prior Facility of $225.0 million to $355.0 million and extended the initial maturity date of the Prior Facility from December 15, 2014, to January 3, 2017, with a one-time extension option, which, if exercised, would extend the maturity date to January 3, 2018. The exercise of the extension option is subject to the payment of an extension fee equal to 25 basis points of the total commitment under the Second Amended and Restated Credit Agreement at initial maturity and certain other customary conditions. The Second Amended and Restated Credit Agreement contains an accordion feature, which allows our Operating Partnership to increase the total commitment by $145.0 million, to $500.0 million, under specified circumstances. As of March 31, 2013, and December 31, 2012, $52.0 and $0 million, respectively, was outstanding under the facility.

 

Under the Second Amended and Restated Credit Agreement, our Operating Partnership may elect to have borrowings bear interest at a rate per annum equal to (i) LIBOR plus 200 basis points to 275 basis points, or (ii) a base rate plus 100 basis points to 175 basis points, each depending on our Operating Partnership’s leverage ratio.

 

The total amount available for borrowings under the Second Amended and Restated Credit Agreement will be subject to the lesser of the facility amount or the availability calculated on our unencumbered asset pool. As of March 31, 2013, $294.5 million was available for us to borrow under the Second Amended and Restated Credit Agreement.

 

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

 

·                  a maximum leverage ratio (defined as consolidated total indebtedness to total gross asset value) of 60%;

·                  a maximum secured debt ratio (defined as consolidated total secured debt to total gross asset value) of 40%;

·                  a minimum fixed charge coverage ratio (defined as adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.75 to 1.0; and

·                  a maximum unhedged variable rate debt ratio (defined as unhedged variable rate indebtedness to gross asset value) of 30%.

 

As of March 31, 2013, we were in compliance with the covenants under our Second Amended and Restated Credit Agreement.

 

SV1 Mortgage Loan

 

As of March 31, 2013, SV1 had a $59.4 million mortgage loan with a maturity date of October 9, 2014. The loan bears variable interest and requires the payment of interest and principal until maturity. The mortgage requires ongoing compliance by us with various covenants including liquidity and net operating income covenants. As of March 31, 2013, we were in compliance with the covenants.

 

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Debt Maturities

 

The following table summarizes the amount of our debt maturities when such debt currently becomes due (in thousands):

 

Year Ending December 31, 

 

 

 

Remainder of 2013

 

$

1,125

 

2014

 

58,250

 

2015

 

 

2016

 

 

2017

 

52,000

 

Total

 

$

111,375

 

 

6. Noncontrolling Interests — Operating Partnership

 

Noncontrolling interests represent the limited partnership interests in the Operating Partnership held by individuals and entities other than CoreSite Realty Corporation. Since September 28, 2011, the current holders of Common Operating Partnership units have been eligible to have the Common Operating Partnership units redeemed for cash or, at our option, exchangeable into our common stock on a one-for-one basis. We have evaluated whether we control the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement of the Common Operating Partnership units. Based on the results of this analysis, we concluded that the Common Operating Partnership units met the criteria to be classified within equity at March 31, 2013.

 

The following table shows the ownership interest in the Operating Partnership as of March 31, 2013, and December 31, 2012:

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Number of Units

 

Percentage of Total

 

Number of Units

 

Percentage of Total

 

The Company

 

20,718,955

 

45.0

%

20,610,523

 

44.8

%

Noncontrolling interests consist of:

 

 

 

 

 

 

 

 

 

Common units held by third parties

 

25,275,390

 

54.8

%

25,275,390

 

55.0

%

Incentive units held by employees

 

78,319

 

0.2

%

78,319

 

0.2

%

Total

 

46,072,664

 

100.0

%

45,964,232

 

100.0

%

 

For each share of common stock issued by the Company, the Operating Partnership issues an equivalent Common Operating Partnership unit to the Company. During the three months ended March 31, 2013, the Company issued 109,234 shares of common stock related to employee compensation arrangements and, therefore, an equivalent number of Common Operating Partnership units were issued.

