XNYS:COR CoreSite Realty Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012.

 

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

For the Transition Period From                     to                     .

Commission file number: 001-34877

 

 

CoreSite Realty Corporation

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-1925611

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1050 17th Street, Suite 800

Denver, CO

 

80265

(Address of principal executive offices)   (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 ¨.

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  ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  ¨    No  x

The number of shares of common stock outstanding at April 25, 2012 was 20,990,651.

 

 

 


Table of Contents

CORESITE REALTY CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS

 

     PAGE  
     NO.  

PART I. FINANCIAL INFORMATION

     3   

ITEM 1. Financial Statements

     3   

Condensed Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011

     3   

Condensed Consolidated Statements of Operations for the three months ended March  31, 2012 and 2011 (unaudited)

     4   

Condensed Consolidated Statements of Comprehensive Income for the three months ended March  31, 2012 and 2011(unaudited)

     5   

Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March  31, 2012 (unaudited)

     6   

Condensed Consolidated Statements of Cash Flows for the three months ended March  31, 2012 and 2011 (unaudited)

     7   

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

     21   

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

     31   

ITEM 4. Controls and Procedures

     31   

PART II. OTHER INFORMATION

     32   

ITEM 1. Legal Proceedings

     32   

ITEM 1A. Risk Factors

     32   

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

     32   

ITEM 3. Defaults Upon Senior Securities

     32   

ITEM 4. Mine Safety Disclosures

     32   

ITEM 5. Other Information

     32   

ITEM 6. Exhibits

     33   

Signatures

     34   

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

(in thousands except share data)

 

     March 31,     December 31,  
     2012     2011  
     (unaudited)        

ASSETS

    

Investments in real estate:

    

Land

   $ 84,738      $ 84,738   

Building and building improvements

     517,934        499,717   

Leasehold improvements

     82,660        81,057   
  

 

 

   

 

 

 
     685,332        665,512   

Less: Accumulated depreciation and amortization

     (73,571     (64,428
  

 

 

   

 

 

 

Net investment in operating properties

     611,761        601,084   

Construction in progress

     69,519        73,084   
  

 

 

   

 

 

 

Net investments in real estate

     681,280        674,168   

Cash and cash equivalents

     3,998        6,628   

Restricted cash

     8,712        9,291   

Accounts and other receivables, net of allowance for doubtful accounts of $623 and $465 as of March 31, 2012 and December 31, 2011, respectively

     7,403        6,562   

Lease intangibles, net of accumulated amortization of $33,107 and $33,711 as of March 31, 2012 and December 31, 2011, respectively

     30,905        36,643   

Goodwill

     41,191        41,191   

Other assets

     37,431        33,743   
  

 

 

   

 

 

 

Total assets

   $ 810,920      $ 808,226   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Liabilities:

    

Revolving credit facility

   $ 40,250      $ 5,000   

Mortgage loans payable

     91,782        116,864   

Accounts payable and accrued expenses

     39,096        38,822   

Deferred rent payable

     3,785        3,535   

Acquired below-market lease contracts, net of accumulated amortization of $10,241 and $9,267 as of March 31, 2012 and December 31, 2011, respectively

     10,898        11,872   

Prepaid rent and other liabilities

     10,755        11,946   
  

 

 

   

 

 

 

Total liabilities

     196,566        188,039   

Stockholders’ equity:

    

Common stock, par value $0.01, 100,000,000 shares authorized and 20,800,379 and 20,747,794 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     204        204   

Additional paid-in capital

     257,338        256,183   

Accumulated other comprehensive income (loss)

     (47     (34

Accumulated deficit

     (26,683     (23,545
  

 

 

   

 

 

 

Total stockholders’ equity

     230,812        232,808   

Noncontrolling interests

     383,542        387,379   
  

 

 

   

 

 

 

Total equity

     614,354        620,187   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 810,920      $ 808,226   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three Months Ended March 31,  
     2012     2011  

Operating revenues:

    

Rental revenue

   $ 29,493      $ 25,210   

Power revenue

     12,330        9,781   

Tenant reimbursement

     1,296        1,720   

Other revenue

     4,165        3,255   
  

 

 

   

 

 

 

Total operating revenues

     47,284        39,966   

Operating expenses:

    

Property operating and maintenance

     14,395        12,023   

Real estate taxes and insurance

     2,014        2,743   

Depreciation and amortization

     15,461        19,473   

Sales and marketing

     2,129        1,377   

General and administrative

     6,352        5,617   

Transaction costs

     122        —     

Rent

     4,577        4,547   
  

 

 

   

 

 

 

Total operating expenses

     45,050        45,780   
  

 

 

   

 

 

 

Operating income (loss)

     2,234        (5,814

Interest income

     2        66   

Interest expense

     (1,018     (2,252
  

 

 

   

 

 

 

Income (loss) before income taxes

     1,218        (8,000

Income tax benefits

     125        84   
  

 

 

   

 

 

 

Net income (loss) per share attributable to common shares:

   $ 1,343      $ (7,916

Net income (loss) attributable to noncontrolling interests

     743        (4,544
  

 

 

   

 

 

 

Net income (loss) attributable to common shares

   $ 600      $ (3,372
  

 

 

   

 

 

 

Net income (loss) per share attributable to common shares:

    

Basic

   $ 0.03      $ (0.17

Diluted

   $ 0.03      $ (0.17
  

 

 

   

 

 

 

Weighted average common shares outstanding:

    

Basic

     20,455,875        19,458,605   

Diluted

     20,694,855        19,458,605   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)

 

     Three Months Ended March 31,  
     2012     2011  

Net income (loss):

   $ 1,343      $ (7,916

Other comprehensive income (loss):

    

Change in fair value on derivative contracts

     (69     (65

Reclassification of other comprehensive loss to interest expense

     41        38   
  

 

 

   

 

 

 

Comprehensive income (loss)

     1,315        (7,943

Comprehensive income (loss) attributable to noncontrolling interests

     728        (4,560
  

 

 

   

 

 

 

Comprehensive income (loss) attributable to common shares

   $ 587      $ (3,383
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

CORESITE REALTY CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(unaudited and in thousands except share data)

 

                                Accumulated                    
                   Additional            Other     Total              
     Common Shares      Paid-in      Accumulated     Comprehensive     Stockholders’     Noncontrolling     Total  
     Number      Amount      Capital      Deficit     Income (Loss)     Equity     Interests     Equity  

Balance at January 1, 2012

     20,747,794       $ 204       $ 256,183       $ (23,545   $ (34   $ 232,808      $ 387,379      $ 620,187   

Issuance of restricted stock awards, net of forfeitures

     26,536         —           —           —          —          —          —          —     

Exercise of stock options

     26,049         —           408         —          —          408        —          408   

Amortization of deferred compensation

     —           —           747         —          —          747        —          747   

Dividends and distributions

     —           —           —           (3,738     —          (3,738     (4,565     (8,303

Net income

     —           —           —           600        —          600        743        1,343   

Change in fair value on derivative contracts

     —           —           —           —          (31     (31     (38     (69

Reclassification of other comprehensive loss to interest expense

     —           —           —           —          18        18        23        41   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     20,800,379       $ 204       $ 257,338       $ (26,683   $ (47   $ 230,812      $ 383,542      $ 614,354   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income (loss)

   $ 1,343      $ (7,916

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     15,461        19,473   

Amortization of above/below market leases

     (396     (390

Amortization of deferred financing costs

     436        427   

Amortization of share-based compensation

     747        497   

Amortization of discount to fair market value of acquired loan

     —          687   

Bad debt expense

     142        20   

Changes in operating assets and liabilities:

    

Restricted cash

     427        (77

Accounts receivable

     (983     (873

Due to and due from related parties

     —          2   

Deferred rent receivable

     (1,568     (859

Deferred leasing costs

     (1,982     (2,038

Other assets

     (1,608     658   

Accounts payable and accrued expenses

     1,969        2,941   

Prepaid rent and other liabilities

     (1,054     241   

Deferred rent payable

     250        366   
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,184        13,159   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Real estate improvements

     (18,161     (20,310

Changes in reserves for capital improvements

     152        78   
  

 

 

   

 

 

 

Net cash used in investing activities

     (18,009     (20,232
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Offering costs

     —          (17

Proceeds from exercise of stock options

     408        —     

Proceeds from revolving credit facility

     35,250        —     

Repayments of mortgage loans payable

     (25,082     —     

Payments of loan fees and costs

     (109     (6

Dividends and distributions

     (8,272     (5,940
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     2,195        (5,963
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (2,630     (13,036

Cash and cash equivalents, beginning of period

     6,628        86,246   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 3,998      $ 73,210   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

    

Cash paid for interest

   $ 1,481      $ 1,100   

NON-CASH INVESTING AND FINANCING ACTIVITY

    

Construction costs payable capitalized to real estate

   $ 3,841      $ 10,987   

Accrual of dividends and distributions

   $ 8,489      $ 5,997   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

CORESITE REALTY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012

(unaudited)

1. Organization and Description of Business

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

We are engaged in the business of owning, acquiring, constructing and managing technology-related real estate and as of March 31, 2012, our property portfolio included 12 operating data center facilities and one development site located in some of the largest and fastest growing data center markets in the United States, including Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago, Boston, New York City and Miami.

2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in compliance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the expected results for the year ending December 31, 2012. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011. Intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates, including those related to assessing the carrying values of our real estate properties, accrued liabilities, performance-based equity compensation plans, and qualification as a REIT based on estimates of historical experience, current market conditions, and various other assumptions that are believed to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could vary under different assumptions or conditions.

Investments in Real Estate

Real estate investments are carried at cost less accumulated depreciation and amortization. The cost of real estate includes the purchase price of the property and leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized. During the development of the properties, the capitalization of costs, which include interest, real estate taxes and other direct and indirect costs, begins upon commencement of development efforts and ceases when the property is ready for its intended use. Interest is capitalized during the period of development based upon applying the weighted-average borrowing rate to the actual development costs expended. Capitalized interest costs were $0.7 million and $0.1 million for the three months ended March 31, 2012 and 2011, respectively.

