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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, 2015

 

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

 

For the transition period from                      to                     .

 

Commission file number: 001-34877

 

CoreSite Realty Corporation

(Exact name of registrant as specified in its charter)

 

Maryland
(State or other jurisdiction
of incorporation or organization)

 

27-1925611
(I.R.S. Employer
Identification No.)

 

 

 

1001 17th Street, Suite 500
Denver, CO

(Address of principal executive offices)

 

80202
(Zip Code)

 

(866) 777-2673

(Registrant’s telephone number, including area code)

 

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 22, 2015, was 22,019,669.

 

 

 



Table of Contents

 

CORESITE REALTY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2015
TABLE OF CONTENTS

 

 

PAGE

 

NO.

 

 

PART I. FINANCIAL INFORMATION

3

 

 

ITEM 1. Financial Statements

3

 

 

Condensed Consolidated Balance Sheets as of March 31, 2015, and December 31, 2014 (unaudited)

3

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2015, and 2014 (unaudited)

4

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015, and 2014 (unaudited)

5

 

 

Condensed Consolidated Statement of Equity for the three months ended March 31, 2015 (unaudited)

6

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015, and 2014 (unaudited)

7

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

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

20

 

 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

29

 

 

ITEM 4. Controls and Procedures

30

 

 

PART II. OTHER INFORMATION

30

 

 

ITEM 1. Legal Proceedings

30

 

 

ITEM 1A. Risk Factors

30

 

 

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

30

 

 

ITEM 3. Defaults Upon Senior Securities

31

 

 

ITEM 4. Mine Safety Disclosures

31

 

 

ITEM 5. Other Information

31

 

 

ITEM 6. Exhibits

31

 

 

Signatures

32

 

 

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,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

Land

 

$

80,398

 

$

78,983

 

Buildings and improvements

 

928,562

 

888,966

 

 

 

1,008,960

 

967,949

 

Less: Accumulated depreciation and amortization

 

(231,987

)

(215,978

)

Net investment in operating properties

 

776,973

 

751,971

 

Construction in progress

 

165,154

 

178,599

 

Net investments in real estate

 

942,127

 

930,570

 

Cash and cash equivalents

 

12,058

 

10,662

 

Accounts and other receivables, net of allowance for doubtful accounts of $160 and $112 as of March 31, 2015, and December 31, 2014, respectively

 

10,715

 

10,290

 

Lease intangibles, net of accumulated amortization of $12,121 and $14,477 as of March 31, 2015, and December 31, 2014, respectively

 

6,424

 

7,112

 

Goodwill

 

41,191

 

41,191

 

Other assets, net

 

73,772

 

75,600

 

Total assets

 

$

1,086,287

 

$

1,075,425

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Revolving credit facility

 

$

233,750

 

$

218,500

 

Senior unsecured term loan

 

100,000

 

100,000

 

Accounts payable and accrued expenses

 

44,666

 

42,463

 

Accrued dividends and distributions

 

22,374

 

22,355

 

Deferred rent payable

 

8,751

 

8,985

 

Acquired below-market lease contracts, net of accumulated amortization of $4,802 and $4,688 as of March 31, 2015, and December 31, 2014, respectively

 

5,349

 

5,576

 

Unearned revenue, prepaid rent and other liabilities

 

21,800

 

19,205

 

Total liabilities

 

436,690

 

417,084

 

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 outstanding as of March 31, 2015, and December 31, 2014

 

115,000

 

115,000

 

Common Stock, par value $0.01, 100,000,000 shares authorized and 22,022,535 and 21,757,366 shares issued and outstanding at March 31, 2015, and December 31, 2014, respectively

 

214

 

212

 

Additional paid-in capital

 

277,181

 

275,038

 

Accumulated other comprehensive loss

 

(574

)

(125

)

Distributions in excess of net income

 

(72,202

)

(67,538

)

Total stockholders’ equity

 

319,619

 

322,587

 

Noncontrolling interests

 

329,978

 

335,754

 

Total equity

 

649,597

 

658,341

 

Total liabilities and equity

 

$

1,086,287

 

$

1,075,425

 

 

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 March 31,

 

 

 

2015

 

2014

 

Operating revenues:

 

 

 

 

 

Data center revenue:

 

 

 

 

 

Rental revenue

 

$

41,323

 

$

34,899

 

Power revenue

 

19,669

 

16,002

 

Interconnection revenue

 

10,215

 

8,059

 

Tenant reimbursement and other

 

1,416

 

2,756

 

Office, light-industrial and other revenue

 

2,134

 

2,015

 

Total operating revenues

 

74,757

 

63,731

 

Operating expenses:

 

 

 

 

 

Property operating and maintenance

 

19,780

 

16,289

 

Real estate taxes and insurance

 

1,935

 

2,966

 

Depreciation and amortization

 

22,816

 

17,882

 

Sales and marketing

 

3,782

 

3,588

 

General and administrative

 

7,865

 

7,705

 

Rent

 

5,243

 

5,066

 

Impairment of internal-use software

 

 

922

 

Transaction costs

 

 

4

 

Total operating expenses

 

61,421

 

54,422

 

Operating income

 

13,336

 

9,309

 

Gain on real estate disposal

 

36

 

 

Interest income

 

2

 

2

 

Interest expense

 

(1,265

)

(1,173

)

Income before income taxes

 

12,109

 

8,138

 

Income tax expense

 

(49

)

(20

)

Net income

 

$

12,060

 

$

8,118

 

Net income attributable to noncontrolling interests

 

5,408

 

3,301

 

Net income attributable to CoreSite Realty Corporation

 

$

6,652

 

$

4,817

 

Preferred stock dividends

 

(2,084

)

(2,084

)

Net income attributable to common shares

 

$

4,568

 

$

2,733

 

Net income per share attributable to common shares:

 

 

 

 

 

Basic

 

$

0.21

 

$

0.13

 

Diluted

 

$

0.21

 

$

0.13

 

Weighted average common shares outstanding

 

 

 

 

 

Basic

 

21,372,157

 

20,992,758

 

Diluted

 

21,978,307

 

21,521,838

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Net income

 

$

12,060

 

$

8,118

 

Other comprehensive income (loss):

 

 

 

 

 

Unrealized gain (loss) on derivative contracts

 

(1,309

)

518

 

Reclassification of other comprehensive income to interest expense

 

328

 

118

 

Comprehensive income

 

11,079

 

8,754

 

Comprehensive income attributable to noncontrolling interests

 

4,876

 

3,649

 

Comprehensive income attributable to CoreSite Realty Corporation

 

$

6,203

 

$

5,105

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(unaudited and in thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

Distributions

 

Total

 

 

 

 

 

 

 

Preferred

 

Common Shares

 

Paid-in

 

Comprehensive

 

in Excess of

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Stock

 

Number

 

Amount

 

Capital

 

Loss

 

Net Income

 

Equity

 

Interests

 

Equity

 

Balance at January 1, 2015

 

$

115,000

 

21,757,366

 

$

212

 

$

275,038

 

$

(125

)

$

(67,538

)

$

322,587

 

$

335,754

 

$

658,341

 

Issuance of stock awards, net of forfeitures

 

 

244,882

 

 

 

 

 

 

 

 

Exercise of stock options

 

 

20,287

 

1

 

448

 

 

 

449

 

 

449

 

Share-based compensation

 

 

 

1

 

1,695

 

 

 

1,696

 

 

1,696

 

Dividends declared on preferred stock

 

 

 

 

 

 

(2,084

)

(2,084

)

 

(2,084

)

Dividends and distributions

 

 

 

 

 

 

(9,232

)

(9,232

)

(10,652

)

(19,884

)

Net income

 

 

 

 

 

 

6,652

 

6,652

 

5,408

 

12,060

 

Other comprehensive loss

 

 

 

 

 

(449

)

 

(449

)

(532

)

(981

)

Balance at March 31, 2015

 

$

115,000

 

22,022,535

 

$

214

 

$

277,181

 

$

(574

)

$

(72,202

)

$

319,619

 

$

329,978

 

$

649,597

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

12,060

 

$

8,118

 

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

 

 

 

 

 

Depreciation and amortization

 

22,816

 

17,882

 

Amortization of above/below market leases

 

(128

)

(70

)

Amortization of deferred financing costs

 

294

 

580

 

Gain on land disposal

 

(36

)

 

Share-based compensation

 

1,569

 

1,716

 

Bad debt expense

 

78

 

285

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(503

)

(400

)

Deferred rent receivable

 

(581

)

(473

)