 

On December 12, 2012, the Operating Partnership issued 4.6 million Preferred Operating Partnership units to CoreSite Realty Corporation in connection with our issuance of Series A Cumulative Preferred Stock. The Preferred Operating Partnership units rank senior to the Common Operating Partnership units held by the Company and noncontrolling interests.

 

The redemption value of the noncontrolling interests at March 31, 2013, was $886.9 million based on the closing price of the Company’s stock of $34.98 on March 28, 2013, the last trading day of the quarter.

 

7. Stockholders’ Equity

 

On March 5, 2013, we declared a regular cash dividend for the quarter ended March 31, 2013, of $0.27 per common share payable to stockholders of record as of March 28, 2013. In addition, holders of Common Operating Partnership units also received a distribution of $0.27 per unit. The dividend and distribution were paid on April 15, 2013.

 

On March 5, 2013, we also declared a regular cash dividend for the quarter ended of March 31, 2013, of $0.62 per share of Series A Cumulative Redeemable Preferred Stock for the period December 12, 2012, to April 14, 2013. The dividend was paid on April 15, 2013, to stockholders of record as of March 28, 2013.

 

8. Equity Incentive Plan

 

In connection with our IPO, the Company’s Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan is administered by the Board of Directors, or the plan administrator. Awards issuable under the 2010 Plan include common stock, stock options, restricted stock, stock appreciation rights, dividend equivalents and other incentive awards. We have reserved a total of 3,000,000 shares of our common stock for issuance pursuant to the 2010 Plan, which may be adjusted for changes in our capitalization and certain corporate transactions. To the extent that an award expires, terminates or lapses, or an award is settled in cash without the delivery of shares of common stock to the participant, then any unexercised shares subject to the award will be available for future grant or sale under the 2010 Plan. Shares of restricted stock which are forfeited or repurchased by us pursuant to the 2010 Plan may again be optioned, granted or awarded under the 2010

 

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Plan. The payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the 2010 Plan.

 

As of March 31, 2013, 618,326 shares of our common stock remained available for issuance pursuant to the 2010 Plan.

 

Stock Options

 

Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant. The fair value of each option granted under the 2010 Plan is estimated on the date of grant using the Black-Scholes option-pricing model. For the three months ended March 31, 2013, options to purchase 208,198 shares of common stock were granted. The fair values are being expensed on a straight-line basis over the vesting periods.

 

The following table sets forth the stock option activity under the 2010 Plan for the three months ended March 31, 2013:

 

 

 

Number of
Shares Subject
to Option

 

Weighted
Average
Exercise Price

 

Options outstanding, December 31, 2012

 

1,017,195

 

$

17.25

 

Granted

 

208,198

 

32.48

 

Forfeited

 

(4,036

)

15.68

 

Exercised

 

(8,358

)

15.66

 

Options outstanding, March 31, 2013

 

1,212,999

 

$

19.88

 

 

The following table sets forth the number of shares subject to options that are unvested as of March 31, 2013, and the fair value of these options at the grant date:

 

 

 

Number of
Shares Subject
to Option

 

Weighted
Average Fair
Value at Grant

 

Unvested balance, December 31, 2012

 

730,159

 

$

5.70

 

Granted

 

208,198

 

10.00

 

Forfeited

 

(4,036

)

4.92

 

Vested

 

(106,982

)

4.97

 

Unvested balance, March 31, 2013

 

827,339

 

$

6.88

 

 

As of March 31, 2013, total unearned compensation on options was approximately $5.0 million, and the weighted-average vesting period was 2.6 years.