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

 

Buildings

   27 to 40 years

Building improvements

   1 to 15 years

Leasehold improvements

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

Depreciation expense was $9.4 million and $8.6 million for the three months ended March 31, 2012 and 2011, respectively.

 

8


Table of Contents

Acquisition of Investment in Real Estate

Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and the value of customer relationships.

The fair value of the land and building of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land and building based on management’s determination of the fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.

The fair value of intangibles related to in-place leases includes the value of lease intangibles for above-market and below-market leases, lease origination costs, and customer relationships, determined on a lease-by-lease basis. Above-market and below-market leases are valued based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. Lease origination costs include estimates of costs avoided associated with leasing the property, including tenant allowances and improvements and leasing commissions. Customer relationship intangibles relate to the additional revenue opportunities expected to be generated through interconnection services and utility services to be provided to the in-place lease tenants.

The capitalized values for above and below-market lease intangibles, lease origination costs, and customer relationships are amortized over the term of the underlying leases. Amortization related to above-market and below-market leases where the Company is the lessor is recorded as either an increase to or a reduction of rental income, amortization related to above-market and below-market leases where the Company is the lessee is recorded as either an increase to or a reduction of 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.

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, 2012, we had approximately $41.2 million of goodwill. 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.

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.

Restricted Cash

The Company is required to maintain certain minimum cash balances in escrow by loan agreements to cover various building improvements. The Company is legally restricted by these agreements from using this cash other than for the purposes specified therein.

Deferred Costs

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

Deferred financing costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are capitalized and amortized on a straight-line basis, which approximates the effective-interest method, over the term of the loan and are included as a component of interest expense.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the assets. The estimation of expected future net cash flows is inherently uncertain and relies, to a considerable extent, on assumptions regarding current and future economics and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the assets. To the extent that an impairment has occurred, the excess of the carrying amount of long-lived assets over its estimated fair value would be charged to income. For the three months ended March 31, 2012 and 2011, no impairment was recognized.

 

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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. Any ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. For derivatives that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized in earnings.

Revenue Recognition

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

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

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

Above-market and below-market lease intangibles that were acquired are amortized on a straight-line basis as decreases and increases, respectively, to rental revenue over the remaining non-cancellable term of the underlying leases. For the three months ended March 31, 2012 and 2011, the net effect of amortization of acquired above-market and below-market leases resulted in an increase to rental income of $0.6 million and $0.4 million, respectively. Balances, net of accumulated amortization, at March 31, 2012 and December 31, 2011, are as follows (in thousands):

 

     March 31,     December 31,  
     2012     2011  

Lease contracts above-market value

   $ 8,492      $ 8,668   

Accumulated amortization

     (4,654     (4,253
  

 

 

   

 

 

 

Lease contracts above-market value, net

   $ 3,838      $ 4,415   
  

 

 

   

 

 

 

Lease contracts below-market value

   $ 21,139      $ 21,139   

Accumulated amortization

     (10,241     (9,267
  

 

 

   

 

 

 

Lease contracts below-market value, net

   $ 10,898      $ 11,872   
  

 

 

   

 

 

 

A provision for uncollectible accounts is recorded if a receivable balance relating to contractual rent, rent recorded on a straight-line basis, or tenant reimbursements is considered by management to be uncollectible. At March 31, 2012 and December 31, 2011, the allowance for doubtful accounts totaled $0.6 million and $0.5 million, respectively. Additions to the allowance for doubtful accounts were $0.2 million and $0.1 million for the three months ended March 31, 2012 and 2011, respectively. Write-offs (recoveries) charged against the allowance were less than ($0.1) million and less than $0.1 million for the three months ended March 31, 2012 and 2011, respectively.

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

Asset Retirement Obligations

We record accruals for estimated retirement obligations. The asset retirement obligations relate primarily to the removal of asbestos and contaminated soil during development or redevelopment of the properties as well as the estimated equipment removal costs upon termination of a certain lease under which the Company is the lessee. At March 31, 2012 and December 31, 2011, the amount included in other liabilities on the condensed consolidated balance sheets was approximately $1.9 million and $1.9 million, respectively.

 

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Income Taxes

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

To maintain REIT status, we will distribute a minimum of 90% of the Company’s taxable income. However, it is our policy and intent, subject to change, to distribute 100% of the Company’s taxable income and therefore no provision is required in the accompanying financial statements for federal income taxes with regards to activities of the REIT and its subsidiary pass-through entities. Any taxable income prior to the completion of the IPO is the responsibility of the Company’s prior members. The allocable share of income is included in the income tax returns of the members. The Company is subject to the statutory requirements of the locations in which it conducts business. State and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.

We have elected to treat one of our subsidiaries as a taxable REIT subsidiary (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as services for our tenants that would otherwise be impermissible for us to perform and holding assets that we cannot hold directly. A TRS is subject to corporate level federal and state income taxes. Relative deferred tax assets and liabilities arising from temporary differences in financial reporting versus tax reporting are also established as determined by management.

Deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior years that previously had been recognized as deferred income tax assets and the reversal of any previously recorded deferred income tax liabilities. A valuation allowance for deferred income tax assets is provided if we believe all or some portion of the deferred income tax asset may not be realized. Any increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in the estimated realizability of the related deferred income tax asset is included in deferred tax expense. As of March 31, 2012, the deferred income taxes were not material.

We currently have no liabilities for uncertain tax positions. The earliest tax year for which the Company is subject to examination is 2010. Prior to their contribution to our Operating Partnership, our subsidiaries were treated as pass-through entities for tax purposes and the earliest year for which our subsidiaries are subject to examination is 2008.

Concentration of Credit Risks

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

For the three months ended March 31, 2012 and 2011, total operating revenues recognized from one customer accounted for 10.4% and 12.2%, respectively.

Segment Information

The Company manages its business as one reportable segment consisting of investments in data centers located in the United States. Although the Company provides 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.

Recent Accounting Pronouncements

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company adopted the provisions of this standard effective January 1, 2012 by presenting a separate Condensed Consolidated Statement of Comprehensive Income.

 

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3. Investment in Real Estate

The following is a summary of the properties owned and leased at March 31, 2012 (in thousands):

 

Property Name

   Location    Acquisition
Date
            Buildings and
Improvements
     Leasehold
Improvements
     Construction
in Progress
        
         Land               Total Cost  

1656 McCarthy

   Milpitas, CA      12/6/2006       $ 5,086       $ 22,032       $ —         $ —         $ 27,118   

2901 Coronado

   Santa Clara, CA      2/2/2007         3,972         45,105         —           —           49,077   

2972 Stender

   Santa Clara, CA      2/2/2007         4,442         26,951         —           32,130         63,523   

Coronado-Stender Properties

   Santa Clara, CA      2/2/2007         11,486         12,076         —           193         23,755   

70 Innerbelt

   Somerville, MA      4/11/2007         6,100         67,834         —           713         74,647   

32 Avenue of the Americas

   New York, NY      6/30/2007         —           —           30,910         21         30,931   

12100 Sunrise Valley

   Reston, VA      12/28/2007         12,100         75,449         —           23,790         111,339   

One Wilshire

   Los Angeles, CA      9/28/2010         —           —           45,935         867         46,802   

900 N. Alameda

   Los Angeles, CA      9/28/2010         28,467         105,952         —           957         135,376   

55 S. Market

   San Jose, CA      9/28/2010         6,863         97,319         —           1,869         106,051   

427 S. LaSalle

   Chicago, IL      9/28/2010         5,493         55,606         —           8,925         70,024   

1275 K Street

   Washington, DC      9/28/2010         —           —           5,815         22         5,837   

2115 NW 22nd Street

   Miami, FL      9/28/2010         729         9,610         —           32         10,371   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

         $ 84,738       $ 517,934       $ 82,660       $ 69,519       $ 754,851   
        

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

4. Other Assets

Our other assets consisted of the following, net of amortization and depreciation, if applicable, as of March 31, 2012 and December 31, 2011 (in thousands):

 

     March 31,      December 31,  
     2012      2011  

Deferred leasing costs

   $ 12,798       $ 11,601   

Deferred rent receivable

     12,619         11,051   

Deferred financing costs

     3,280         3,607   

Leasehold interests in corporate headquarters

     2,664         2,719   

Other

     6,070         4,765   
  

 

 

    

 

 

 

Total

   $ 37,431       $ 33,743   
  

 

 

    

 

 

 

 

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5. Debt

A summary of outstanding indebtedness as of March 31, 2012 and December 31, 2011 is as follows (in thousands):

 

***** ***** ***** *****
    

Interest Rate

   Maturity Date     March 31,
2012
     December 31,
2011
 

Senior secured credit facility

   (1)      December 15, 2014      $ 40,250       $ 5,000   

55 S. Market

   LIBOR plus 3.50% (3.74% and 3.75% at March 31, 2012 and December 31, 2011)(2)      October 9, 2012 (3)      60,000         60,000   

12100 Sunrise Valley

   LIBOR plus 2.75% (3.00% and 3.06% at March 31, 2012 and December 31, 2011)(2)      June 1, 2013        31,782         31,864   

427 S. LaSalle—Senior mortgage loan

   LIBOR plus 0.60% (0.86% at December 31, 2011)      Repaid, Feburary 2012        —           25,000   
       

 

 

    

 

 

 

Total principal outstanding

        $ 132,032       $ 96,864   
       

 

 

    

 

 

 

 

(1) At the Company’s election, borrowings under the credit facility bear interest at a rate per annum equal to either (i) LIBOR plus 225 basis points to 300 basis points, or (ii) a base rate plus 125 basis points to 200 basis points, depending on our leverage ratio. As of March 31, 2012, the weighted average interest rate on outstanding borrowings under the senior secured credit facility was 2.49%.
(2) In October 2010, we entered into an interest rate swap agreement with respect to the indebtedness on 55 S. Market and an interest rate cap agreement with respect to the indebtedness on 12100 Sunrise Valley, each as a cash flow hedge for interest incurred on these LIBOR based loans.
(3) The mortgage contains one two-year extension option subject to the Company meeting certain financial and other customary conditions and the payment of an extension fee equal to 60 basis points.