Deferred leasing costs

 

(3,779

)

(800

)

Other assets

 

(1,963

)

(1,006

)

Accounts payable and accrued expenses

 

(459

)

(2,988

)

Unearned revenue, prepaid rent and other liabilities

 

1,614

 

3,982

 

Deferred rent payable

 

(234

)

(117

)

Net cash provided by operating activities

 

30,748

 

26,709

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Tenant improvements

 

(1,852

)

(2,300

)

Real estate improvements

 

(23,660

)

(27,747

)

Proceeds from real estate disposal

 

2,410

 

 

Net cash used in investing activities

 

(23,102

)

(30,047

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from exercise of stock options

 

449

 

214

 

Proceeds from revolving credit facility

 

15,250

 

26,750

 

Payments on revolving credit facility

 

 

(41,000

)

Proceeds from senior unsecured term loan

 

 

100,000

 

Repayments of mortgage loans payable

 

 

(58,250

)

Payments of loan fees and costs

 

 

(997

)

Dividends and distributions

 

(21,949

)

(18,539

)

Net cash provided (used) by financing activities

 

(6,250

)

8,178

 

Net change in cash and cash equivalents

 

1,396

 

4,840

 

Cash and cash equivalents, beginning of period

 

10,662

 

5,313

 

Cash and cash equivalents, end of period

 

$

12,058

 

$

10,153

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

Cash paid for interest, net of capitalized amounts

 

$

1,103

 

$

756

 

NON-CASH INVESTING AND FINANCING ACTIVITY

 

 

 

 

 

Construction costs payable capitalized to real estate

 

$

17,419

 

$

14,965

 

Accrual of dividends and distributions

 

$

22,374

 

$

18,686

 

 

See accompanying notes to condensed consolidated financial statements.

 

7



Table of Contents

 

CORESITE REALTY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2015

(unaudited)

 

1. Organization and Description of Business

 

CoreSite Realty Corporation (the “Company,” “we,” 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 March 31, 2015, the Company owns a 45.8% common interest in our Operating Partnership and affiliates of The Carlyle Group and others own a 54.2% interest in our Operating Partnership. See additional discussion in Note 8.

 

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 United States 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 months ended March 31, 2015, are not necessarily indicative of the expected results for the year ending December 31, 2015. 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, 2014. Intercompany balances and transactions have been eliminated.

 

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, Amendments to the Consolidation Analysis, which amends the current consolidation guidance. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The standard permits the use of either modified retrospective or cumulative effect transition method. We have not elected early adoption and we are currently evaluating the impact of the provisions of ASU 2015-02 on our consolidation policies as well as the transition method to be used to implement ASU 2015-02.

 

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 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, goodwill, 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

 

Certain immaterial amounts included in the condensed consolidated financial statements for 2014 have been reclassified to conform to the 2015 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 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 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 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 $1.3 million and $1.2 million for the three months ended March 31, 2015, and 2014, respectively.

 

8



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 10 years

Leasehold improvements

 

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

 

Depreciation expense was $18.0 million and $15.1 million for the three months ended March 31, 2015, and 2014, 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 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 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 fair 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 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 related to these intangible assets was recognized for either the three months ended March 31, 2015, or 2014.

 

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, 2015, and December 31, 2014, 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 either the three months ended March 31, 2015, or 2014.

 

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.

 

9



Table of Contents

 

Deferred Costs

 

Deferred leasing costs include commissions paid to third parties, including leasing agents, and internal sales commissions paid to employees for successful execution of lease agreements. These commissions and other direct and incremental costs incurred to obtain new customer leases 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 deferred costs related to the lease are written off to amortization expense. Deferred leasing costs are included within other assets in the condensed consolidated balance sheets and consisted of the following, net of amortization, as of March 31, 2015, and December 31, 2014 (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Internal sales commissions

 

$

13,931

 

$

13,171

 

Third party commissions

 

13,315

 

13,665

 

External legal counsel

 

464

 

393

 

Total

 

$

27,710

 

$

27,229

 

 

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 the amortization is included as a component of interest expense.

 

In March 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs, which amends the current imputation of interest guidance. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We have not elected early adoption and we are currently evaluating the impact of the provisions of ASU 2015-03 on our balance sheet presentation.

 

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 (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 months ended March 31, 2015, and 2014, no impairment of long-lived assets was recognized.

 

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 effective portion of the gain or loss on the hedge instruments as a component of accumulated other comprehensive income or loss. Any ineffective portion of a derivative’s change in fair value is immediately recognized within net income. 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 6.

 

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. During the three months ended March 31, 2015, and 2014, respectively, zero and $0.9 million impairment was recognized (related to internal use software) in the condensed consolidated statements of operations.

 

Revenue Recognition

 

All customer leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the noncancelable 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 multiple elements, the revenue associated with separate elements is allocated based on the relative fair values of

 

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those elements. The revenue associated with each element is then recognized as earned. Interconnection services and additional space 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. Customer set-up charges and utility installation fees are initially deferred and recognized over the term of the arrangement as revenue.

 

Tenant reimbursements for real estate taxes, common area maintenance, and other recoverable costs are recognized as revenue in the period that the related 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 noncancelable term of the underlying leases. For each of the three month periods ended March 31, 2015, and 2014, the net effect of amortization of acquired above-market and below-market leases resulted in an increase to rental revenue of $0.1 million.

 

A provision for uncollectible accounts is recorded if a receivable balance relating to contractual rent, rent recorded on a straight-line basis, tenant reimbursements or other billed amounts is considered by management to be uncollectible. At March 31, 2015, and December 31, 2014, the allowance for doubtful accounts totaled $0.2 million and $0.1 million, respectively.

 

In May 2014, the FASB issued guidance codified in Accounting Standards Codification (“ASC”) 606, Revenue Recognition — Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition. The standard is effective for interim and annual reporting periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact of the provisions of ASC 606 on our revenue recognition policies as well as the transition method to be used to implement this guidance.

 

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 market 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.

 

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 properties as well as the estimated equipment removal costs upon termination of a certain lease where we are the lessee. At both March 31, 2015, and December 31, 2014, the amount included in unearned revenue, prepaid rent and other liabilities on the condensed consolidated balance sheets was approximately $2.3 million.

 

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 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 condensed consolidated financial statements for federal income taxes with regards to activities of the REIT and its subsidiary pass-through entities. The allocable share of taxable income is included in the income tax returns of its stockholders. 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 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

 

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tax asset may more likely than not be not 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, 2015, and December 31, 2014, the gross deferred income taxes were not material.

 

We currently have no liabilities for uncertain income tax positions. The earliest tax year for which we are subject to examination is 2011.

 

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.

 

3. Investment in Real Estate

 

The following is a summary of the properties owned or leased at March 31, 2015 (in thousands):

 

Property Name

 

Location

 

Land

 

Buildings and
Improvements

 

Construction
in Progress

 

Total Cost

 

SV1

 

San Jose, CA

 

$

6,863

 

$

126,190

 

$

902

 

$

133,955

 

SV2

 

Milpitas, CA

 

5,086

 

26,559

 

700

 

32,345

 

SV3

 

Santa Clara, CA

 

3,972

 

47,283

 

328

 

51,583

 

SV4

 

Santa Clara, CA

 

4,501

 

89,230

 

223

 

93,954

 

SV5

 

Santa Clara, CA

 

2,544

 

20,430

 

 

22,974

 

Santa Clara Campus(1)

 

Santa Clara, CA

 

8,173

 

8,182

 

14,491

 

30,846

 

BO1

 

Somerville, MA

 

5,154

 

81,777

 

295

 

87,226

 

NY1*

 

New York, NY

 

 

34,094

 

125

 

34,219

 

NY2

 

Secaucus, NJ

 

1,158

 

45,364

 

77,655

 

124,177

 

VA1

 

Reston, VA

 

6,903

 

113,168

 

4,268

 

124,339

 

VA2

 

Reston, VA

 

1,356

 

32,401

 

56,983

 

90,740

 

DC1*

 

Washington, DC

 

 

7,924

 

169

 

8,093

 

CH1

 

Chicago, IL

 

5,493

 

84,260

 

5,434

 

95,187

 

LA1*

 

Los Angeles, CA

 

 

62,164

 

2,508

 

64,672

 

LA2

 

Los Angeles, CA

 

28,467

 

135,587

 

1,025

 

165,079

 

MI1

 

Miami, FL

 

728

 

10,305

 

30

 

11,063

 

DE1*

 

Denver, CO

 

 

2,604

 

13

 

2,617

 

DE2*

 

Denver, CO

 

 

1,040

 

5

 

1,045

 

Total

 

 

 

$

80,398

 

$

928,562

 

$

165,154

 

$

1,174,114

 

 


*                      Indicates properties in which we hold a leasehold interest.