 

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Restricted Awards

 

During the three months ended March 31, 2013, the Company granted 174,952 shares of restricted stock. Additionally, the Company granted 240 restricted stock units, or RSUs. The principal difference between these instruments is that RSUs are not outstanding shares of the Company’s common stock and do not have any of the rights or privileges thereof, including voting rights. On the applicable vesting date, the holder of an RSU becomes entitled to one share of common stock for each RSU. Restricted awards are amortized on a straight-line basis over the vesting period. The following table sets forth the number of unvested restricted awards and the weighted average fair value of these awards at the date of grant:

 

 

 

Restricted
Awards

 

Weighted
Average Fair
Value at Grant

 

Unvested balance, December 31, 2012

 

598,695

 

$

21.37

 

Granted

 

175,192

 

32.33

 

Forfeited

 

(3,845

)

21.27

 

Vested

 

(101,456

)

18.72

 

Unvested balance, March 31, 2013

 

668,586

 

$

24.65

 

 

As of March 31, 2013, total unearned compensation on restricted awards was approximately $13.8 million, and the weighted-average vesting period was 2.7 years.

 

Common Operating Partnership Units

 

In connection with our IPO, we granted 25,883 Common Operating Partnership units, which had a grant date fair value of $15.98 per unit, or $0.4 million in total. The Common Operating Partnership units are amortized on a straight-line basis over the vesting period. As of March 31, 2013, 17,254 units have vested, 7,138 units were unvested and 1,491 were forfeited. As of March 31, 2013, total unearned compensation on Common Operating Partnership units was approximately $0.1 million, and the weighted-average vesting period was less than one year.

 

9. Earnings Per Share

 

The following is a summary of basic and diluted income per share (in thousands, except share and per share amounts):

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Net income attributable to common shares

 

$

1,849

 

$

600

 

Weighted average common shares outstanding - basic

 

20,673,896

 

20,455,875

 

Effect of potentially dilutive common shares:

 

 

 

 

 

Stock options

 

363,346

 

119,963

 

Unvested restricted awards

 

277,537

 

119,017

 

Weighted average common shares outstanding - diluted

 

21,314,779

 

20,694,855

 

Net income per share attributable to common shares

 

 

 

 

 

Basic

 

$

0.09

 

$

0.03

 

Diluted

 

$

0.09

 

$

0.03

 

 

In the calculations above, we have excluded weighted average potentially dilutive securities of 133,166 and 23,806 for the three months ended March 31, 2013, and 2012, respectively, as their effect would have been antidilutive.

 

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10. Estimated Fair Value of Financial Instruments

 

Authoritative guidance issued by FASB establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy under the authoritative guidance are as follows:

 

Level 1 — Inputs are quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and market-corroborated inputs which are derived principally from or corroborated by observable market data.

 

Level 3 — Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

 

Our financial instruments consist of cash and cash equivalents, restricted cash, accounts and other receivables, revolving credit facility, mortgage loans payable, interest payable and accounts payable. The carrying values of cash and cash equivalents, restricted cash, accounts and other receivables, interest payable and accounts payable approximate fair values due to the short-term nature of these accounts.

 

The balance of our mortgage loan payable and revolving credit facility was $111.4 million and $59.8 million as of March 31, 2013, and December 31, 2012, respectively, with a fair value that approximated book value at both periods, based on Level 3 inputs from the fair value hierarchy. Under the discounted cash flow method, the fair values of mortgage notes payable and the revolving credit facility are based on the Company’s assumptions of interest rates and terms available incorporating the Company’s credit risk.

 

11. Related Party Transactions

 

We lease 1,515 net rentable square feet of space at VA1 to an affiliate of The Carlyle Group. The lease commenced on July 1, 2008, and expires on June 30, 2013. Rental revenue was less than $0.1 million for both the three months ended March 31, 2013, and 2012.

 

12. Commitments and Contingencies

 

As of March 31, 2013, the Company leases data center space under noncancelable operating lease agreements at NY1, LA1, DC1, DE1, and DE2, and the Company leases its headquarters located in Denver, Colorado, under a noncancelable operating lease agreement. The lease agreements provide for base rental rate increases at defined intervals during the term of the lease. In addition, the Company has negotiated rent abatement periods to better match the phased build-out of the data center space. The Company accounts for such abatements and increasing base rentals using the straight-line method over the noncancelable term of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent payable.