Senior Secured Credit Facility

On December 15, 2011, our Operating Partnership and certain subsidiary co-borrowers entered into an amended and restated senior secured revolving credit facility (the “Amended Credit Agreement”) with a group of lenders for which KeyBank National Association acts as the administrative agent. The Amended Credit Agreement amended our Operating Partnership’s then existing senior secured revolving credit facility, dated September 28, 2010 (the “Prior Facility”), and is unconditionally guaranteed on a senior unsecured basis by us. Our Operating Partnership acts as the parent borrower, and our subsidiaries that own 1656 McCarthy, 70 Innerbelt, 2901 Coronado and 900 N. Alameda are co-borrowers under the Amended Credit Agreement, with borrowings under the facility secured by a lien on these properties on a senior secured basis. In addition, the obligations of each of our Operating Partnership and the co-borrowers under the Amended Credit Agreement are joint and several.

On February 7, 2012, we repaid the senior mortgage loan of $25.0 million secured by the 427 S. LaSalle property and subsequently added 427 S. LaSalle as a co-borrower under the Amended Credit Agreement, with borrowings under the facility secured by a lien on such real estate property on a senior secured basis.

The Amended Credit Agreement increased the commitment from the Prior Facility of $110.0 million to $225.0 million, and extended the initial maturity date of the Prior Facility from September 28, 2013, to December 15, 2014, with a one-time extension option, which, if exercised, would extend the maturity date to December 15, 2015. An 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 Amended Credit Agreement at initial maturity and certain other customary conditions. As of March 31, 2012 and December 31, 2011, $40.3 million and $5.0 million, respectively, was outstanding under the facility.

Under the Amended Credit Agreement, our Operating Partnership may elect to have borrowings bear interest at a rate per annum equal to (i) LIBOR plus 225 basis points to 300 basis points, or (ii) a base rate plus 125 basis points to 200 basis points, each depending on our Operating Partnership’s leverage ratio. The Amended Credit Agreement also contains an accordion feature to allow our Operating Partnership to increase the total commitment by $175.0 million, to $400.0 million, under specified circumstances.

The total amount available for borrowings under the Amended Credit Agreement will be subject to the lesser of a percentage of the appraised value of our Operating Partnership’s properties that form the designated borrowing base properties of the facility, a minimum borrowing base debt service coverage ratio and a minimum borrowing base debt yield. As of March 31, 2012, $153.6 million was available for us to borrow under the facility.

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

 

   

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

 

   

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

 

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

 

   

a maximum recourse debt ratio (defined as recourse indebtedness other than indebtedness under the revolving credit facility to gross asset value) of 30%; and

 

   

a minimum tangible net worth equal to at least $468,750,000 plus 80% of the net proceeds of any additional equity issuances.

As of March 31, 2012, we were in compliance with the covenants.

Financing costs of $2.3 million and $1.8 million, which were incurred in connection with the execution of the Prior Facility and the Amended Credit Agreement, respectively, have been capitalized and are included in deferred financing costs. Amortization of these deferred financing costs for the three months ended March 31, 2012 and 2011 totaled $0.3 million and $0.2 million, respectively, and have been included in interest expense.

55 S. Market

As of March 31, 2012, the 55 S. Market property had a $60.0 million mortgage loan, which matures on October 9, 2012. The mortgage payable contains one two-year extension option provided we meet certain financial and other customary conditions and subject to the payment of an extension fee equal to 60 basis points. The loan bears interest at LIBOR plus 350 basis points and requires the payment of interest only until maturity. The mortgage requires ongoing compliance by us with various covenants including liquidity and net operating income covenants. As of March 31, 2012, we were in compliance with the covenants.

On October 7, 2010, we entered into a $60.0 million 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 the $60.0 million 55 S. Market mortgage. The interest rate swap matures on October 9, 2012, and effectively fixes the interest rate at 4.01%.

12100 Sunrise Valley

As of March 31, 2012, the 12100 Sunrise Valley property had a mortgage loan payable of $31.8 million. The loan is secured by the 12100 Sunrise Valley property and required payments of interest only until the “amortization commencement date” on July 1, 2011. The loan matures on June 1, 2013 and we may exercise the one remaining one-year extension option provided we meet certain financial and other customary conditions and subject to the payment of an extension fee equal to 50 basis points. The mortgage loan payable contains certain financial and nonfinancial covenants. As of March 31, 2012, we were in compliance with the covenants.

On October 8, 2010, we purchased an interest rate cap to hedge $25.0 million of the indebtedness secured by our 12100 Sunrise Valley property. The interest rate cap matures on October 1, 2012, and hedges against LIBOR interest rate increases above 2.0%.

427 S. LaSalle

On February 7, 2012, we repaid the $25.0 million senior mortgage loan on the 427 S. LaSalle property.

Debt Maturities

The following table summarizes our debt maturities as of March 31, 2012 (in thousands):

 

Year Ending December 31,

      

Remainder of 2012(1)

   $ 60,233   

2013

     31,549   

2014

     40,250   
  

 

 

 

Total

   $ 132,032   
  

 

 

 

 

(1) The 55 S. Market mortgage, which is scheduled to mature on October 9, 2012, contains one two-year extension option subject to the Company meeting certain financial and other customary conditions and the payment of an extension fee equal to 60 basis points.

 

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Table of Contents

6. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

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

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its 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. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

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 and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the period, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2012 and 2011, the Company did not record any amount in earnings related to derivatives due to hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During 2012, the Company estimates that $0.1 million will be reclassified as an increase to interest expense.

As of March 31, 2012, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Cash Flow Hedge Derivative Summary

 

     Number of
Instruments
     Notional  

Derivative type

     

Interest rate swap

     1       $ 60,000,000   

Interest rate cap

     1         25,000,000   
  

 

 

    

 

 

 

Total

     2       $ 85,000,000   
  

 

 

    

 

 

 

Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of March 31, 2012 and December 31, 2011.

 

     Fair Values of Derivative Instruments  
     Derivative Assets      Derivative Liabilities  
     As of March  31,
2012
     As of December
31, 2011
     As of March  31,
2012
     As of December
31, 2011
 
     (In thousands)  

Balance sheet location

     Other Assets         Other Assets         Other Liabilities         Other Liabilities   

Interest rate caps

   $ —         $ —         $ —         $ —     

Interest rate swaps

     —           —           82         50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 82       $ 50   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments on the statement of operations for the three months ended March 31, 2012 and 2011 (in thousands).

 

***** ***** ***** ***** ***** ***** ***** *****
    Income Statement Impact of Derivatives in Cash Flow Hedging Relationships  
    Amount of Gain or  (Loss)
Recognized in OCI on
Derivative (Effective
Portion) for the
Three Months Ended
March 31,
   

Location of Gain or

(Loss) Reclassified from

Accumulated OCI into

Income (Effective

Portion)

  Amount of Gain or  (Loss)
Reclassified from
Accumulated OCI into Income
(Effective Portion) for the
Three Months Ended
March 31,
   

Location of Gain or

(Loss) Recognized in

Income on Derivative

(Ineffective Portion and

Amount Excluded from

Effectiveness Testing)

  Amount of Gain or  (Loss)
Recognized in Income on
Derivative (Ineffective Portion
and Amount Excluded from
Effectiveness Testing) for the
Three Months Ended
March 31,
 
    2012     2011       2012     2011       2012     2011  

Interest rate derivatives

               

Interest rate caps

  $ —        $ (13)      Interest income / (expense)   $ —        $ —        Other income / (expense)   $ —        $ —     

Interest rate swap

    (69)        (52)      Interest income / (expense)     (41)        (38)      Other income / (expense)     —          —     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Total

  $ (69)      $ (65)        $ (41)      $ (38)        $ —        $ —     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

 

Credit-Risk-Related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision under which if the Company defaults on any of its indebtedness, including default when repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. Such a default may require the Company to settle any outstanding derivatives at their then current fair value. As of March 31, 2012, the derivative instruments with fair values in a net liability position were not material and the Company has not posted any cash collateral related to these agreements.

7. Noncontrolling Interests — Operating Partnership

Noncontrolling interests represent the limited partnership interests in the Operating Partnership held by individuals and entities other than CoreSite Realty Corporation. Since September 28, 2011, the current holders of Operating Partnership units have been eligible to have the Operating Partnership units redeemed for cash or, at our option, exchangeable into our common stock on a one-for-one basis. We have evaluated whether we control the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement of the Operating Partnership units. Based on the results of this analysis, we concluded that the Operating Partnership units met the criteria to be classified within equity at March 31, 2012.

The following table shows the ownership interest in the Operating Partnership as of March 31, 2012 and December 31, 2011:

 

     March 31, 2012     December 31, 2011  
     Number of Units      Percentage of Total     Number of Units      Percentage of Total  

The Company

     20,494,331         44.7     20,404,743         44.6

Noncontrolling interests consist of:

          

Common units held by third parties

     25,275,390         55.1     25,275,390         55.2

Incentive units held by employees

     69,692         0.2     69,692         0.2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     45,839,413         100.0     45,749,825         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

For each share of common stock issued, the Operating Partnership issues an equivalent Operating Partnership unit to the Company. During the three months ended March 31, 2012, the Company issued 89,588 shares of common stock related to employee compensation arrangements and therefore an equivalent number of Operating Partnership units were issued.

The redemption value of the noncontrolling interests at March 31, 2012, was $597.9 million based on the closing price of the Company’s stock of $23.59 on that date.

8. Stockholders’ Equity

On March 14, 2012, we declared a regular cash dividend for the first quarter of 2012 of $0.18 per common share payable to stockholders of record as of March 30, 2012. In addition, holders of Operating Partnership units also received a distribution of $0.18 per unit. The dividend and distribution were paid on April 16, 2012.