(1)              This campus includes office and light-industrial buildings and land held for development in Santa Clara, California.      

 

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4. Other Assets

 

Our other assets consisted of the following, net of amortization and depreciation, if applicable, as of March 31, 2015, and December 31, 2014 (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Deferred leasing costs

 

$

27,710

 

$

27,229

 

Deferred rent receivable

 

22,091

 

21,510

 

Corporate furniture, fixtures and equipment

 

7,181

 

7,474

 

Internal-use software

 

8,048

 

7,980

 

Deferred financing costs

 

2,127

 

2,421

 

Other

 

6,615

 

8,986

 

Total

 

$

73,772

 

$

75,600

 

 

5. Debt

 

A summary of outstanding indebtedness as of March 31, 2015, and December 31, 2014, is as follows (in thousands):

 

 

 

 

 

Maturity

 

March 31,

 

December 31,

 

 

 

Interest Rate

 

Date

 

2015

 

2014

 

Revolving credit facility

 

2.18% and 2.17% at March 31, 2015, and December 31, 2014, respectively

 

January 3, 2017

 

$

233,750

 

$

218,500

 

Senior unsecured term loan

 

3.23% at March 31, 2015, and at December 31, 2014

 

January 31, 2019

 

100,000

 

100,000

 

Total principal outstanding

 

 

 

 

 

$

333,750

 

$

318,500

 

 

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 (as amended the “Credit Agreement”) with a group of lenders for which KeyBank National Association acts as the administrative agent. The Credit Agreement maturity date is 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 Credit Agreement at initial maturity and certain other customary conditions. The Credit Agreement contains an accordion feature, which allows our Operating Partnership to increase the total commitment from $405 million to $500 million, under specified circumstances.

 

Under the Credit Agreement, borrowings bear interest at a variable rate per annum equal to either (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. At March 31, 2015, the Operating Partnership’s leverage ratio was 17.1% and the interest rate was LIBOR plus 200 basis points.

 

The total amount available for borrowings under the Credit Agreement is subject to the lesser of the facility amount or the availability calculated based on our unencumbered asset pool. As of March 31, 2015, the borrowing capacity was $405 million. As of March 31, 2015, $233.8 million was borrowed and outstanding, $7.3 million was outstanding under letters of credit and $163.9 million remained available for us to borrow under the Credit Agreement.

 

Our ability to borrow under the 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 total consolidated indebtedness to total gross asset value) of 60%, which, as of March 31, 2015, was 17.1%;

·                  a maximum secured debt ratio (defined as total consolidated secured debt to total gross asset value) of 40%, which, as of March 31, 2015, was 0%;

·                  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 1.00, which, as of March 31, 2015, was 8.8 to 1.00; and

·                  a maximum unhedged variable rate debt ratio (defined as unhedged variable rate indebtedness to gross asset value) of 30%, which, as of March 31, 2015, was 11.8%.

 

As of March 31, 2015, we were in compliance with all of the covenants under the Credit Agreement.

 

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Senior Unsecured Term Loan

 

On January 31, 2014, our Operating Partnership and certain subsidiaries entered into a $100 million senior unsecured term loan (as amended the “Term Loan”). The Term Loan has a five-year term and contains an accordion feature, which allows our Operating Partnership to increase the total commitments by $100 million, to $200 million, under specified circumstances. The Term Loan ranks pari passu with our Credit Agreement and contains the same financial covenants and other customary restrictive covenants. As of March 31, 2015, we were in compliance with all of the covenants under the Term Loan.

 

The borrowings under the Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 175 basis points to 265 basis points, or (ii) a base rate plus 75 basis points to 165 basis points, each depending on our Operating Partnership’s leverage ratio. At March 31, 2015, the Operating Partnership’s leverage ratio was 17.1% and the interest rate was LIBOR plus 175 basis points.

 

On February 3, 2014, we entered into a $100 million interest rate swap agreement to hedge one-month LIBOR variable rate debt, which includes the Term Loan and, if the Term Loan is repaid prior to maturity, the revolving credit facility under the Credit Agreement. The interest rate swap has a five-year term and, at our current leverage ratio, effectively fixes the Term Loan interest rate at 3.23%. See additional discussion in Note 6.

 

Debt Maturities

 

The following table summarizes the amount of our outstanding debt as of March 31, 2015, when such debt currently becomes due (in thousands):

 

Year Ending December 31,

 

 

 

Remainder of 2015

 

$

 

2016

 

 

2017

 

233,750

 

2018

 

 

2019

 

100,000

 

2020

 

 

Total

 

$

333,750

 

 

6. Derivatives and Hedging Activities

 

On February 3, 2014, we entered into a $100 million five-year interest rate swap agreement to protect against adverse fluctuations in interest rates by reducing our exposure to variability in cash flows relating to interest payments on $100 million of one-month LIBOR variable rate debt. The interest rate swap was designated for hedge accounting. This interest rate swap is our only derivative outstanding as of March 31, 2015, and December 31, 2014.

 

On April 9, 2015, we entered into a $75 million forward starting five-year interest rate swap agreement to protect against adverse fluctuation in interest rates by reducing our exposure to variability in cash flows relating to interest payments on $75 million of one-month LIBOR variable rate debt. The agreement was designated for hedge accounting and will be effective May 5, 2015.

 

Risk Management Objective of Using Derivatives

 

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known or uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings.

 

Cash Flow Hedges of Interest Rate Risk

 

Our objectives in using interest rate derivatives are to reduce variability in interest expense and to manage our exposure to adverse interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

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The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income or loss on the condensed consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three months ended March 31, 2015, and 2014, the amount recorded in other comprehensive income related to the unrealized gain or loss on derivative contracts was a loss of $1.3 million and a gain of $0.5 million, respectively. The amount reclassified out of other comprehensive income into interest expense on the condensed consolidated statements of operations was $0.3 million and $0.1 million for the three months ended March 31, 2015, and 2014, respectively. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2015, and 2014, we did not record any amount in earnings related to derivatives as there was no hedge ineffectiveness.

 

Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the subsequent twelve months, beginning April 1, 2015, we estimate that $1.2 million will be reclassified as an increase to interest expense.

 

Derivatives are recorded at fair value in our condensed consolidated balance sheets in other assets and other liabilities, as applicable. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. We had a $1.3 million and $0.3 million derivative liability recognized in unearned revenue, prepaid rent and other liabilities in our condensed consolidated balance sheet as of March 31, 2015, and December 31, 2014, respectively.

 

7. Stockholders’ Equity

 

We paid the following dividends per share on our Series A Cumulative Preferred Stock and common stock during the three months ended March 31, 2015:

 

Declaration Date 

 

Record Date

 

Payment Date

 

Preferred Stock

 

Common Stock

 

March 12, 2015

 

March 31, 2015

 

April 15, 2015

 

$

0.4531

(1)

$

0.42

 

 


(1) Dividend covers the period from January 15, 2015, to April 14, 2015.

 

8. 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. The current holders of common Operating Partnership units are eligible to have the common Operating Partnership units redeemed for registered or unregistered common stock on a one-for-one basis or cash, at our option.

 

In connection with the issuance by the Company of its 7.25% Series A Cumulative Redeemable Preferred Stock on December 12, 2012, the Operating Partnership issued 4,600,000 7.25% Series A Cumulative Redeemable Preferred Operating Partnership units to the Company. Preferred Operating Partnership units rank senior to the common Operating Partnership units held by both the Company and noncontrolling interests.

 

The following table shows the ownership interests in the Operating Partnership as of March 31, 2015, and December 31, 2014:

 

 

 

March 31, 2015

 

December 31, 2014

 

 

 

Number of Units

 

Percentage of Total

 

Number of Units

 

Percentage of Total

 

The Company

 

21,418,289

 

45.8

%

21,287,191

 

45.6

%

Noncontrolling interests

 

25,360,847

 

54.2

%

25,360,847

 

54.4

%

Total

 

46,779,136

 

100.0

%

46,648,038

 

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, 2015, the Company issued 131,098 shares of common stock related to employee compensation arrangements and therefore an equivalent number of common Operating Partnership units were issued to the Company by the Operating Partnership.

 

Holders of common Operating Partnership units of record as of March 31, 2015, received quarterly distributions of $0.42 per unit, payable in correlation with declared dividends on common stock.