 

Additionally, the Company has commitments related to telecommunications capacity used to connect data centers located within the same market or geographical area and power usage. The following table summarizes our contractual obligations as of March 31, 2013 (in thousands):

 

Obligation

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Operating leases

 

$

13,634

 

$

18,336

 

$

18,014

 

$

17,752

 

$

16,288

 

$

72,518

 

$

156,542

 

Credit Facility(1)

 

858

 

1,144

 

1,144

 

1,144

 

52,000

 

 

56,290

 

Mortgages payable (2)

 

2,755

 

59,846

 

 

 

 

 

62,601

 

Construction Contracts (3)

 

50,758

 

 

 

 

 

 

50,758

 

Other (4)

 

967

 

1,178

 

1,039

 

532

 

142

 

745

 

4,603

 

Total

 

$

68,972

 

$

80,504

 

$

20,197

 

$

19,428

 

$

68,430

 

$

73,263

 

$

330,794

 

 


(1) Includes $52.0 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 payments based on the interest rate as of March 31, 2013.

(2) Includes $59.4 million of mortgage principal payments and annual interest payments until debt maturity of $1.6 million in 2013 and $1.6 million in 2014. The mortgage payable is subject to variable rates and we estimated payments based on the interest rate as of March 31, 2013.

(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.

 

Rent expense on operating leases for the three months ended March 31, 2013, and 2012 was $4.8 million and $4.6 million, respectively.

 

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 us.

 

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ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this “Quarterly Report”), together with other statements and information publicly disseminated by our company, contains certain forward-looking statements within the meaning of 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 Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.

 

In particular, statements pertaining to our capital resources, portfolio performance, financial condition and results of operations contain certain 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 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.

 

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Quarterly Report. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the United States Securities and Exchange Commission, or SEC, pursuant to the Exchange Act. We discussed a number of material risks in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012. Those risks continue to be relevant to our performance and financial condition. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

 

Overview

 

Unless the context requires otherwise, references in this Quarterly Report to “we,” “our,” “us” and “our company” refer to CoreSite Realty Corporation, a Maryland corporation, together with its consolidated subsidiaries, including CoreSite, L.P., a Delaware limited partnership of which CoreSite Realty Corporation is the sole general partner and which we refer to in this Quarterly Report as our “Operating Partnership” and CoreSite Services, Inc., a Delaware corporation, our taxable REIT subsidiary, or “TRS”.

 

We provide data center solutions to more than 750 of the world’s leading carriers and mobile operators, content and cloud providers, media and entertainment companies and global enterprises. Across 14 high-performance data center campuses in nine North America markets, we connect customers to help them grow their businesses, run performance-sensitive applications and secure their crucial data devices.

 

We formed CoreSite Realty Corporation as a Maryland corporation on February 17, 2010. We completed our IPO of common stock on September 28, 2010, and through our controlling interest in 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 Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago, Boston, New York City, Miami and Denver. Our high-quality data centers feature ample and redundant power, advanced cooling and security systems and many are points of dense network interconnection. We have 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.

 

Our Portfolio

 

As of March 31, 2013, our property portfolio included 14 operating data center facilities and multiple development projects which collectively comprise over 2.7 million net rentable square feet of space (“NRSF”), of which approximately 1.3 million NRSF is existing data center space, including pre-stabilized space. The development projects include construction of new facilities in the San Francisco Bay, Northern Virginia,

 

17



Table of Contents

 

and New York.  The operating portfolio includes approximately 324,000 NRSF of space readily available for lease, of which 245,000 NRSF is available for lease as data center space. Including the space currently under construction or in preconstruction at March 31, 2013, vacant space and land targeted for future development, we own land and buildings sufficient to develop approximately 1.2 million square feet of data center space. 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 significantly increase our cash flows. We intend to pursue development projects and expansion into new markets when we believe those opportunities support the additional supply in those markets. The following table provides an overview of our properties as of March 31, 2013:

 

 

 

 

 

Stabilized Operating NRSF (1)

 

 

 

 

 

 

 

 

 

 

 

Data Center(2)

 

Office and Light-
Industrial(3)

 

Total

 

Pre-
Stabilized(7)

 

Development(8)

 

 

 

Market/Facilities

 

Annualized
Rent ($000)(4)

