UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
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For The Fiscal Year Ended December 31, 2010
Or
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Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934
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For The Transition Period From
To
Commission file number 001-34877
CoreSite Realty Corporation
(Exact name of registrant as specified in its charter)
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Maryland
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27-1925611
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(State of incorporation)
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(I.R.S. Employer Identification Number)
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1050 17
th
Street, Suite 800
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Denver, CO
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80265
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(Address of principal executive offices)
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(Zip Code)
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(866) 777-2673
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Class
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Name of Exchange upon Which Registered
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Common Stock, $0.01 par value per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
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No
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Indicate by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
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No
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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 during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations
S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment of this Form 10-K.
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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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes
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No
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The aggregate market
value of common shares held by non-affiliates of the registrant was
approximately $298.5 million as of March 9, 2011. The registrant has provided this information as
of March 9, 2011
because its common equity was not publicly-traded as of the last business day of its most recently
completed second fiscal quarter.
As of March 9, 2011, there were
19,690,661
shares of the registrants Common Stock, $0.01 par value
per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement to be issued in conjunction with the
registrants 2011 Annual Meeting of Stockholders, which is expected to be filed not later than 120
days after the registrants fiscal year ended December 31, 2010, are incorporated by reference in
Part III of this report. Except as expressly incorporated by reference, the registrants proxy
statement shall not be deemed to be a part of this report on Form 10-K
Cautionary Note Regarding Forward-Looking Statements
This Annual Report, together with other statements and information publicly disseminated by
our company contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1955 (PSLRA), namely Section 27A of the Securities Act of
1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934,
as amended (the Exchange Act). We intend such forward-looking statements to be covered by the
safe harbor provisions for forward-looking statements contained in the PSLRA and include this
statement for purposes of complying with these safe harbor provisions.
In particular, statements pertaining to our capital resources, portfolio performance and
results of operations contain forward-looking statements. You can identify forward-looking
statements by the use of forward-looking terminology such as believes, expects, may,
will, should, seeks, intends, plans, pro forma or anticipates or the negative of
these words and phrases or similar words or phrases that are predictions of or indicate future
events or trends and that do not relate solely to historical matters. You can also identify
forward-looking statements by discussions of strategy, plans or intentions. Such statements are
subject to risks, uncertainties and assumptions and are not guarantees of future performance,
which may be affected by known and unknown risks, trends, uncertainties and factors that are
beyond our control. Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from those
anticipated, estimated or projected. The following factors, among others, could cause actual
results and future events to differ materially from those set forth or contemplated in the
forward-looking statements: (i) the geographic concentration of our data centers in certain
markets and any adverse developments in local economic conditions or the demand for data center
space in these markets; (ii) fluctuations in interest rates and increased operating costs; (iii)
difficulties in identifying properties to acquire and completing acquisitions; (iv) the
significant competition in our industry and an inability to lease vacant space, renew existing
leases or release space as leases expire; (v) lack of sufficient customer demand to realize
expected returns on our investments to expand our property portfolio; (vi) decreased revenue from
costs and disruptions associated with any failure of our physical infrastructure or services;
(vii) our ability to lease available space to existing or new customers; (viii) our failure to
obtain necessary outside financing; (ix) our failure to qualify or maintain our status as a REIT;
(x) financial market fluctuations; (xi) changes in real estate and zoning laws and increases in
real property tax rates; (xii) delays or disruptions in third-party network connectivity; (xiii)
inability to renew net leases on the data center properties we lease; and (xiv) 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 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. In
addition, we discussed a number of material risks in our prospectus, dated September 22, 2010,
filed with the SEC on September 23, 2010 pursuant to Rule 424(b) under the Securities Act in
connection with the initial public offering of our common stock. Those risks continue to be
relevant to our performance and financial condition. Moreover, we operate in a very competitive
and rapidly changing environment. New risk factors emerge from time to time and it is not
possible for management to predict all such risk factors, nor can we assess the impact of all
such risk factors on our companys business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in any
forward-looking statements. Given these risks and uncertainties, investors should not place undue
reliance on forward-looking statements as a prediction of actual results.
When we use the terms we, us, our, the Company and our company in this Annual
Report, we are referring to CoreSite Realty Corporation, a Maryland corporation and the issuer of
the shares of $0.01 par value common stock that have been registered under the Exchange Act,
together with our consolidated subsidiaries, including CoreSite, L.P., a Maryland limited
partnership of which we are the sole general partner and which we refer to as our Operating
Partnership.
3
PART
I
ITEM 1. BUSINESS
Our Initial Public Offering and Formation
We are a fully integrated, self-administered, and self-managed real estate investment trust
(REIT). Through our controlling interest in our Operating Partnership, we are engaged in the
business of ownership, acquisition, construction and management of technology-related real
estate.