 

The redemption value of the noncontrolling interests at March 31, 2015, was $1,234.6 million based on the closing price of the Company’s common stock of $48.68 on that date.

 

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9. Equity Incentive Plan

 

The Company’s Board of Directors has adopted and, with the approval of the Company’s stockholders, amended the 2010 Equity Incentive Plan (as amended, the “2010 Plan”). The 2010 Plan is administered by the Compensation Committee of the Board of Directors. Awards issuable under the 2010 Plan include common stock, stock options, restricted stock, stock appreciation rights, dividend equivalents, Operating Partnership units and other incentive awards. We have reserved a total of 6,000,000 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 awarded under the 2010 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, 2015, 3,318,347 shares of our common stock were 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 on 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. The fair values are amortized on a straight-line basis over the vesting periods.

 

The following table sets forth stock option activity under the 2010 Plan for the three months ended March 31, 2015:

 

 

 

Number of
Shares Subject
to Options

 

Weighted-
Average Exercise
Price

 

Options outstanding, December 31, 2014

 

758,095

 

$

20.94

 

Granted

 

 

 

Exercised

 

(20,287

)

22.13

 

Forfeited

 

(562

)

15.23

 

Expired

 

(282

)

15.23

 

Options outstanding, March 31, 2015

 

736,964

 

$

20.91

 

 

The following table sets forth the number of shares subject to options that are unvested as of March 31, 2015, and the fair value of these options at the grant date:

 

 

 

Number of
Shares Subject
to Options

 

Weighted-
Average Fair
Value at Grant
Date

 

Unvested balance, December 31, 2014

 

283,964

 

$

7.75

 

Granted

 

 

 

Forfeited

 

(562

)

4.89

 

Vested

 

(116,780

)

6.43

 

Unvested balance, March 31, 2015

 

166,622

 

$

8.67

 

 

As of March 31, 2015, total unearned compensation on options was approximately $1.0 million, and the weighted-average vesting period was 1.4 years.

 

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Restricted Awards and Units

 

During the three months ended March 31, 2015, the Company granted 176,269 shares of restricted stock which had a fair value of $8.4 million as of the date of grant. Also during the three months ended March 31, 2015, the Company issued 428 restricted stock units, or RSUs. The principal difference between these instruments is that RSUs are not 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 a share of common stock. The restricted stock awards are amortized on a straight-line basis to expense over the vesting period. The following table sets forth the number of unvested restricted stock and RSU awards and the weighted-average fair value of these awards at the date of grant:

 

 

 

Restricted
Awards

 

Weighted-
Average Fair
Value at Grant
Date

 

Unvested balance, December 31, 2014

 

394,016

 

$

29.10

 

Granted

 

176,697

 

47.49

 

Forfeited

 

(2,749

)

28.17

 

Vested

 

(111,143

)

27.24

 

Unvested balance, March 31, 2015

 

456,821

 

$

36.67

 

 

As of March 31, 2015, total unearned compensation on restricted awards was approximately $15.1 million, and the weighted-average vesting period was 2.5 years.

 

Performance Stock Awards

 

The Company grants long-term incentives to members of management in the form of performance-based restricted stock awards (“PSAs”) under the 2010 Plan. The number of PSAs earned is based on the Company’s achievement of relative total shareholder return (“TSR”) measured versus the MSCI US REIT Index over a three-year performance period, and the number of shares earned under the PSAs may range from 0% to 150% for 2014 grants and from 25% to 175% for 2015 grants. The PSAs are earned as follows: (i) 20% of the PSAs are eligible to be earned upon TSR achievement in year one of the performance period, (ii) 20% of the PSAs are eligible to be earned upon TSR achievement in year two of the performance period, (iii) 20% of the PSAs are eligible to be earned upon TSR achievement in year three of the performance period, and (iv) 40% of the PSAs are eligible to be earned upon a cumulative TSR achievement over the three-year performance period. The PSAs have a service condition and will be released at the end of the three-year performance period provided that the holder continues to be employed by the Company at the end of the three-year performance period. Holders of the PSAs are entitled to dividends on the PSAs, which will be accrued and paid in cash at the end of the three-year performance period. The PSAs initially are granted and issued at the highest target amount and thereafter are forfeited to the extent vesting conditions are not met.

 

On March 4, 2014, the Company granted 91,335 PSAs equal to 150% of the target amount, with an aggregate value of $1.6 million on the grant date. The PSAs, in addition to a service condition, are subject to the Company’s performance versus the MSCI US REIT Index which is a market condition and impacts the number of shares that ultimately vests. Upon evaluating the results of the market condition, the final number of shares is determined and such shares vest based on satisfaction of the service condition. The PSAs are amortized on a straight-line basis over the vesting period. During the three months ended March 31, 2015, no PSAs were forfeited due to termination of service.

 

On March 3, 2015, the Company granted 78,551 PSAs equal to 175% of the target amount, with an aggregate value of $2.7 million on the grant date. The PSAs, in addition to a service condition, are subject to the Company’s performance versus the MSCI US REIT Index which is a market condition and impacts the number of shares that ultimately vests. Upon evaluating the results of the market condition, the final number of shares is determined and such shares vest based on satisfaction of the service condition. The PSAs are amortized on a straight-line basis over the vesting period. During the three months ended March 31, 2015, no PSAs were forfeited due to termination of service.

 

As of March 31, 2015, total unearned compensation on PSAs was approximately $3.6 million, and the weighted-average vesting period was 2.4 years. The fair value of each PSA award is estimated on the date of grant using a Monte Carlo simulation. The simulation requires assumptions for expected volatility, risk-free rate of return, and dividend yield. The following table summarizes the assumptions used to value the PSAs granted during the three months ended March 31, 2015, and 2014.

 

 

 

Three Months Ended March 31,

 

 

 

2015

 

2014

 

Expected term (in years)

 

2.83

 

2.83

 

Expected volatility

 

25.51

%

32.98

%

Expected annual dividend

 

 

 

Risk-free rate

 

1.02

%

0.64

%

 

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10. Earnings Per Share

 

Basic income per share is calculated by dividing the net income attributable to common shares by the weighted average number of common stock outstanding during the period. Diluted income per share adjusts basic income per share for the effects of potentially dilutive common shares, if the effect is not antidilutive. Potentially dilutive common stock consist of shares issuable under the 2010 Plan. 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,

 

 

 

2015

 

2014

 

Net income attributable to common shares

 

$

4,568

 

$

2,733

 

Weighted-average common shares outstanding - basic

 

21,372,157

 

20,992,758

 

Effect of potentially dilutive common shares:

 

 

 

 

 

Stock options

 

382,603

 

364,158

 

Unvested awards

 

223,547

 

164,922

 

Weighted-average common shares outstanding - diluted

 

21,978,307

 

21,521,838

 

Net income per share attributable to common shares

 

 

 

 

 

Basic

 

$

0.21

 

$

0.13

 

Diluted

 

$

0.21

 

$

0.13

 

 

In the calculations above, we have excluded weighted-average potentially dilutive securities of 70,153 and 262,473 for the three months ended March 31, 2015, and 2014, respectively, as their effect would have been antidilutive.

 

11. 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 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date.

 

Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

Level 3 — Unobservable inputs for the asset or liability.

 

Our financial instruments consist of cash and cash equivalents, accounts and other receivables, interest rate swaps, the revolving credit facility, the senior unsecured term loan, interest payable and accounts payable. The carrying values of cash and cash equivalents, accounts and other receivables, interest payable and accounts payable approximate fair values due to the short-term nature of these financial instruments. Interest rate swaps are carried at fair value.

 

The Company has determined that the majority of the inputs used to value its derivative fall within Level 2 of the fair value hierarchy; however, the credit valuation adjustments associated with its derivative utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Operating Partnership and its counterparties. As of March 31, 2015, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of its derivative portfolio. As a result, the Company classifies its derivative valuation in Level 2 of the fair value hierarchy.

 

The total balance of our revolving credit facility and senior unsecured term loan was $333.8 million as of March 31, 2015, with a fair value that approximated book value based on Level 3 inputs from the fair value hierarchy. Under the discounted cash flow method, the fair values of the revolving credit facility and the senior unsecured term loan are based on the Company’s assumptions of market interest rates and terms available incorporating the Company’s credit risk.

 

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12. Commitments and Contingencies

 

Our properties require periodic investments of capital for general capital improvements and for tenant-related capital expenditures. We enter into various construction and equipment contracts with third parties for the development of our properties. In addition, we enter into contracts for company-wide improvements that are ancillary to revenue generation. At March 31, 2015, we had open commitments related to construction contracts of approximately $19.0 million.