 

Total

 

Percent
Occupied(5)

 

Total

 

Percent
Occupied(5)

 

Total(6)

 

Percent
Occupied(5)

 

Total

 

Total

 

Total
Portfolio

 

Los Angeles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One Wilshire Campus

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LA1*

 

$

24,233

 

150,278

 

76.4

%

7,500

 

45.5

%

157,778

 

74.9

%

 

7,309

 

165,087

 

LA2

 

12,944

 

159,617

 

81.2

 

6,055

 

72.7

 

165,672

 

80.9

 

31,585

 

236,902

 

434,159

 

Los Angeles Total

 

37,177

 

309,895

 

78.9

 

13,555

 

57.7

 

323,450

 

78.0

 

31,585

 

244,211

 

599,246

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco Bay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SV1

 

11,328

 

84,045

 

87.9

 

206,255

 

80.2

 

290,300

 

82.4

 

 

 

290,300

 

SV2

 

6,092

 

76,676

 

65.5

 

 

 

76,676

 

65.5

 

 

 

76,676

 

Santa Clara Campus

 

18,978

 

119,067

 

84.6

 

71,196

 

91.7

 

190,263

 

87.3

 

16,640

 

289,347

 

496,250

 

San Francisco Bay Total

 

36,398

 

279,788

 

79.5

 

277,451

 

83.2

 

557,239

 

81.8

 

16,640

 

289,347

 

863,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern Virginia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VA1

 

21,761

 

201,719

 

74.4

 

61,050

 

74.9

 

262,769

 

74.5

 

 

 

262,769

 

VA2

 

 

 

 

 

 

 

 

 

198,000

 

198,000

 

DC1*

 

2,315

 

22,137

 

80.8

 

 

 

22,137

 

80.8

 

 

 

22,137

 

Northern Virginia Total

 

24,076

 

223,856

 

75.1

 

61,050

 

74.9

 

284,906

 

75.0

 

 

198,000

 

482,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boston

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BO1

 

10,030

 

148,795

 

91.6

 

13,063

 

31.7

 

161,858

 

86.8

 

 

111,313

 

273,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chicago

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CH1

 

10,513

 

158,167

 

82.5

 

4,946

 

56.9

 

163,113

 

81.7

 

 

20,240

 

183,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NY1*

 

5,195

 

48,404

 

71.9

 

 

 

48,404

 

71.9

 

 

 

48,404

 

NY2

 

 

 

 

 

 

 

 

 

283,000

 

283,000

 

New York Total

 

5,195

 

48,404

 

71.9

 

 

 

48,404

 

71.9

 

 

283,000

 

331,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miami

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MI1

 

1,689

 

30,176

 

56.7

 

1,934

 

100.0

 

32,110

 

59.3

 

 

13,154

 

45,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denver

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DE1*

 

770

 

4,144

 

92.3

 

 

 

4,144

 

92.3

 

 

 

4,144

 

DE2*

 

165

 

5,140

 

70.6

 

 

 

5,140

 

70.6

 

 

 

5,140

 

Denver Total

 

935

 

9,284

 

80.3

 

 

 

9,284

 

80.3

 

 

 

9,284

 

Total Facilities

 

$

126,013

 

1,208,365

 

79.7

%

371,999

 

78.8

%

1,580,364

 

79.5

%

48,225

 

1,159,265

 

2,787,854

 

 


* Indicates properties in which we hold a leasehold interest.

 

(1)

 

Represents the square feet at each building under lease as specified in existing customer lease agreements plus management’s estimate of space available for lease to customers based on engineers’ drawings and other factors, including required data center support space (such as mechanical, telecommunications and utility rooms) and building common areas. Total NRSF at a given facility includes the total operating NRSF, pre-stabilized NRSF and total development NRSF, but excludes our office space at a facility and our corporate headquarters.

 

 

 

(2)

 

Represents the NRSF at each operating facility that is currently occupied or readily available for lease as 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.

 

 

 

(3)

 

Represents the NRSF at each operating facility 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.