 

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9. Equity Incentive Plan

In connection with our IPO, the Company’s Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan is administered by the Board of Directors, or the plan administrator. Awards issuable under the 2010 Plan include common stock, stock options, restricted stock, stock appreciation rights, dividend equivalents and other incentive awards. We have reserved a total of 3,000,000 shares of our common stock for issuance pursuant to the 2010 Plan, which may be adjusted for changes in our capitalization and certain corporate transactions. To the extent that an award expires, terminates or lapses, or an award is settled in cash without the delivery of shares of common stock to the participant, then any unexercised shares subject to the award will be available for future grant or sale under the 2010 Plan. Shares of restricted stock which are forfeited or repurchased by us pursuant to the 2010 Plan may again be optioned, granted or awarded under the 2010 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, 2012, 1,456,609 shares of our common stock remained available for issuance pursuant to the 2010 Plan. On April 5, 2012, the Board of Directors approved the issuance of 190,518 shares of restricted stock and options to purchase 211,267 shares of common stock to certain employees under the 2010 Plan, leaving 1,054,824 shares of our common stock available for issuance pursuant to the 2010 Plan.

Stock Options

Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant. The fair value of each option granted under the 2010 Plan is estimated on the date of the grant using the Black-Scholes option-pricing model. For the three months ended March 31, 2012, options to purchase 5,473 shares of common stock were granted. The fair values are being expensed on a straight-line basis over the vesting periods.

The following table sets forth the stock option activity under the 2010 Plan for the three months ended March 31, 2012:

 

     Number of
Shares  Subject
to Option
    Weighted-
Average
Exercise Price
 

Options outstanding, December 31, 2011

     998,051      $ 15.63   

Granted

     5,473        20.10   

Forfeited

     (15,917     15.84   

Expired

     (156     16.00   

Exercised

     (26,049     15.68   
  

 

 

   

 

 

 

Options outstanding, March 31, 2012

     961,402      $ 15.65   
  

 

 

   

 

 

 

The following table sets forth the number of shares subject to option that are unvested as of March 31, 2012 and the fair value of these options at the grant date:

 

     Number of
Shares  Subject
to Option
    Weighted-
Average  Fair
Value at Grant
Date
 

Unvested balance, December 31, 2011

     867,109      $ 4.92   

Granted

     5,473        6.10   

Forfeited

     (15,917     4.94   

Vested

     (118,133     4.86   
  

 

 

   

 

 

 

Unvested balance, March 31, 2012

     738,532      $ 4.94   
  

 

 

   

 

 

 

As of March 31, 2012, total unearned compensation on options was approximately $3.0 million, and the weighted-average vesting period was 2.8 years.

 

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Table of Contents

Restricted Awards

During the three months ended March 31, 2012, the Company issued 30,207 shares of restricted stock. Additionally, the Company issued 192 restricted stock units, or RSUs. The principal difference between these instruments is that RSUs are not outstanding shares of the Company’s common stock and do not have any of the rights or privileges thereof, including voting rights. On the applicable vesting date, the holder of an RSU becomes entitled to one share of common stock for each RSU. The restricted awards are amortized on a straight-line basis to expense over the vesting period. The following table sets forth the number of unvested restricted awards and the weighted-average fair value of these awards at the date of grant:

 

     Restricted
Awards
    Weighted-
Average Fair
Value at Grant
Date
 

Unvested balance, December 31, 2011

     343,231      $ 15.35   

Granted

     30,399        22.57   

Forfeited

     (3,671     15.78   

Vested

     (63,911     14.98   
  

 

 

   

 

 

 

Unvested balance, March 31, 2012

     306,048      $ 16.14   
  

 

 

   

 

 

 

As of March 31, 2012, total unearned compensation on restricted awards was approximately $4.3 million, and the weighted-average vesting period was 2.2 years.

Operating Partnership Units

In connection with the Company’s IPO, we issued 25,883 Operating Partnership units, which had a grant date fair value of $15.98 per unit or $0.4 million in total. The Operating Partnership units are amortized on a straight-line basis to expense over the vesting period. As of March 31, 2012, 8,627 Operating Partnership units have vested and 17,256 Operating Partnership units were unvested. As of March 31, 2012, total unearned compensation on Operating Partnership units was approximately $0.2 million, and the weighted-average vesting period was 1.5 years.

10. Earnings Per Share

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

 

     Three Months Ended March 31,  
     2012      2011  

Net income (loss) attributable to common shares

   $ 600       $ (3,372

Weighted average common shares outstanding—basic

     20,455,875         19,458,605   

Potentially dilutive common shares:

     

Stock options

     119,963         —     

Unvested restricted awards

     119,017         —     
  

 

 

    

 

 

 

Weighted average common shares outstanding—diluted

     20,694,855         19,458,605   
  

 

 

    

 

 

 

Net income (loss) per share attributable to common shares

     

Basic

   $ 0.03       $ (0.17

Diluted

   $ 0.03       $ (0.17

We have excluded the following potentially dilutive securities in the calculations above as their effect would have been antidilutive:

 

     Three Months Ended March 31,  
     2012      2011  

Stock options

     841,439         1,052,176   

Restricted awards

     187,031         421,995   
  

 

 

    

 

 

 
     1,028,470         1,474,171   
  

 

 

    

 

 

 

 

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11. Estimated Fair Value of Financial Instruments

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

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

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

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

Our financial instruments consist of cash and cash equivalents, restricted cash, accounts and other receivables, interest rate caps, interest rate swaps, senior secured credit facility, mortgage loans payable, interest payable and accounts payable. The carrying values of cash and cash equivalents, restricted cash, accounts and other receivables, interest payable and accounts payable approximate fair values due to the short-term nature of these accounts. The interest rate caps and interest rate swap are carried at fair value.

The combined balance of our mortgage loans payable was $91.8 million and $116.9 million as of March 31, 2012 and December 31, 2011, respectively, with a fair value of $91.1 million and $116.1 million, respectively, based on Level 3 inputs from the fair value hierarchy. The carrying value of the senior secured credit facility approximated fair value at March 31, 2012, based on Level 3 inputs from the fair value hierarchy. The fair values of mortgage notes payable and the senior secured credit facility are based on the Company’s assumptions of interest rates and terms available incorporating the Company’s credit risk.

Measurements of asset retirement obligations upon initial recognition are based on Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of remediation costs, inflation rate, market risk premium and the expected timing of development or redevelopment. The inputs are derived based on historical data as well as management’s best estimate of current costs.

Derivative financial instruments

Currently, the Company uses interest rate derivative instruments to manage interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. In addition, to comply with the provisions of FASB ASC 820, credit valuation adjustments, which consider the impact of any credit risk to the contracts, are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2012, 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 portfolios. As a result, the Company classifies its derivative valuations in Level 2 of the fair value hierarchy.

The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall.

 

     Recurring Fair Value Measurements  
    

Quoted Prices in Active

Markets for Identical Assets
and Liabilities

    

Significant Other

Observable Inputs

     Significant Unobservable
Inputs
               
   (Level 1)      (Level 2)      (Level 3)      Total Fair Value  
     As of March
31, 2012
     December
31, 2011
     As of March
31, 2012
     December
31, 2011
     As of March
31, 2012
     December
31, 2011
     As of March
31, 2012
     December
31, 2011
 
     (In thousands)  

Assets

                       

Derivative Financial Instruments

   $ —         $ —         $ —         $ —         $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                       

Derivative Financial Instruments

   $ —         $ —         $ 82       $ 50       $ —         $ —         $ 82       $ 50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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12. Related Party Transactions

We lease 1,515 net rentable square feet of space at our 12100 Sunrise Valley property to an affiliate of The Carlyle Group. The lease commenced on July 1, 2008 and expires on June 30, 2013. Rental revenue was less than $0.1 million and less than $0.1 million for the three months ended March 31, 2012 and 2011, respectively.

13. Commitments and Contingencies

As of March 31, 2012, the Company currently leases the data center space under noncancelable operating lease agreements at 32 Avenue of the Americas, One Wilshire and 1275 K Street, and the Company leases its headquarters located in Denver, Colorado under a noncancelable operating lease agreement. The lease agreements provide for base rental rate increases at defined intervals during the term of the lease. In addition, the Company has negotiated rent abatement periods to better match the phased build-out of the data center space. The Company accounts for such abatements and increasing base rentals using the straight-line method over the noncancelable term of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent payable.

Additionally, the Company has commitments related to telecommunications capacity used to connect data centers located within the same market or geographical area and power usage.

The following table summarizes our contractual obligations as of March 31, 2012 (in thousands):

 

Obligation

   2012      2013      2014      2015      2016      Thereafter      Total  

Operating leases

   $ 12,826       $ 17,457       $ 17,742       $ 17,620       $ 17,370       $ 26,885       $ 109,900   

Construction Contracts

     13,811         —           —           —           —           —           13,811   

Other (1)

     3,665         1,384         261         157         142         887         6,496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,302       $ 18,841       $ 18,003       $ 17,777       $ 17,512       $ 27,772       $ 130,207   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Obligations for tenant improvement work at 55 S. Market Street, power contracts, telecommunications leases and insurance premiums.

Rent expense for the three months ended March 31, 2012 and 2011 was $4.6 million and $4.5 million, respectively.

Our properties require periodic investments of capital for general capital improvements and for tenant related capital expenditures. Additionally, the Company enters into various construction contracts with third parties for the development and redevelopment of our properties. At March 31, 2012, we had open commitments related to construction contracts of approximately $13.8 million.

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. Management believes that the resolution of such matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

As previously disclosed, the Company is involved in litigation in Colorado District Court in Denver with Ari Brumer, the former general counsel of its affiliate, CoreSite, LLC, arising out of the termination of Mr. Brumer’s employment. The allegations made by Mr. Brumer in his complaint against the Company, certain of our affiliates, and certain affiliates of the Funds and Carlyle also have been previously reported, as have been the counterclaims asserted against Mr. Brumer by the Company and certain of our affiliates. The case remains in the discovery stage and various discovery matters require resolution by the court. We intend to vigorously defend the case and pursue our counterclaims against Mr. Brumer. Based on the information currently available, the Company continues to believe that this litigation will not have a material adverse effect on its business, financial position or liquidity.