 

Additionally, we have commitments related to telecommunications capacity used to connect data centers located within the same market or geographical area and power usage. At March 31, 2015, we had open commitments related to these contracts of approximately $11.4 million.

 

In April 2015, CoreSite executed a lease and began construction on a 100% pre-leased, 136,580 square-foot powered shell on land CoreSite owns on the company’s Santa Clara campus, which will be known as SV6. CoreSite has incurred $1.2 million of the estimated $27.0 million required to complete the project, and expects to deliver the build-to-suit to a strategic customer in the first half of 2016.

 

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 matter to which we currently are a party, the ultimate disposition of any such matter will not result in a material adverse effect on our business, financial condition, cash flows or results of operations.

 

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Table of Contents

 

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 the Private Securities Litigation Reform Act of 1995 (“PSLRA”), namely Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the PSLRA and include this statement for purposes of complying with these safe harbor provisions.

 

In particular, statements pertaining to our capital resources, portfolio performance, business strategies and results of operations contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,”  “expects” “may,” “will,” should,” “seeks,” “intends,” “plans,” “pro forma” or “anticipates” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) the geographic concentration of our data centers in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets; (ii) fluctuations in interest rates and increased operating costs; (iii) difficulties in identifying properties to acquire and completing acquisitions; (iv) the significant competition in our industry and an inability to lease vacant space, renew existing leases or release space as leases expire; (v) lack of sufficient customer demand to realize expected returns on our investments to expand our property portfolio; (vi) decreased revenue from costs and disruptions associated with any failure of our physical infrastructure or services; (vii) our ability to lease available space to existing or new customers; (viii) our failure to obtain necessary outside financing; (ix) our failure to qualify or maintain our status as a 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, 2014. 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 our consolidated subsidiaries, including CoreSite, L.P., a Delaware limited partnership of which we are the sole general partner and to which we refer in this Quarterly Report as our Operating Partnership.”

 

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

 

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

 

Our focus is to bring together a network and cloud community to support the needs of enterprises, and create a diverse customer ecosystem. Our growth strategy includes (i) increasing cash flow of in-place data center space, (ii) capitalizing on embedded expansion opportunities, (iii) selectively pursuing acquisition and development opportunities in new and existing markets, (iv) expanding existing customer relationships, and (v) attracting new customers.

 

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Table of Contents

 

Our Portfolio

 

As of March 31, 2015, our property portfolio included 17 operating data center facilities and multiple development projects which collectively comprise over 2.8 million net rentable square feet (“NRSF”), of which approximately 1.5 million NRSF is existing data center space. The 0.9 million NRSF of development projects includes entitled land and space available for development and construction of new facilities. We expect that this development potential plus any potential expansion into new markets will enable us to accommodate existing and future customer demand and position us to continue to increase our operating cash flows. The following table provides an overview of our properties as of March 31, 2015:

 

 

 

Data Center Operating NRSF (1)

 

Development

 

Total

 

 

 

 

 

Stabilized

 

Pre-Stabilized (2)

 

Total

 

NRSF (3)

 

NRSF

 

Market/Facilities

 

Annualized
Rent ($000)(4)

 

Total

 

Percent
Occupied(5)

 

Total(7)

 

Percent
Occupied(5)

 

Total

 

Percent
Occupied(5)

 

Total

 

Total
Portfolio

 

Los Angeles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One Wilshire Campus

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LA1*

 

$

25,304

 

139,053

 

82.8

%

 

%

139,053

 

82.8

%

 

139,053

 

LA2

 

18,887

 

191,202

 

87.0

 

33,711

 

4.2

 

224,913

 

74.6

 

199,978

 

424,891

 

Los Angeles Total

 

44,191

 

330,255

 

85.3

 

33,711

 

4.2

 

363,966

 

77.7

 

199,978

 

563,944

 

San Francisco Bay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SV1

 

6,814

 

84,045

 

83.5

 

 

 

84,045

 

83.5

 

 

84,045

 

SV2

 

8,189

 

76,676

 

87.2

 

 

 

76,676

 

87.2

 

 

76,676

 

Santa Clara Campus

 

26,822

 

237,316

 

91.6

 

14,857

 

74.4

 

252,173

 

90.5

 

302,580

 

554,753

 

San Francisco Bay Total

 

41,825

 

398,037

 

89.0

 

14,857

 

74.4

 

412,894

 

88.5

 

302,580

 

715,474

 

Northern Virginia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VA1

 

25,583

 

201,719

 

87.6

 

 

 

201,719

 

87.6

 

 

201,719

 

VA2

 

 

 

 

44,036

 

 

44,036

 

 

144,411

 

188,447

 

DC1*

 

3,085

 

22,137

 

89.3

 

 

 

22,137

 

89.3

 

 

22,137

 

Northern Virginia Total

 

28,668

 

223,856

 

87.7

 

44,036

 

 

267,892

 

73.3

 

144,411

 

412,303

 

Boston

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BO1

 

14,269

 

166,026

 

99.4

 

 

 

166,026

 

99.4

 

87,650

 

253,676

 

Chicago

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CH1

 

13,188

 

146,463

 

88.2

 

20,240

 

28.1

 

166,703

 

80.9

 

11,704

 

178,407

 

New York

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NY1*

 

5,858

 

48,404

 

73.4

 

 

 

48,404

 

73.4

 

 

48,404

 

NY2

 

3,172

 

 

 

52,692

 

66.7

 

52,692

 

66.7

 

183,558

 

236,250

 

New York Total

 

9,030

 

48,404

 

73.4

 

52,692

 

66.7

 

101,096

 

69.9

 

183,558

 

284,654

 

Miami

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MI1

 

1,817

 

30,176

 

80.9

 

 

 

30,176

 

80.9

 

13,154

 

43,330

 

Denver

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DE1*

 

1,053

 

5,878

 

90.1

 

 

 

5,878

 

90.1

 

 

5,878

 

DE2*

 

329

 

5,140

 

64.2

 

 

 

5,140

 

64.2

 

 

5,140

 

Denver Total

 

1,382

 

11,018

 

78.0

 

 

 

11,018

 

78.0

 

 

11,018

 

Total Data Center

 

$

154,370

 

1,354,235

 

88.2

%

165,536

 

32.2

%

1,519,771

 

82.1

%

943,035

 

2,462,806

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Office and Light-Industrial(6)

 

7,014

 

358,648

 

74.9

 

 

 

358,648

 

74.9

 

 

358,648

 

Total Portfolio

 

$

161,384

 

1,712,883

 

85.5

%

165,536

 

32.2

%

1,878,419

 

80.8

%

943,035

 

2,821,454

 

 


* Indicates properties in which we hold a leasehold interest.

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

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

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

(4)          Represents the monthly contractual rent under existing commenced customer leases as of March 31, 2015, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement. On a gross basis, our total portfolio annualized rent was approximately $165.6 million as of March 31, 2015, which reflects the addition of $4.2 million in operating expense reimbursements to contractual net rent under modified gross and triple-net leases.

(5)          Includes customer leases that have commenced and are occupied as of March 31, 2015. The percent occupied is determined based on leased square feet as a proportion of total operating NRSF as of March 31, 2015. The percent occupied for data center stabilized space would have been 90.6%, rather than 88.2%, if all leases signed in the current and prior periods had commenced. The percent occupied for our total portfolio, including data center stabilized space, pre-stabilized space and office and light-industrial space, would have been 85.0%, rather than 80.8%, if all leases signed in current and prior periods had commenced.

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

(7)          VA2 Phase 1, which consists of 44,036 NRSF classified as pre-stabilized data center, is 100% leased to a single customer as of March 31, 2015. The customer lease commenced on April 1, 2015.

 

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Table of Contents

 

The following table shows the March 31, 2015, same store operating statistics for space within each data center facility that was leased or available to be leased as of December 31, 2013, and excludes space for which development was completed and became available to be leased after December 31, 2013. We track same store space leased or available to be leased at the computer room level within each data center facility. For comparison purposes, the operating activity totals as of December 31, 2014, and 2013, for this space are provided at the bottom of this table.