 

 

 

(4)

 

Represents the monthly contractual rent under existing commenced customer leases as of March 31, 2013, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and it excludes power revenue, interconnection revenue and operating expense reimbursement.

 

 

 

(5)

 

Includes customer leases that have commenced and are occupied as of March 31, 2013. The percent occupied is determined based on leased square feet as a proportion of total operating NRSF. The percent occupied for data center space, office and light industrial space, and space in total would have been 81.6%, 79.4%, and 81.1%, respectively, if all leases signed in current and prior periods had commenced.

 

 

 

(6)

 

Represents the NRSF at an operating facility currently occupied or readily available for lease. This excludes existing vacant space held for development and pre-stabilized NRSF.

 

 

 

(7)

 

Represents pre-stabilized NRSF of projects/facilities which have been recently developed and are in the initial lease-up phase. Effective January 1, 2013, new pre-stabilized projects/facilities are excluded from stabilized operating NRSF. Pre-stabilized projects/facilities become stabilized operating properties at the earlier of achievement of 85% occupancy or 24 months after development completion.

 

 

 

(8)

 

Represents vacant space and entitled land in our portfolio that requires significant capital investment in order to develop into data center facilities as of March 31, 2013. Includes NRSF under construction for which substantial activities are ongoing to prepare the property for its intended use following development.

 

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Table of Contents

 

Our property portfolio has experienced consistent growth since our IPO. The following table shows the March 31, 2013, operating statistics for space that was leased and available to be leased as of December 31, 2011, at each of our properties, and excludes space for which development was completed and became available to be leased after December 31, 2011. For comparison purposes, the operating activity totals as of December 31, 2012, and 2011, 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)

 

Total

 

Percent
Occupied

 

Total

 

Percent
Occupied

 

Total

 

Percent
Occupied

 

Los Angeles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LA1*

 

$

24,233

 

150,278

 

76.4

%

7,500

 

45.5

%

157,778

 

74.9

%

LA2

 

12,815

 

156,366

 

80.8

 

5,147

 

85.5

 

161,513

 

80.9

 

Los Angeles Total

 

37,048

 

306,644

 

78.6

 

12,647

 

61.8

 

319,291

 

78.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco Bay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SV1

 

11,328

 

84,045

 

87.9

 

206,255

 

80.2

 

290,300

 

82.4

 

SV2

 

6,092

 

76,676

 

65.5

 

 

 

76,676

 

65.5

 

Santa Clara Campus

 

12,695

 

68,116

 

91.8

 

70,760

 

91.6

 

138,876

 

91.7

 

San Francisco Bay Total

 

30,115

 

228,837

 

81.6

 

277,015

 

83.1

 

505,852

 

82.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern Virginia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VA1

 

19,530

 

137,670

 

97.8

 

61,050

 

74.9

 

198,720

 

90.8

 

DC1*

 

2,315

 

22,137

 

80.8

 

 

 

22,137

 

80.8

 

Northern Virginia Total

 

21,845

 

159,807

 

95.4

 

61,050

 

74.9

 

220,857

 

89.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boston

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BO1

 

10,030

 

148,795

 

91.6

 

13,063

 

31.7

 

161,858

 

86.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chicago

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CH1

 

10,266

 

128,906

 

96.7

 

4,946

 

56.9

 

133,852

 

95.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NY1*

 

5,195

 

48,404

 

71.9

 

 

 

48,404

 

71.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miami

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MI1

 

1,689

 

30,176

 

56.7

 

1,934

 

100.0

 

32,110

 

59.3

 

Total Facilities at March 31, 2013(1)

 

$

116,188

 

1,051,569

 

84.9

%

370,655

 

79.0

%

1,422,224

 

83.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Facilities at December 31, 2012

 

$

114,206

 

 

 

84.2

%

 

 

79.1

%

 

 

82.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Facilities at December 31, 2011

 

$

103,502

 

 

 

83.5

%

 

 

83.5

%

 

 

83.5

%

 


* Indicates properties in which we hold a leasehold interest.