One of our former customers, Add2Net, Inc., brought an action against us in April 2009 before the American Arbitration Association in California asserting claims of breach of contract, unfair business practices, negligent misrepresentation and fraudulent inducement. Add2Net alleged that it suffered damages of approximately $3.5 million, consisting of license and service fees paid to us, loss of business income and equipment damage, and sought attorney’s fees and punitive damages. We counterclaimed for breach of contract and bad faith dealing. On April 6, 2012, we agreed to pay Add2Net $1.5 million to settle the action in its entirety and recorded the expense in general and administrative expense for the quarter ended March 31, 2012.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

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

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Quarterly Report. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the United States Securities and Exchange Commission, or SEC, pursuant to the Exchange Act. We discussed a number of material risks in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2011. Those risks continue to be relevant to our performance and financial condition. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Overview

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

We formed CoreSite Realty Corporation as a Maryland corporation on February 17, 2010, with perpetual existence. We completed our IPO of common stock on September 28, 2010 and through our controlling interest in our Operating Partnership, we are engaged in the business of ownership, acquisition, construction and management of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago, Boston, New York City and Miami. Our high-quality data centers feature ample and redundant power, advanced cooling and security systems and many are points of dense network interconnection. We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ending December 31, 2010.

Our Portfolio

As of March 31, 2012, our property portfolio included 12 operating data center facilities and one development site, which collectively comprise over 2.0 million net rentable square feet (“NRSF”), of which approximately 1.1 million NRSF is existing data center space. These properties include 279,963 NRSF of space readily available for lease, of which 205,858 NRSF is available for lease as data center space. Including the space currently under construction or in preconstruction at March 31, 2012, and including currently operating space targeted for future redevelopment, we own land and buildings sufficient to develop or redevelop 888,892 square feet of data center space, comprised of (1) 78,856 NRSF of data center space currently under construction, (2) 464,786 NRSF of office and industrial space currently available for redevelopment, and (3) 345,250 NRSF of new data center space that can be developed on land that we currently own at our Coronado-Stender Business Park.

 

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We expect that this redevelopment and development potential plus any potential expansion into new markets will enable us to accommodate existing and future customer demand and position us to significantly increase our cash flows. We intend to pursue redevelopment and development projects and expansion into new markets when we believe those opportunities support the additional supply in those markets.

The following table provides an overview of our new and expansion data center leasing activity (in NRSF) during the three months ended March 31, 2012:

 

     NRSF  

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

     25,571   

New and expansion leases signed during the period

     37,563   

New and expansion leases signed during the period which have commenced

     (15,195

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

     (15,503
  

 

 

 

Total leases signed but not yet commenced at end of period

     32,436   

The following table provides an overview of our properties as of March 31, 2012:

 

              NRSF  
              Operating(1)                          
              Data Center(2)     Office
and Light-
Industrial(3)
    Total     Redevelopment  and
Development(4)
       

Market/Facilities

 

Acquisition
Date(5)

  Annualized
Rent

($000)(6)
    Total     Percent
Leased(7)
    Total     Percent
Leased(7)
    Total(8)     Percent
Leased(7)
    Under
Construction(9)
    Vacant     Total     Total
Portfolio
 

Los Angeles

                       

One Wilshire*

  Aug. 2007   $ 22,495        157,588        68.7     7,500        52.0     165,088        67.9     —          —          —          165,088   

900 N. Alameda

  Oct. 2006     11,113        156,366        77.6        8,360        28.4        164,726        75.1        —          269,433        269,433        434,159   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Los Angeles Total

      33,608        313,954        73.1        15,860        39.6        329,814        71.5        —          269,433        269,433        599,247   

San Francisco Bay

                       

55 S. Market

  Feb. 2000     12,153        84,045        91.9        206,255        91.9        290,300        91.9        —          —          —          290,300   

2901 Coronado

  Feb. 2007     9,085        50,000        100.0        —          —          50,000        100.0        —          —          —          50,000   

1656 McCarthy

  Dec. 2006     7,728        76,676        90.0        —          —          76,676        90.0        —          —          —          76,676   

Coronado-Stender Properties(10)

  Feb. 2007     1,040        —          —          115,560        82.5        115,560        82.5        —          13,640        13,640        129,200   

2972 Stender(11)

  Feb. 2007     3,014        33,129        55.9        436        74.8        33,565        56.1        16,835        50,600        67,435        101,000   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

San Francisco Bay Total

      33,020        243,850        88.1        322,251        88.5        566,101        88.3        16,835        64,240        81,075        647,176   

Northern Virginia

                       

12100 Sunrise Valley

  Dec. 2007     17,906        168,959        81.8        61,050        72.7        230,009        79.4        32,760        —          32,760        262,769   

1275 K Street*

  June 2006     1,791        22,137        72.0        —          —          22,137        72.0        —          —          —          22,137   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Northern Virginia Total

      19,697        191,096        80.7        61,050        72.7        252,146        78.7        32,760        —          32,760        284,906   

Boston

                       

70 Innerbelt

  Apr. 2007     9,000        148,795        88.1        13,063        34.2        161,858        83.7        —          111,313        111,313        273,171   

Chicago

                       

427 S. LaSalle

 

Feb. 2007

    7,934        128,906        93.7        4,946        56.9        133,852        92.3        29,261        20,241        49,502        183,354   

New York

                       

32 Avenue of the Americas*

 

June 2007

    5,174        48,404        66.7        —          —          48,404        66.7        —          —          —          48,404   

Miami

                       

2115 NW 22nd Street

 

June 2006

    1,706        30,175        55.3        1,890        100.0        32,065        58.0        —          13,199        13,199        45,264   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Facilities

    $ 110,139        1,105,180        81.4     419,060        82.3     1,524,240        81.6     78,856        478,426        557,282        2,081,522   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

* Indicates properties in which we hold a leasehold interest.
(1) Represents the square feet at each building under lease as specified in existing customer lease agreements plus management’s estimate of space available for lease to customers based on engineers’ drawings and other factors, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas. Total NRSF at a given facility includes the total operating NRSF and total redevelopment and development NRSF, but excludes our office space at a facility and our corporate headquarters.
(2) Represents the NRSF at each operating facility that is currently leased or readily available for lease as data center space. Both leased and available data center NRSF includes a factor to account for a customer’s proportionate share of the required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas, which may be updated on a periodic basis to reflect the most current build out of our properties.
(3) Represents the NRSF at each operating facility that is currently leased or readily available for lease as space other than data center space, which is typically space offered for office or light-industrial uses.
(4) Represents vacant space in our portfolio that requires significant capital investment in order to redevelop or develop into data center facilities. Total redevelopment and development NRSF and total operating NRSF represent the total NRSF at a given facility.
(5) Reflects date property was acquired by certain real estate funds affiliated with the Carlyle Group and not the date of our acquisition upon consummation of our initial public offering. In the case of a leased property, indicates the date the initial lease commenced.
(6) Represents the monthly contractual rent under existing customer leases as of March 31, 2012 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to such lease. On a gross basis, our annualized rent was approximately $115,270,162 as of March 31, 2012, which reflects the addition of $5,131,286 in operating expense reimbursements to contractual net rent under modified gross and triple-net leases.
(7) Includes customer leases that have commenced as of March 31, 2012. The percent leased is determined based on leased square feet as a proportion of total operating NRSF. The percent leased for data center space, office and light industrial space, and space in total would have been 84.4%, 82.5%, and 83.9%, respectively, if all leases signed in current and prior periods had commenced.
(8) Represents the NRSF at an operating facility currently leased or readily available for lease. This excludes existing vacant space held for redevelopment or development.
(9) Reflects NRSF for which substantial activities are ongoing to prepare the property for its intended use following redevelopment or development, as applicable. All of the 78,856 NRSF under construction as of March 31, 2012, was data center space.
(10) The Coronado-Stender Business Park became entitled for our proposed data center development upon receipt of the mitigated negative declaration from the city of Santa Clara in the first quarter of 2011. We have the ability to develop 345,250 NRSF of data center space at this property, which is in addition to the 50,400 NRSF of data center space and 50,600 NRSF of unconditioned core and shell space completed or under construction at 2972 Stender.
(11) We have completed construction on 33,129 NRSF of data center space at this property, and are under construction on an additional 16,835 NRSF of data center space. We have also developed an incremental 50,600 NRSF of unconditioned core and shell space to be held for potential future development into data center space, subject to our assessment of market demand and alternative uses of our capital.

 

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The following table shows the March 31, 2012 operating statistics for space that was leased and available to be leased as of December 31, 2010 at each of our properties, and excludes space for which development or redevelopment was completed and became available to be leased after December 31, 2010 (the December 31, 2010 same store pool). For comparison purposes, the operating activity totals as of December 31, 2011 and 2010, for this space are provided at the bottom of this table.