 

 

 

Same Store Property Portfolio (in NRSF)

 

 

 

 

 

Data Center

 

Office and Light-Industrial

 

Total

 

Market/Facilities

 

Annualized Rent
($000)(1)

 

Total

 

Percent
Occupied(2)

 

Total

 

Percent
Occupied(2)

 

Total

 

Percent
Occupied(2)

 

Los Angeles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One Wilshire Campus

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LA1*

 

$

25,453

 

139,053

 

82.8

%

4,373

 

82.8

%

143,426

 

82.8

%

LA2

 

18,821

 

191,202

 

87.0

 

7,029

 

85.7

 

198,231

 

87.0

 

Los Angeles Total

 

44,274

 

330,255

 

85.3

 

11,402

 

84.6

 

341,657

 

85.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco Bay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SV1

 

11,540

 

84,045

 

83.5

 

206,255

 

79.4

 

290,300

 

80.6

 

SV2

 

8,189

 

76,676

 

87.2

 

 

 

76,676

 

87.2

 

Santa Clara Campus

 

27,250

 

252,173

 

90.5

 

34,548

 

82.8

 

286,721

 

89.6

 

San Francisco Bay Total

 

46,979

 

412,894

 

88.5

 

240,803

 

79.9

 

653,697

 

85.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern Virginia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VA1

 

26,633

 

201,719

 

87.6

 

61,050

 

78.4

 

262,769

 

85.4

 

DC1*

 

3,085

 

22,137

 

89.3

 

 

 

22,137

 

89.3

 

Northern Virginia Total

 

29,718

 

223,856

 

87.7

 

61,050

 

78.4

 

284,906

 

85.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boston

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BO1

 

14,527

 

166,026

 

99.4

 

19,495

 

61.6

 

185,521

 

95.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chicago

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CH1

 

13,263

 

166,703

 

80.9

 

4,946

 

66.7

 

171,649

 

80.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NY1*

 

5,870

 

48,404

 

73.4

 

209

 

100.0

 

48,613

 

73.5

 

NY2

 

1,880

 

18,103

 

75.1

 

 

 

18,103

 

75.1

 

New York Total

 

7,750

 

66,507

 

73.8

 

209

 

100.0

 

66,716

 

73.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miami

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MI1

 

1,837

 

30,176

 

80.9

 

1,934

 

57.1

 

32,110

 

79.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denver

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DE1*

 

818

 

4,726

 

87.7

 

 

 

4,726

 

87.7

 

DE2*

 

329

 

5,140

 

64.2

 

 

 

5,140

 

64.2

 

Denver Total

 

1,147

 

9,866

 

75.5

 

 

 

9,866

 

75.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Facilities at March 31, 2015(3)

 

$

159,495

 

1,406,283

 

87.1

%

339,839

 

78.4

%

1,746,122

 

85.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Facilities at December 31, 2014

 

$

155,731

 

 

 

85.5

%

 

 

78.5

%

 

 

84.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Facilities at December 31, 2013

 

$

136,856

 

 

 

77.7

%

 

 

77.8

%

 

 

77.7

%

 


* Indicates properties in which we hold a leasehold interest.

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

 

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

 

(3) The percent occupied for data center space, office and light-industrial space, and total space would have been 89.4%, 79.2% and 87.4%, respectively, if all leases signed in current and prior periods had commenced.

 

Same store annualized rent increased to $159.5 million at March 31, 2015, compared to $155.7 million at December 31, 2014. The $3.8 million annualized rent increase is due primarily to a 6.2% increase in data center occupancy in the Northern Virginia area.

 

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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 NRSF under construction and NRSF held for development throughout our portfolio as of March 31, 2015:

 

 

 

Development Opportunities (in NRSF)

 

Facilities

 

Under
Construction(1)

 

Held for
Development(2)

 

Total

 

Los Angeles

 

 

 

 

 

 

 

One Wilshire Campus

 

 

 

 

 

 

 

LA2

 

 

199,978

 

199,978

 

San Francisco Bay

 

 

 

 

 

 

 

Santa Clara Campus(3)

 

136,580

 

200,000

 

336,580

 

Northern Virginia

 

 

 

 

 

 

 

VA2

 

48,137

 

96,274

 

144,411

 

Boston

 

 

 

 

 

 

 

BO1

 

15,149

 

72,501

 

87,650

 

Chicago

 

 

 

 

 

 

 

CH1

 

11,704

 

 

11,704

 

New York

 

 

 

 

 

 

 

NY2(4)

 

49,050

 

134,508

 

183,558

 

Miami

 

 

 

 

 

 

 

MI1

 

 

13,154

 

13,154

 

Total Facilities

 

260,620

 

716,415

 

977,035

 

 


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

 

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

 

(3)            Our Santa Clara Campus includes 336,580 developable NRSF of which 34,000 NRSF is currently operating as office and light-industrial space as of March 31, 2015. On April 3, 2015, we began construction on 136,580 NRSF at this campus pursuant to the terms of a lease entered into on the same date with a strategic customer for a 100% pre-leased powered shell, which will be known as SV6. We expect to deliver SV6 during the first half of 2016.

 

(4)            We may develop up to 283,558 NRSF at NY2.  This includes the undeveloped existing shell building of 183,558 NRSF set forth in the table above and an additional 100,000 NRSF of data center space that we may develop upon our receipt of the necessary entitlements.

 

Capital Expenditures

 

The following table sets forth information regarding capital expenditures during the three months ended March 31, 2015 (in thousands):

 

 

 

Three Months Ended
March 31, 2015

 

Data center expansion

 

$

21,078

 

Non-recurring investments

 

3,872

 

Tenant improvements

 

2,197

 

Recurring capital expenditures

 

1,981

 

Total capital expenditures

 

$

29,128

 

 

During the three months ended March 31, 2015, we incurred approximately $29.1 million of capital expenditures, of which approximately $21.1 million related to new data center expansion activities, including new data center construction, the development of capacity within existing data centers and other revenue generating investments.

 

Of the $21.1 million of capital expenditures related to new data center expansion activities, we incurred approximately $15.2 million on NY2 and VA2. During the three months ended March 31, 2015, we placed into service 44,036 NRSF at VA2. We also incurred an additional $5.9 million of capital expenditures to add capacity in new computer rooms at CH1, develop a new data center at the Santa Clara Campus and other activities during the three months ended March 31, 2015.

 

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During the three months ended March 31, 2015, we incurred approximately $3.9 million in non-recurring investments, of which $1.2 million is a result of internal IT system development and the remaining $2.7 million is a result of other non-recurring investments, such as remodel or upgrade projects.

 

During the three months ended March 31, 2015, we incurred approximately $2.2 million in tenant improvements, of which $1.2 million relates to a customer lease at our VA1 property and the remaining $1.0 million is a result of other tenant improvements at various properties.

 

During the three months ended March 31, 2015, we incurred approximately $2.0 million of recurring capital expenditures within our portfolio for required equipment upgrades that have a future economic benefit.

 

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, 2014, filed with the SEC on February 13, 2015, which is accessible on the SEC’s website at www.sec.gov.

 

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 361,344 NRSF of space currently unoccupied in our portfolio, 490 and 452 data center leases representing approximately 10.7% and 12.6% of the NRSF in our stabilized operating portfolio with current annualized rental rates of $152 per NRSF and $145 per NRSF are scheduled to expire during the remainder of 2015 and the year ending December 31, 2016, respectively. The following table sets forth a summary of the expirations for leases in place as of March 31, 2015, plus unoccupied space (excluding space held for development of under construction). The information set forth in the table assumes that customers exercise no renewal options or early termination rights.

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Annualized

 

 

 

Number

 

Operating

 

Percentage

 

 

 

Percentage

 

Annualized

 

Annualized

 

Rent Per

 

 

 

of

 

NRSF of

 

of Total

 

 

 

of Total

 

Rent Per

 

Rent at

 

Leased

 

 

 

Leases

 

Expiring

 

Operating

 

Annualized

 

Annualized

 

Leased

 

Expiration

 

NRSF at

 

Year of Lease Expiration

 

Expiring(1)

 

Leases

 

NRSF

 

Rent ($000)(2)

 

Rent

 

NRSF

 

($000)(3)

 

Expiration(4)

 

Unoccupied colocation

 

 

271,469

 

14.5

 

$

 

 

$

 

$

 

$

 

Unoccupied office and light-industrial

 

 

 

89,875

 

4.8

 

 

 

 

 

 

 

 

 

 

 

2015

 

490

 

201,372

 

10.7

 

30,692

 

19.0

 

152

 

30,749

 

153

 

2016

 

452

 

236,481

 

12.6

 

34,334

 

21.3

 

145

 

35,905

 

152

 

2017

 

353

 

204,592

 

10.9

 

35,225

 

21.8

 

172

 

37,532

 

184

 

2018

 

133

 

205,140

 

10.9

 

24,892

 

15.4

 

121

 

28,613

 

139

 

2019

 

72

 

163,614

 

8.7

 

12,512

 

7.8

 

76

 

18,745

 

115

 

2020-Thereafter

 

53

 

237,103

 

12.6

 

16,715

 

10.4

 

71

 

20,350

 

86

 

Office and light-industrial (5)

 

97

 

268,773

 

14.3

 

7,014

 

4.3

 

26

 

6,999

 

26

 

Portfolio Total / Weighted Average

 

1,650

 

1,878,419

 

100.0

%

$

161,384

 

100.0

%

$

106

 

$

178,893

 

$

118

 

 


(1)

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

(2)

Represents the monthly contractual rent under existing commenced customer leases as of March 31, 2015, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement.