(1) The percent occupied for data center space, office and light industrial space, and space in total would have been 87.1%, 79.6%, and 85.1%, respectively, if all leases signed in current and prior periods had commenced.

 

19



Table of Contents

 

Development space is unoccupied space or entitled land that requires significant capital investment in order to develop data center facilities that are ready for use. The following table summarizes the NRSF under development and NRSF held for development throughout our portfolio as of March 31, 2013:

 

 

 

Development Opportunities (in NRSF)

 

Facilities

 

Under
Construction(1)

 

Held for
Development(2)

 

Total

 

Los Angeles

 

 

 

 

 

 

 

One Wilshire Campus

 

 

 

 

 

 

 

LA1

 

 

7,309

 

7,309

 

LA2

 

 

236,902

 

236,902

 

San Francisco Bay

 

 

 

 

 

 

 

Santa Clara Campus(3)

 

116,107

 

173,240

 

289,347

 

Northern Virginia

 

 

 

 

 

 

 

VA2

 

50,000

 

148,000

 

198,000

 

Boston

 

 

 

 

 

 

 

BO1

 

23,663

 

87,650

 

111,313

 

Chicago

 

 

 

 

 

 

 

CH1

 

20,240

 

 

20,240

 

New York

 

 

 

 

 

 

 

NY2

 

65,000

 

218,000

 

283,000

 

Miami

 

 

 

 

 

 

 

MI1

 

 

13,154

 

13,154

 

Total Facilities

 

275,010

 

884,255

 

1,159,265

 

 


(1)

 

Reflects NRSF at a facility for which the initiation of substantial development activities to prepare the property for its intended use has commenced prior to March 31, 2013.

(2)

 

Reflects NRSF held for development at a facility which will require substantial development activities to prepare the property for its intended use.

(3)

 

We plan and are entitled to develop approximately 290,000 NRSF of data center space at this campus. Incremental to the 290,000 NRSF, we have approximately 71,000 NRSF of office and light-industrial space in our operating portfolio which we may develop into data center space and we plan to develop an additional 116,000 NRSF of data center space at this campus upon our receipt of the necessary entitlement.

 

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Table of Contents

 

During the three months ended March 31, 2013, we signed new leases totaling approximately 42,799 NRSF. The following table provides an overview of our new and expansion data center leasing activity (in NRSF):

 

 

 

Three Months Ended:

 

 

 

March 31,
2013

 

December 31,
2012

 

September 30,
2012

 

June 30,
2012

 

March 31,
2012

 

New and expansion leases signed but not yet commenced at beginning of period

 

148,817

 

12,941

 

41,545

 

32,436

 

25,571

 

Adjustments(1)

 

 

 

544

 

 

 

 

 

 

 

New and expansion leases signed during the period

 

42,799

 

156,704

 

11,387

 

26,290

 

37,563

 

New and expansion leases signed during the period which have commenced

 

(14,679

)

(14,414

)

(5,699

)

(8,157

)

(15,195

)

New and expansion leases signed in previous periods which commenced during period

 

(24,697

)

(6,958

)

(34,292

)

(9,024

)

(15,503

)

Total leases signed but not yet commenced at end of period

 

152,240

 

148,817

 

12,941

 

41,545

 

32,436

 

 


(1)

 

Adjustments due to a change in the factor used to allocate support space to reflect the current build-out of certain properties. The adjustment does not alter the contractual rent we expect to receive under the affected leases.

 

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 324,000 NRSF of available space in our portfolio, which excludes pre-stabilized leasable space, leases representing approximately 14.2% and 19.7% of the NRSF in our portfolio are scheduled to expire during the remainder of 2013 and the year ending December 31, 2014, respectively.

 

Results of Operations

 

Factors that May Influence our Results of Operations

 

A complete discussion of factors that may influence our results of operations can be found in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 25, 2013, which is accessible on the SEC’s website at www.sec.gov.

 

Three Months Ended March 31, 2013, Compared to Three Months Ended March 31, 2012

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2013

 

2012

 

$ Change

 

% Change

 

 

 

(in thousands)

 

 

 

Operating Revenue