 

                   Operating NRSF  
                   Data Center     Office and Light-
Industrial
    Total  

Market/Facilities

   Acquisition Date      Annualized
Rent ($000)
     Total      Percent
Leased
    Total      Percent
Leased
    Total      Percent
Leased
 

Los Angeles

                     

One Wilshire*

     Aug. 2007       $ 22,495         157,587         68.7     7,500         52.0     165,087         67.9

900 N. Alameda

     Oct. 2006         11,113         149,473         80.7        8,360         28.4        157,833         77.9   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Los Angeles Total

        33,608         307,061         74.5        15,860         39.6        322,921         72.8   

San Francisco Bay

                     

55 S. Market

     Feb. 2000         12,153         84,045         91.9        206,255         91.9        290,301         91.9   

2901 Coronado

     Feb. 2007         9,085         50,000         100.0        —           —          50,000         100.0   

1656 McCarthy

     Dec. 2006         7,728         76,676         90.0        —           —          76,676         90.0   

Coronado-Stender Properties

     Feb. 2007         718         —           —          78,800         74.3        78,800         74.3   

2972 Stender

     Feb. 2007         —           —           —          —           —          —           —     
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

San Francisco Bay Total

        29,684         210,721         93.1        285,055         87.0        495,777         89.6   

Northern Virginia

                     

12100 Sunrise Valley

     Dec. 2007         14,162         116,499         98.4        61,050         72.7        177,549         89.6   

1275 K Street*

     June 2006         1,791         22,137         72.0        —           —          22,137         72.0   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Northern Virginia Total

        15,953         138,637         94.2        61,050         72.7        199,687         87.6   

Boston

                     

70 Innerbelt

     Apr. 2007         9,000         133,646         98.1        13,063         34.2        146,709         92.4   

Chicago

                     

427 S. LaSalle

     Feb. 2007         7,889         128,906         93.7        —           —          128,906         93.7   

New York

                     

32 Avenue of the Americas*

     June 2007         5,174         48,404         66.7        —           —          48,404         66.7   

Miami

                     

2115 NW 22nd Street

     June 2006         1,706         30,176         55.3        1,890         100.0        32,065         58.0   
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Facilities at March 31, 2012(1)

      $ 103,014         997,550         85.9     376,918         81.5     1,374,468         84.5
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Facilities at December 31, 2011

      $ 101,084            85.6        79.9        83.9
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Facilities at December 31, 2010

      $ 89,364            80.5        76.5        79.4
     

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

* Indicates properties in which we hold a leasehold interest.
(1) The percent leased for data center space, office and light industrial space, and space in total would have been 87.0%, 81.6%, and 85.3%, respectively, if all leases signed in current and prior periods had commenced.

 

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The following table summarizes the redevelopment and development opportunities throughout our portfolio as of March 31, 2012:

Redevelopment NRSF

 

     Currently Vacant      Currently Operating         

Facilities

   Under
Construction(1)
     Near-
Term(2)
     Long-
Term
     Total      Near-
Term(2)
     Long-
Term
     Total      Incremental
Entitled
     Total  

Los Angeles

                          

One Wilshire*

     —           —           —           —           —           —           —           —           —     

900 N. Alameda(3)

     —           22,500         246,933         269,433         —           —           —           —           269,433   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Los Angeles Total

     —           22,500         246,933         269,433         —           —           —           —           269,433   

San Francisco Bay

                          

55 S. Market

     —           —           —           —           —           —           —           —           —     

2901 Coronado

     —           —           —           —           —           —           —           —           —     

1656 McCarthy

     —           —           —           —           —           —           —           —           —     

2972 Stender(4)

     16,835         50,600         —           67,435         —           —           —           —           67,435   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

San Francisco Bay Total

     16,835         50,600         —           67,435         —           —           —           —           67,435   

Northern Virginia

                          

12100 Sunrise Valley(5)

     32,760         —           —           32,760         —           —           —           —           32,760   

1275 K Street*

     —           —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Northern Virginia Total

     32,760         —           —           32,760         —           —           —           —           32,760   

Boston

                          

70 Innerbelt(3)

     —           —           111,313         111,313         —           —           —           —           111,313   

Chicago

                          

427 S. LaSalle

     29,261         —           20,241         49,502         —           —           —           —           49,502   

New York

                          

32 Avenue of the Americas*

     —           —           —           —           —           —           —           —           —     

Miami

                          

2115 NW 22nd Street

     —           —           13,199         13,199         —           —           —           —           13,199   

Total Redevelopment

     78,856         73,100         391,686         543,642         —           —           —           —           543,642   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Development NRSF

                          

San Francisco Bay

                          

Coronado-Stender Properties(6)

     —           —           13,640         13,640         —           115,560         115,560         216,050         345,250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Development

     —           —           13,640         13,640         —           115,560         115,560         216,050         345,250   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Facilities

     78,856         73,100         450,926         557,282         —           115,560         115,560         216,050         888,892   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Indicates properties in which we hold a leasehold interest.
(1) Reflects NRSF at a facility for which the initiation of substantial activities to prepare the property for its intended use following redevelopment or development, as applicable, has commenced prior to the applicable period.
(2) Reflects NRSF at a facility for which the initiation of substantial activities to prepare the property for its intended use following redevelopment or development, as applicable, is planned to commence after March 31, 2012 but prior to March 31, 2013.
(3) The NRSF shown is our current estimate based on engineering drawings and required support space and is subject to change based on final demising of the space.
(4) We have completed construction on 33,129 NRSF of data center space at this property, and are under construction on an additional 16,835 NRSF of data center space. We have also completed development of an incremental 50,600 NRSF of unconditioned core and shell space to be held for potential future development into data center space, subject to our assessment of market demand and alternative uses of our capital.
(5) The remaining 32,760 NRSF of vacant space is being redeveloped into data center space and will deliver in the second quarter of 2012.
(6) We are entitled to develop up to 345,250 NRSF of data center space at this property, or an incremental 216,050 NRSF, which is in addition to the leased and vacant NRSF existing at the property.

 

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Table of Contents

Customer Diversification

As of March 31, 2012, our portfolio was leased to over 700 customers, many of which are nationally recognized firms. The following table sets forth information regarding the ten largest customers in our portfolio based on annualized rent as of March 31, 2012:

 

    

Customer

   Number
of
Locations
     Total
Leased
NRSF(1)
     Percentage
of Total
Operating
NRSF(2)
    Annualized
Rent
($000)(3)
     Percentage
of
Annualized
Rent( 4)
    Weighted
Average
Remaining
Lease
Term in
Months(5)
 
1    Facebook, Inc.      3         74,091         4.9   $ 11,902         10.8     42   
2    Computer Sciences Corporation      3         52,902         3.5        6,331         5.7        65   
3    Akamai Technologies      6         34,077         2.2        4,023         3.7        15   
4    General Services Admin - IRS*(6)      1         141,774         9.3        3,790         3.4        32   
5    Nuance Communications      1         25,404         1.7        3,240         2.9        75   
6    Verizon Communications      7         74,048         4.9        2,572         2.3        37   
7    Gov’t of District of Columbia      2         16,646         1.1        2,201         2.0        30   
8    Tata Communications      2         18,476         1.2        1,875         1.7        91   
9    NBC Universal      1         11,293         0.7        1,719         1.6        4   
10    Intermedia, Inc      3         9,719         0.6        1,597         1.4        15   
        

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   Total/Weighted Average         458,430         30.1   $ 39,250         35.5     43   
        

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

* Denotes customer using space for general office purposes.
(1) Total leased NRSF is determined based on contractually leased square feet for leases that have commenced on or before March 31, 2012. We calculate occupancy based on factors in addition to contractually leased square feet, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.
(2) Represents the customer’s total leased square feet divided by the total operating NRSF in the portfolio which, as of March 31, 2012, consisted of 1,524,240 NRSF.
(3) Represents the monthly contractual rent under existing customer leases as of March 31, 2012 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to those leases.
(4) Represents the customer’s total annualized rent divided by the total annualized rent in the portfolio as of March 31, 2012, which was approximately $110,139,000.
(5) Weighted average based on percentage of total annualized rent expiring and is as of March 31, 2012.
(6) The data presented represents an interim lease in place that expires in May 2014. Upon expiration of the interim lease and the substantial completion of tenant improvements by us, a new lease that has already been executed by both parties will commence. That lease includes 119,729 NRSF with a ten-year term and a termination option at the end of year eight.

 

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Table of Contents

Lease Distribution

The following table sets forth information relating to the distribution of leases in the properties in our portfolio, based on NRSF (excluding space held for redevelopment or development) under lease as of March 31, 2012:

 

                  Total      Percentage            Percentage  
     Number      Percentage     Operating      of Total     Annualized      of  
     of      of All     NRSF of      Operating     Rent      Annualized  

Square Feet Under Lease(1)

   Leases(2)      Leases     Leases(3)      NRSF     ($000)(4)      Rent  

Available(5)

        —       279,963         18.4   $ —           —  

1,000 or less

     972         85.6        165,749         10.9        29,705         27.0   

1,001 - 2,000

     55         4.8        78,269         5.1        8,849         8.0   

2,001 - 5,000

     66         5.8        198,067         13.0        20,243         18.4   

5,001 - 10,000

     20         1.8        141,452         9.3        14,271         13.0   

10,001 - 25,000

     17         1.5        309,873         20.3        26,063         23.6   

Greater than 25,000

     6         0.5        350,867         23.0        11,008         10.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Portfolio Total

     1,136         100.0     1,524,240         100.0   $ 110,139         100.0 %
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Represents all leases in our portfolio, including data center and office and light-industrial leases.
(2) Includes leases that upon expiration will be automatically renewed, primarily on a month-to-month basis. Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.
(3) Represents the square feet at a building under lease as specified in the lease agreements plus management’s estimate of space available for lease to third parties based on engineer’s drawings and other factors, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.
(4) Represents the monthly contractual rent under existing customer leases as of March 31, 2012 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to those leases.
(5) Excludes approximately 557,282 vacant NRSF held for redevelopment or under construction at March 31, 2012.

Lease Expirations

The following table sets forth a summary schedule of the expirations for leases in place as of March 31, 2012, plus available space, for the remainder of 2012 and for each of the ten full calendar years beginning January 1, 2013 at the properties in our portfolio. Unless otherwise stated in the footnotes, the information set forth in the table assumes that customers exercise no renewal options and all early termination rights.