(3)

Represents the final monthly contractual rent under existing customer leases as of March 31, 2015, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes operating expense reimbursement, power revenue and interconnection revenue.

(4)

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

(5)

Of the occupied office and light industrial leases, 38,191 NRSF, 61,330 NRSF, 9,073 NRSF, 5,046 NRSF, 4,948 NRSF and 150,185 NRSF are scheduled to expire in 2015, 2016, 2017, 2018, 2019 and 2020 and thereafter, respectively, which accounts for (in thousands) $677, $1,466, $250, $137, $149 and $4,335 of annualized rent scheduled to expire during each respective period.

 

 

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The amount of revenue generated by the properties in our portfolio depends on several factors, including our ability to maintain or improve the occupancy rates of currently leased space and to lease currently available space. During the twelve months ended March 31, 2015, we renewed an average of 45,000 NRSF per quarter at an average rental growth rate of 9.2%. Excluding space held for development, as of March 31, 2015, the occupancy rate of data center properties in our portfolio, stabilized and pre-stabilized, was 82.1% of NRSF. During the three months ended March 31, 2015, new and expansion leases totaling approximately 61,000 NRSF commenced. The following table summarizes our leasing activity during the three months ended March 31, 2015:

 

 

 

Leasing Acitivty

 

Number of

 

Total Leased

 

Rental

 

Rent

 

 

 

Period

 

Leases(1)

 

NRSF(2)

 

Rates(3)

 

Growth(4)

 

New/expansion leases commenced

 

Three months ended March 31, 2015

 

110

 

60,797

 

$

152

 

 

 

New/expansion leases signed

 

Three months ended March 31, 2015

 

100

 

54,385

 

$

163

 

 

 

Renewal leases signed

 

Three months ended March 31, 2015

 

122

 

40,446

 

$

179

 

11.4

%

 


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

(2)            Total leased NRSF is determined based on contractually leased square feet for leases that have been signed or commenced on or before March 31, 2015. We calculate occupancy based on factors in addition to contractually leased square feet, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.

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

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

 

Results of Operations

 

Three Months Ended March 31, 2015, Compared to the Three Months Ended March 31, 2014

 

The discussion below relates to our financial condition and results of operations for the three months ended March 31, 2015, and 2014. A summary of our operating results for the three months ended March 31, 2015, and 2014, is as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Operating revenue

 

$

74,757

 

$

63,731

 

$

11,026

 

17.3

%

Operating expense

 

61,421

 

54,422

 

6,999

 

12.9

%

Operating income

 

13,336

 

9,309

 

4,027

 

43.3

%

Interest expense

 

1,265

 

1,173

 

92

 

7.8

%

Net income

 

12,060

 

8,118

 

3,942

 

48.6

%

 

Operating Revenues

 

Operating revenues during the three months ended March 31, 2015, and 2014, were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Data center revenue:

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

41,323

 

$

34,899

 

$

6,424

 

18.4

%

Power revenue

 

19,669

 

16,002

 

3,667

 

22.9

%

Interconnection revenue

 

10,215

 

8,059

 

2,156

 

26.8

%

Tenant reimbursement and other

 

1,416

 

2,756

 

(1,340

)

-48.6

%

Total data center revenue

 

72,623

 

61,716

 

10,907

 

17.7

%

Office, light-industrial and other revenue

 

2,134

 

2,015

 

119

 

5.9

%

Total operating revenues

 

$

74,757

 

$

63,731

 

$

11,026

 

17.3

%

 

A majority of the increase in operating revenues was due to a $6.4 million increase in data center rental revenue during the three months ended March 31, 2015, compared to the 2014 period. The increase in data center rental revenue is due primarily to the net commencement of new and expansion leases during the twelve months ended March 31, 2015, which increased occupied data center NRSF from 1,127,856 NRSF as of March 31, 2014, to 1,248,302 NRSF as of March 31, 2015. Commenced leases that contributed to the increase in rental revenue include a 5,694 NRSF lease at CH1, which commenced in April 2014, a 12,600 NRSF lease at SV3, which commenced in May 2014, a 12,096 NRSF lease at NY2, which commenced September 2014, a 5,506 NRSF lease at SV4, which commenced October 2014, and a 15,321 NRSF lease at VA1,

 

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which commenced January 2015. These five leases increased data center rental revenue by $1.9 million during the three months ended March 31, 2015, compared to the 2014 period, which represented 29% of the total increase in data center rental revenue. The remainder of the increase in data center revenue is due to the additional 452 leases that commenced during the twelve months ended March 31, 2015, partially offset by expiring leases that were not renewed.

 

Data center power revenue increased $3.7 million during the three months ended March 31, 2015, compared to the 2014 period, as a result of new and expansion leases entered into and the overall increase in occupied NRSF and data center rental revenue. In addition, interconnection revenue increased $2.2 million during the three months ended March 31, 2015, compared to the 2014 period, as a result of an increase in the volume of cross connects from new and existing customers.

 

Operating Expenses

 

Operating expenses during the three months ended March 31, 2015, and 2014, were as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Property operating and maintenance

 

$

19,780

 

$

16,289

 

$

3,491

 

21.4

%

Real estate taxes and insurance

 

1,935

 

2,966

 

(1,031

)

-34.8

%

Depreciation and amortization

 

22,816

 

17,882

 

4,934

 

27.6

%

Sales and marketing

 

3,782

 

3,588

 

194

 

5.4

%

General and administrative

 

7,865

 

7,705

 

160

 

2.1

%

Rent

 

5,243

 

5,066

 

177

 

3.5

%

Impairment of internal-use software

 

 

922

 

(922

)

-100.0

%

Transaction costs

 

 

4

 

(4

)

-100.0

%

Total operating expenses

 

$

61,421

 

$

54,422

 

$

6,999

 

12.9

%

 

Property operating and maintenance expense increased $3.5 million as a result of an increase in power expense due to the commencement of new and expansion leases during the three months ended March 31, 2015, and an 11% increase in occupied data center NRSF from 1,127,856 NRSF as of March 31, 2014, to 1,248,302 NRSF as of March 31, 2015. In addition, payroll and benefits expense increased due to an increase in facilities and operations headcount associated with data center expansion.

 

Real estate taxes and insurance decreased $1.0 million during the three months ended March 31, 2015, compared to the 2014 period, primarily as a result of a real estate tax refund related to a successful appeal of the 2007 through 2010 tax years for one of our California properties. In addition, insurance premiums decreased as a result of new insurance contracts with lower rates.

 

Depreciation and amortization expense increased $4.9 million as a result of an increase in depreciation expense from new capital projects placed into service and an increase in amortization expense from new deferred leasing commissions related to new leases signed and lease renewals.

 

Interest Expense

 

A summary of interest expense for the three months ended March 31, 2015, and 2014, is as follows (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

2015

 

2014

 

$ Change

 

% Change

 

Interest expense and fees

 

$

2,226

 

$

1,762

 

$

464

 

26.3

%

Amortization of deferred financing costs

 

294

 

580

 

(286

)

-49.3

%

Capitalized interest

 

(1,255

)

(1,169

)

(86

)

7.4

%

Total interest expense

 

1,265

 

1,173

 

92

 

7.8

%

Percent capitalized

 

49.8

%

49.9

%

 

 

 

 

 

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Table of Contents

 

Liquidity and Capital Resources

 

Discussion of Cash Flows

 

Three Months Ended March 31, 2015, Compared to Three Months Ended March 31, 2014

 

Net cash provided by operating activities was $30.7 million for the three months ended March 31, 2015, compared to $26.7 million for the three months ended March 31, 2014. The increase in cash provided by operating activities of $4.0 million was due primarily to growth in data center rental, power and interconnection revenue from existing customers and completion and subsequent leasing of new data center space at several properties.

 

Net cash used in investing activities decreased by $6.9 million to $23.1 million for the three months ended March 31, 2015, compared to $30.0 million for the three months ended March 31, 2014. This decrease was primarily due to a reduction in cash expended on our real estate projects and proceeds from real estate disposal of $2.4 million primarily related to the Massachusetts Bay Transportation Authority acquiring 52,248 square feet of land at BO1 pursuant to an order of taking.

 

Net cash used in financing activities was $6.3 million for the three months ended March 31, 2015, compared to $8.2 million provided by financing activities for the three months ended March 31, 2014. The decrease of $14.4 million was primarily a result of $12.3 million less net cash proceeds from debt instruments during the three months ended March 31, 2015. The remaining decrease was due to an increase of $3.4 million in dividends and distributions paid on our common stock and Operating Partnership units during the three months ended March 31, 2015, as a result of the increased dividend from $0.35 per share or unit as of March 31, 2014, to $0.42 per share or unit as of March 31, 2015.

 

Analysis of Liquidity and Capital Resources

 

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

 

Our short-term liquidity requirements primarily consist of funds needed for interest expense, operating costs including utilities, site maintenance costs, real estate and personal property taxes, insurance, rental expenses and selling, general and administrative expenses, certain capital expenditures, including for the development of data center space and future distributions to common and preferred stockholders and holders of our common Operating Partnership units during the next twelve months. As of March 31, 2015, we had $12.1 million of cash and cash equivalents. Subject to our ability to obtain capital upon favorable terms, we estimate our anticipated development activity over the next twelve months will require approximately $120 million to $140 million of capital investment to expand our operating data center portfolio.

 

We expect to meet our short-term liquidity requirements, including our anticipated development activity over the next twelve months, through net cash provided by operations and by incurring additional indebtedness, including drawing on our revolving credit facility or other debt instruments. The total amount available for borrowings under our revolving credit facility is subject to the lesser of the facility amount or the availability calculated on our unencumbered asset pool. As of March 31, 2015, $233.8 million of borrowings were outstanding and up to $163.9 million of borrowing capacity remained available under our revolving credit facility. The Credit Agreement for our revolving credit facility contains an accordion feature, which allows our Operating Partnership to increase the total commitment from $405.0 million to $500.0 million, under specified circumstances. The revolving credit facility matures on January 3, 2017.

 

In order to increase our liquidity resources and access to capital and meet the needs of our development plans, our Operating Partnership and certain subsidiaries entered into a $100.0 million senior unsecured term loan on January 31, 2014. The senior unsecured term loan has a five-year term and contains an accordion feature, which allows our Operating Partnership to increase the total commitments by $100.0 million, to $200.0 million, under specified circumstances. The senior unsecured term loan matures on January 31, 2019.

 

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

 

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Table of Contents

 

Indebtedness

 

A summary of outstanding indebtedness as of March 31, 2015, and December 31, 2014, is as follows (in thousands):

 

 

 

Interest Rate

 

Maturity
Date

 

March 31,
2015

 

December 31,
2014

 

Revolving credit facility

 

2.18% and 2.17% at March 31, 2015, and December 31, 2014, respectively

 

January 3, 2017

 

$

233,750

 

$

218,500

 

Senior unsecured term loan

 

3.23% at March 31, 2015, and at December 31, 2014

 

January 31, 2019

 

100,000

 

100,000

 

SV1 - Mortgage loan

 

Repaid on January 31, 2014, and 3.67% at December 31, 2013

 

N/A

 

 

 

Total principal outstanding

 

 

 

 

 

$

333,750

 

$

318,500

 

 

As of March 31, 2015, we were in compliance with the covenants under our revolving credit facility and senior unsecured term loan. For additional information with respect to our outstanding indebtedness as of March 31, 2015, and December 31, 2014, as well as the available credit under our existing revolving credit facility, debt covenant requirements, and future debt maturities, refer to Item 1. Financial Statements — Note 5 — Debt.

 

Funds From Operations

 

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

 

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

 

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

 

 

 

Three Months Ended March 31,

 

(in thousands)

 

2015

 

2014

 

Net income

 

$

12,060

 

$

8,118

 

Real estate depreciation and amortization

 

20,253

 

16,836

 

Gain on land disposal

 

(36

)

 

FFO

 

32,277

 

24,954

 

Preferred stock dividends

 

(2,084

)

(2,084

)

FFO attributable to common shares and units

 

$

30,193

 

$

22,870

 

 

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Table of Contents

 

Distribution Policy

 

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

 

We have made distributions every quarter since our initial public offering. During the three months ended March 31, 2015, we paid a dividend of $0.42 per common share and Operating Partnership Unit as of March 31, 2015. While we plan to continue to make quarterly distributions, no assurances can be made as to the frequency or amounts of any future distributions. The payment of common share distributions is dependent upon our financial condition, operating results and REIT distribution requirements and may be adjusted at the discretion of our Board of Directors during the year.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The primary market risk to which we believe we are exposed is interest rate risk. Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk.

 

As of March 31, 2015, we had $333.8 million of consolidated indebtedness that bore variable interest based on one month LIBOR. As of March 31, 2015, we have an interest rate swap agreement in place to fix the interest rate on $100 million of our one month LIBOR variable rate debt. The interest rate swap has a five-year term and, at our current leverage ratio, effectively fixes the interest rate at 3.23%. Our interest rate risk not covered by an interest rate swap agreement is $233.8 million of variable rate debt outstanding as of March 31, 2015.

 

We monitor our market interest rate risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market interest rate risk sensitive instruments assuming a hypothetical 1% change in interest rates on our $233.8 million unhedged variable rate debt. If interest rates were to increase or decrease by 1%, the corresponding increase or decrease, as applicable, in interest expense on our variable rate debt would increase or decrease, as applicable, future earnings and cash flows by approximately $2.3 million per year.

 

On April 9, 2015, we entered into a $75 million forward starting five-year interest rate swap agreement to protect against adverse fluctuation in interest rates by reducing our exposure to variability in cash flows relating to interest payments on $75 million of one-month LIBOR variable rate debt. The agreement was designated for hedge accounting and will be effective May 5, 2015.

 

These analyses do not consider the effect of any change in overall economic activity that could impact interest rates. Further, in the event of an increase in interest rates of significant magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

 

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ITEM 4. CONTROLS AND PROCEDURES 

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As of March 31, 2015, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2015.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors included in the section entitled “Risk Factors” beginning on page 17 of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on February 13, 2015, which is accessible on the SEC’s website at www.sec.gov.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

SALES OF UNREGISTERED EQUITY SECURITIES

 

None.

 

REPURCHASES OF EQUITY SECURITIES

 

None.

 

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6.                                                EXHIBITS

 

Exhibit
Number

 

Description

3.1

 

Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)

 

 

 

3.2

 

Articles Supplementary of CoreSite Realty Corporation — 7.25% Series A Cumulative Redeemable Preferred Stock.(2)

 

 

 

3.3

 

Bylaws of CoreSite Realty Corporation.(1)

 

 

 

4.1

 

Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(3)

 

 

 

10.1

 

2015 Executive Short-Term Incentive Plan.*

 

 

 

10.2

 

Employment Offer Letter between CoreSite L.L.C. and Steve Smith, dated January 8, 2014.*

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 


*                 Represents management contract or compensatory plan or arrangement.

(1)         Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(2)         Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on December 18, 2012.

(3)         Incorporated by reference to our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

CORESITE REALTY CORPORATION

 

 

 

 

Date: April 24, 2015

By:

/s/ Jeffrey S. Finnin

 

 

Jeffrey S. Finnin

 

 

Chief Financial Officer

 

 

(Principal Financial Officer)

 

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Table of Contents

 

Exhibit Index

 

Exhibit
Number

 

Description

3.1

 

Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)

 

 

 

3.2

 

Articles Supplementary of CoreSite Realty Corporation — 7.25% Series A Cumulative Redeemable Preferred Stock.(2)

 

 

 

3.3

 

Bylaws of CoreSite Realty Corporation.(1)

 

 

 

4.1

 

Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(3)

 

 

 

10.1

 

2015 Executive Short-Term Incentive Plan.*

 

 

 

10.2

 

Employment Offer Letter between CoreSite L.L.C. and Steve Smith, dated January 8, 2014.*

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 


*                 Represents management contract or compensatory plan or arrangement.

(1)         Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(2)   Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on December 18, 2012.

(3)         Incorporated by reference to our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

 

33