 

            Total                                       Annualized  
     Number      Operating      Percentage            Percentage     Annualized      Annualized      Rent Per  
     of      NRSF of      of Total            of     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(3)      ($000)(4)      Expiration(5)  

Available as of March 31, 2012(6)

     —           279,963         18.4   $ —           —     $ —         $ —         $ —     

Remainder of 2012

     414         260,399         17.1        27,812         25.3        106.80         27,862         107.00   

2013

     264         181,376         11.9        18,806         17.1        103.69         19,521         107.63   

2014(7)

     230         250,205         16.4        20,180         18.2        80.65         22,845         91.31   

2015

     73         101,204         6.6        7,299         6.6        72.12         11,284         111.50   

2016(8)

     88         163,375         10.7        11,861         10.8        72.60         14,035         85.90   

2017

     37         66,110         4.3        10,548         9.6        159.55         12,596         190.52   

2018

     8         79,341         5.2        8,131         7.4        102.48         10,147         127.89   

2019

     2         80,466         5.3        1,567         1.4        19.48         1,730         21.51   

2020

     3         2,746         0.2        75         0.1        27.14         78         28.51   

2021

     9         18,155         1.2        1,872         1.7        103.13         3,883         213.91   

2022-Thereafter

     8         40,900         2.7        1,988         1.8        48.61         2,626         64.22   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Portfolio Total / Weighted Average

     1,136         1,524,240         100.0   $ 110,139         100.0   $ 88.52       $ 126,607       $ 101.75   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) Includes leases that upon expiration will be automatically renewed, primarily on a month-to-month basis. Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.
(2) Represents the monthly contractual rent under existing customer leases as of March 31, 2012 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to those leases.
(3) Annualized rent as defined above, divided by the square footage of leases expiring in the given year.
(4) Represents the final monthly contractual rent under existing customer leases as of March 31, 2012 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to those leases.
(5) 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.
(6) Excludes approximately 557,282 vacant NRSF held for redevelopment or under construction at March 31, 2012.
(7) Includes an office lease with General Services Administration—IRS, which is an interim lease in place that expires on May 31, 2014. Upon the expiration of the interim lease and the substantial completion of tenant improvements by us, a new lease that has already been executed by both parties will commence. The new lease includes 119,729 NRSF with a ten-year term and a termination option at the end of year eight.
(8) Total operating NRSF of expiring leases in 2016 reflects the expiration of half of a 50,000 NRSF lease, the other half of which expires in 2017.

 

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Table of Contents

Results of Operations

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

 

     Three Months Ended March 31,  
     2012     2011  
     (in thousands)  

Operating Revenue

   $ 47,284      $ 39,966   

Operating Expense

   $ 45,050      $ 45,780   

Interest Expense

   $ (1,018   $ (2,252

Net income (loss)

   $ 1,343      $ (7,916

Operating Revenue. Operating revenue for the three months ended March 31, 2012 was $47.3 million. This includes rental revenue of $29.5 million, power revenue of $12.3 million, tenant reimbursements of $1.3 million and other revenue of $4.2 million, primarily from interconnection services. This compares to revenue of $40.0 million for the three months ended March 31, 2011. The increase of $7.3 million or 18.3% was primarily due to the placement into service of several computer rooms at our newest data center, 2972 Stender, which occurred during the third quarter of 2011 and the first quarter of 2012 and the completion and subsequent leasing of expansion space at our 12100 Sunrise Valley and 70 Innerbelt properties.

Operating Expenses. Operating expenses for the three months ended March 31, 2012 were $45.1 million compared to $45.8 million for the three months ended March 31, 2011. The decrease of $0.7 million was primarily due to a decrease in depreciation and amortization expense of $4.0 million due to the short-term useful life of the lease intangibles acquired in connection with our IPO on September 28, 2010. The decrease in depreciation and amortization expense was partially offset by an increase in property operating expenses due to the placement into service of additional space at our 2972 Stender, 12100 Sunrise Valley and 70 Innerbelt properties. Additionally, the decrease in depreciation and amortization expense was further offset by an increase in general and administrative expense due to a $1.5 million settlement expense accrual related to the Add2Net, Inc. matter, offset by the reversal of a $0.8 million annual cash incentive accrual which was paid in the form of an equity incentive grant under our 2010 Plan with a one-year vesting period.

Interest Expense. Interest expense, including amortization of deferred financing costs, for the three months ended March 31, 2012 was $1.0 million compared to interest expense of $2.3 million for the three months ended March 31, 2011. The decrease in interest expense was primarily due to an increase in the amount of capitalized interest and the lower debt balance carried for the first half of the quarter compared to the first quarter of 2011. The amount of interest expense capitalized is directly correlated to the amount spent on construction related activities which can fluctuate on a quarterly basis. We expect the amount of interest capitalized for the three months ended June 30, 2012, will be lower than the amount capitalized during the three months ended March 31, 2012.

Net Income (Loss). Net income for the three months ended March 31, 2012 was $1.3 million compared to net loss of $7.9 million for the three months ended March 31, 2011. The increase of $9.3 million was primarily due to the increased operating revenue from the placement into service of several computer rooms at our newest data center, 2972 Stender and the completion and subsequent leasing of expansion space at our 12100 Sunrise Valley and 70 Innerbelt properties. Additionally, the increase in net income was attributable to a decrease in operating expenses due to decreased depreciation and amortization expense and a decrease in interest expense primarily related to an increase in the amount of capitalized interest and the lower debt balance carried for the first half of the quarter compared to the first quarter of 2011.

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, 2011, filed with the SEC on February 24, 2012, which is accessible on the SEC’s website at www.sec.gov.

Liquidity and Capital Resources

Discussion of Cash Flows

Three Months ended March 31, 2012 Compared to Three Months ended March 31, 2011

Net cash provided by operating activities was $13.2 million for the three months ended March 31, 2012, compared to $13.2 million for the prior period. Changes in operating assets and liabilities were offset by an increase in operating income due to the placement into service of several computer rooms at our newest data center, 2972 Stender and the completion and subsequent leasing of expansion space at our 12100 Sunrise Valley and 70 Innerbelt properties.

Net cash used in investing activities decreased by $2.2 million to $18.0 million for the three months ended March 31, 2012, compared to $20.2 million for the three months ended March 31, 2011. This decrease was primarily due to a decrease in cash paid for capital expenditures related to redevelopment and development of data center space. Capital expenditures will fluctuate on a quarterly basis based on the number and magnitude of construction related activities.

 

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Table of Contents

Net cash provided by financing activities was $2.2 million for the three months ended March 31, 2012, compared to cash used in financing activities of $6.0 million for the three months ended March 31, 2011. The increase in cash provided by financing activities of $8.2 million was primarily due to increased borrowings under our revolving credit facility partially offset by an increase in the dividends and distributions paid.

Analysis of Liquidity and Capital Resources

As of March 31, 2012, we had $4.0 million of cash and equivalents, excluding $8.7 million of restricted cash. Restricted cash primarily consists of interest bearing cash deposits required by the terms of our loans and cash impound accounts for real estate taxes, insurance and anticipated or contractually obligated tenant improvements as required by several of our mortgage loans.

We have an effective shelf registration statement filed on September 28, 2011, that allows us to register up to $800 million of 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 future distributions to stockholders and holders of our operating partnership units, interest expense, operating costs including utilities, site maintenance costs, real estate and personal property taxes, insurance, rental expenses and selling, general and administrative expenses and certain recurring and non-recurring capital expenditures, including for the redevelopment and development of data center space during the next 12 months. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established for certain future payments, and by incurring additional indebtedness, including by drawing on our revolving credit facility.

Our long-term liquidity requirements primarily consist of the costs to fund the development of the Coronado-Stender Properties, our 9.1 acre development site that houses five buildings in Santa Clara, California, future redevelopment or development of other space in our portfolio not currently scheduled, property acquisitions, future distributions to stockholders and holders of our operating partnership units, scheduled debt maturities and recurring and non-recurring capital improvements. We expect to meet our short and long-term liquidity requirements primarily by incurring long-term indebtedness and drawing on our revolving credit facility. 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 operating partnership units. However, there is no assurance that we will be able to successfully raise additional capital on acceptable terms or at all.

Indebtedness

A summary of outstanding indebtedness as of March 31, 2012 and December 31, 2011 is as follows (in thousands):

 

          Maturity     March 31,      December 31,  
    

Interest Rate

   Date     2012      2011  

Senior secured credit facility

   (1)      December 15, 2014      $ 40,250       $ 5,000   

55 S. Market

   LIBOR plus 3.50% (3.74% and 3.75% at March 31, 2012 and December 31, 2011)(2)      October 9, 2012 (3)      60,000         60,000   

12100 Sunrise Valley

   LIBOR plus 2.75% (3.00% and 3.06% at March 31, 2012 and December 31, 2011)(2)      June 1, 2013        31,782         31,864   

427 S. LaSalle—Senior mortgage loan

   LIBOR plus 0.60% (0.86% at December 31, 2011)      Repaid, Feburary 2012        —           25,000   
       

 

 

    

 

 

 

Total principal outstanding

        $ 132,032       $ 96,864   
       

 

 

    

 

 

 

 

(1) At the Company’s election, borrowings under the credit facility bear interest at a rate per annum equal to either (i) LIBOR plus 225 basis points to 300 basis points, or (ii) a base rate plus 125 basis points to 200 basis points, depending on our leverage ratio. As of March 31, 2012, the weighted average interest rate on outstanding borrowings under the senior secured credit facility was 2.49%.
(2) In October 2010, we entered into an interest rate swap agreement with respect to the indebtedness on 55 S. Market and an interest rate cap agreement with respect to the indebtedness on 12100 Sunrise Valley, each as a cash flow hedge for interest incurred on these LIBOR based loans.
(3) The mortgage contains one two-year extension option subject to the Company meeting certain financial and other customary conditions and the payment of an extension fee equal to 60 basis points.

Senior Secured Credit Facility

On December 15, 2011, our Operating Partnership and certain subsidiary co-borrowers entered into an amended and restated senior secured revolving credit facility (the “Amended Credit Agreement”) with a group of lenders for which KeyBank National Association acts as the administrative agent. The Amended Credit Agreement amended our Operating Partnership’s then existing senior secured revolving credit facility, dated September 28, 2010 (the “Prior Facility”), and is unconditionally guaranteed on a senior unsecured basis by us. Our Operating Partnership acts as the parent borrower, and our subsidiaries that own 1656 McCarthy, 70 Innerbelt, 2901 Coronado and 900 N. Alameda are co-borrowers under the Amended Credit Agreement, with borrowings under the facility secured by a lien on these properties on a senior secured basis. In addition, the obligations of each of our Operating Partnership and the co-borrowers under the Amended Credit Agreement are joint and several.

 

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On February 7, 2012, we repaid the senior mortgage loan of $25.0 million secured by the 427 S. LaSalle property and subsequently added 427 S. LaSalle as a co-borrower under the Amended Credit Agreement, with borrowings under the facility secured by a lien on such real estate property on a senior secured basis.

The Amended Credit Agreement increased the commitment from the Prior Facility of $110.0 million to $225.0 million, and extended the initial maturity date of the Prior Facility from September 28, 2013, to December 15, 2014, with a one-time extension option, which, if exercised, would extend the maturity date to December 15, 2015. An 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 Amended Credit Agreement at initial maturity and certain other customary conditions. As of March 31, 2012 and December 31, 2011, $40.3 million and $5.0 million, respectively, was outstanding under the facility.

Under the Amended Credit Agreement, our Operating Partnership may elect to have borrowings bear interest at a rate per annum equal to (i) LIBOR plus 225 basis points to 300 basis points, or (ii) a base rate plus 125 basis points to 200 basis points, each depending on our Operating Partnership’s leverage ratio. The Amended Credit Agreement also contains an accordion feature to allow our Operating Partnership to increase the total commitment by $175.0 million, to $400.0 million, under specified circumstances.

The total amount available for borrowings under the Amended Credit Agreement will be subject to the lesser of a percentage of the appraised value of our Operating Partnership’s properties that form the designated borrowing base properties of the facility, a minimum borrowing base debt service coverage ratio and a minimum borrowing base debt yield. As of March 31, 2012, $153.6 million was available for us to borrow under the facility.

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

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

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

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

 a maximum recourse debt ratio (defined as recourse indebtedness other than indebtedness under the revolving credit facility to gross asset value) of 30%; and

 a minimum tangible net worth equal to at least 75% of our tangible net worth at the closing of our IPO plus 80% of the net proceeds of any additional equity issuances.

As of March 31, 2012, we were in compliance with the covenants.

55 S. Market

As of March 31, 2012, the 55 S. Market property had a $60.0 million mortgage loan, which matures on October 9, 2012. The mortgage payable contains one two-year extension option provided we meet certain financial and other customary conditions and subject to the payment of an extension fee equal to 60 basis points. The loan bears interest at LIBOR plus 350 basis points and requires the payment of interest only until maturity. The mortgage requires ongoing compliance by us with various covenants including liquidity and net operating income covenants. As of March 31, 2012, we were in compliance with the covenants.

On October 7, 2010, we entered into a $60.0 million 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 the $60.0 million 55 S. Market mortgage. The interest rate swap matures on October 9, 2012, and effectively fixes the interest rate at 4.01%.

12100 Sunrise Valley

As of March 31, 2012, the 12100 Sunrise Valley property had a mortgage loan payable of $31.8 million. The loan is secured by the 12100 Sunrise Valley property and required payments of interest only until the “amortization commencement date” on July 1, 2011. The loan matures on June 1, 2013 and we may exercise the one remaining one-year extension option provided we meet certain financial and other customary conditions and subject to the payment of an extension fee equal to 50 basis points. The mortgage loan payable contains certain financial and nonfinancial covenants. As of March 31, 2012, we were in compliance with the covenants.

On October 8, 2010, we purchased an interest rate cap to hedge $25.0 million of the indebtedness secured by our 12100 Sunrise Valley property. The interest rate cap matures on October 1, 2012, and hedges against LIBOR interest rate increases above 2.0%.

427 S. LaSalle

On February 7, 2012, we repaid the $25.0 million senior mortgage loan on the 427 S. LaSalle property.

 

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Table of Contents

Debt Maturities

The following table summarizes our debt maturities as of March 31, 2012 (in thousands):

 

Year Ending December 31,

      

Remainder of 2012(1)

   $ 60,233   

2013

     31,549   

2014

     40,250   
  

 

 

 

Total

   $ 132,032   
  

 

 

 

 

(1) The 55 S. Market mortgage, which is scheduled to mature on October 9, 2012, contains one two-year extension option subject to the Company meeting certain financial and other customary conditions and the payment of an extension fee equal to 60 basis points.

Funds From Operations

We consider funds from operations (“FFO”) 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 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.

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 disclose 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 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 an 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 (loss) to FFO:

 

     Three Months Ended March 31,  

(in thousands)

   2012      2011  

Net income (loss)

   $ 1,343       $ (7,916

Real estate depreciation and amortization

     15,008         19,237   
  

 

 

    

 

 

 

FFO

   $ 16,351       $ 11,321   
  

 

 

    

 

 

 

Recent Accounting Pronouncements

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We adopted the provisions of this standard effective January 1, 2012 by presenting a separate Condensed Consolidated Statement of Comprehensive Income.

 

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Distribution Policy

In order to comply with the REIT requirements of the Code, we are generally required to make annual distributions to our shareholders of at least 90% of our taxable net 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 IPO. While we plan to continue to make quarterly distributions, no assurances can be made as to the frequency or amounts of any future distributions. The payment of common share distributions is dependent upon our financial condition, operating results and REIT distribution requirements and may be adjusted at the discretion of the Board during the year.

Inflation

Substantially all of our leases contain annual rent increases. As a result, we believe that we are largely insulated from the effects of inflation. However, any increases in the costs of redevelopment or development of our properties will generally result in a higher cost of the property, which will result in increased cash requirements to develop our properties and increased depreciation expense in future periods, and, in some circumstances, we may not be able to directly pass along the increase in these development costs to our customers in the form of higher rents.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. 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. 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, 2012, we had $132.0 million of consolidated indebtedness that bore interest at variable rates, of which $25.0 million of our consolidated indebtedness is hedged against LIBOR interest rate increases above 2.0%. In addition, we entered into a swap agreement that effectively fixed the interest rate on $60.0 million of consolidated indebtedness under our 55 S. Market mortgage at 4.01% through the maturity date of such indebtedness.

We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 1% change in year-end interest rates. If interest rates were to increase by 1%, the increase in interest expense on our variable rate debt (excluding the $60.0 million of consolidated indebtedness under our 55 S. Market mortgage that is hedged through our interest rate swap) would decrease future earnings and cash flows by less than $0.7 million annually. If interest rates were to decrease 1%, the decrease in interest expense (excluding the $60.0 million of consolidated indebtedness under our 55 S. Market mortgage that is hedged through our interest rate swap) on the variable rate debt would be less than $0.7 million annually.

These analyses do not consider the effect of any change in overall economic activity that could impact interest rates. Further, in the event of a change of that 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.

 

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 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, 2012, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded, that our disclosure controls and procedures were effective as of March 31, 2012.

 

31


Table of Contents

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 quarter ended March 31, 2012 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

As previously disclosed, we are involved in litigation in Colorado District Court in Denver with Ari Brumer, the former general counsel of our affiliate, CoreSite, LLC, arising out of the termination of Mr. Brumer’s employment. The allegations made by Mr. Brumer in his complaint against us, certain of our affiliates, and certain affiliates of real estate funds affiliated with the Carlyle Group also have been previously reported, as have been the counterclaims asserted against Mr. Brumer by us and certain of our affiliates. The case remains in the discovery stage and various discovery matters require resolution by the District Court. We intend to vigorously defend the case and pursue our counterclaims against Mr. Brumer. Based on the information currently available, we continue to believe that this litigation will not have a material adverse effect on our business, financial position or liquidity.

One of our former customers, Add2Net, Inc., brought an action against us in April 2009 before the American Arbitration Association in California asserting claims of breach of contract, unfair business practices, negligent misrepresentation and fraudulent inducement. Add2Net alleged that it suffered damages of approximately $3.5 million, consisting of license and service fees paid to us, loss of business income and equipment damage, and sought attorney’s fees and punitive damages. We counterclaimed for breach of contract and bad faith dealing. On April 6, 2012, we agreed to pay Add2Net $1.5 million to settle the action in its entirety and recorded the expense in general and administrative expense for the quarter ended March 31, 2012.

In the ordinary course of our business, we are subject to claims for negligence and other 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 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 15 of our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 24, 2012, which is accessible on the SEC’s website at www.sec.gov.

 

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

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

32


Table of Contents
ITEM 6. Exhibits

 

Exhibit
Number

  

Description

3.1    Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)
3.2    Bylaws of CoreSite Realty Corporation.(1)
4.1    Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(2)
10.1    Employment Agreement between CoreSite LLC and Jarrett Appleby, dated as of April 6, 2012.(3)*
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 Label 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 agreement.
** Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
(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 our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.
(3) Incorporated by reference to our Current Report on Form 8-K filed on April 10, 2012.

 

33


Table of Contents

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 27, 2012     By:   /s/ Jeffrey S. Finnin
      Jeffrey S. Finnin
     

Chief Financial Officer

(Principal Financial Officer)

 

34


Table of Contents

Exhibit Index

 

Exhibit
Number

  

Description

3.1    Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)
3.2    Bylaws of CoreSite Realty Corporation.(1)
4.1    Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(2)
10.1    Employment Agreement between CoreSite LLC and Jarrett Appleby, dated as of April 6, 2012.(3)*
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 Label 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 agreement.
** Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
(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 our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.
(3) Incorporated by reference to our Current Report on Form 8-K filed on April 10, 2012.

 

35

XNYS:COR CoreSite Realty Corp Quarterly Report 10-Q Filling

CoreSite Realty Corp XNYS:COR Stock - Get Quarterly Report SEC Filing of CoreSite Realty Corp XNYS:COR stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNYS:COR CoreSite Realty Corp Quarterly Report 10-Q Filing - 3/31/2012
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