On September 28, 2010, we closed on our initial public offering of common stock (the IPO)
and completed the following transactions:
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We issued 19,435,000 shares of our common stock in exchange for proceeds of $289.2 million
net of underwriter discounts and commissions of $21.8 million,
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As part of our formation transactions, our Operating Partnership acquired 100% of the
ownership interests in the various entities that owned our Predecessor, comprised of the
real estate activities and interconnection services of four of our operating properties,
1656 McCarthy, 32 Avenue of the Americas, 12100 Sunrise Valley and 70 Innerbelt, as well as
the Coronado-Stender Business Park, from certain real estate funds (the Funds) affiliated
with The Carlyle Group (Carlyle), in exchange for 14,797,755 Operating Partnership units,
or $236.8 million in value based on the $16.00 per share IPO price for our common stock,
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Our Operating Partnership also acquired 100% of the ownership interests in the entities
that owned the CoreSite Acquired Properties, comprised of the continuing real estate
operations at 55 S. Market, One Wilshire, 1275 K Street, 900 N. Alameda, 427 S. LaSalle,
2115 NW 22nd Street, and 1050 17th Street, a non-revenue generating property that we lease
for our corporate headquarters, as well as CoreSite, LLC, our management company, from the
Funds and their affiliates in exchange for 19,802,245 Operating Partnership units, or $316.8
million in value based on the $16.00 per share IPO price,
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Concurrently with the closing of the IPO, we used a portion of the cash proceeds to
purchase from the Funds and their affiliates 8,435,000 Operating Partnership units for an
aggregate purchase price of $125.5 million,
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We purchased an additional 11,000,000 newly-issued Operating Partnership units from our
Operating Partnership for a purchase price of $163.7 million, and
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We entered into a $110.0 million secured credit facility that contains an accordion
feature that allows us to increase the total commitment by $90.0 million, to $200.0 million,
under specified terms.
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Our Business
We are an owner, developer and operator 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 and New York City. Our data centers
feature advanced power, cooling and security systems, including twenty-four hours a day, seven
days a week security staffing, and many are points of dense network interconnection. We are able
to satisfy the full spectrum of our customers data center requirements by providing data center
space ranging in size from an entire building or large dedicated suite to a cage or cabinet. We
lease our space to a broad and growing customer base ranging from enterprise customers to less
space-intensive, more network-centric customers. Our operational flexibility allows us to
selectively lease data center space to its highest and best use depending on customer demand,
regional economies and property characteristics.
The first data center in our portfolio was purchased in 2000 and since then we have
continued to acquire, redevelop, develop and operate these types of facilities. Our properties
are self-managed, including with respect to construction project management in connection with
our redevelopment and development initiatives. As of December 31, 2010, our property portfolio
included 11 operating data center facilities, one data center under construction and one
development site, which collectively comprise over 2.0 million net rentable square feet (NRSF),
of which over 1.1 million NRSF is existing data center space.
We formed CoreSite Realty Corporation as a Maryland corporation on February 17, 2010. While
we initially elected to be treated as an S corporation for federal income tax purposes, we
terminated our S corporation status shortly before completion of our IPO (thereby ending the S
corporation tax year) and intend to qualify as a REIT for federal income tax purposes commencing
with our partial taxable year ending on December 31, 2010. We also conduct certain activities
through our taxable REIT subsidiary (TRS), CoreSite Services, Inc., a Delaware corporation.
Our corporate offices are located at 1050 17th Street, Suite 800, Denver, CO 80265. Our
telephone number is (866) 777-2673. Our website is www.coresite.com. The information contained
on, or accessible through, our website is not incorporated by reference into this Annual Report
and should not be considered a part of this Annual Report.
4
Our Market Opportunity
Data centers are highly specialized and secure buildings that house networking, storage and
communications technology infrastructure, including servers, storage devices, switches, routers
and fiber optic transmission equipment. These buildings are designed to provide the power,
cooling and network connectivity necessary to efficiently operate this mission-critical
equipment.
This infrastructure requires an uninterruptable power supply, backup generators, cooling,
fire suppression systems and physical security. Data centers located at points where many
communications networks converge can also function as interconnection hubs where customers are
able to connect to multiple networks and exchange traffic with each other.
According to the
Cisco Visual Networking Index, global IP traffic, including Internet,
non-Internet and mobile data, is expected to quadruple from 2009 to 2014, representing a
compounded annual growth rate of 34%. We believe the data center industry enjoys strong demand
dynamics principally driven by the continued growth of Internet traffic, the corresponding increase
in processing and storage equipment and the increased need for network interconnection
capabilities. Additionally, companies are increasingly outsourcing their data center needs due to
the high cost of operating and maintaining in-house data center facilities, increasing power and
cooling requirements for data centers and the growing focus on business and disaster recovery
planning.
We believe that sufficiently capitalized operators with space and land available for
redevelopment and development, as well as a proven track record and reputation for operating
high-quality data center facilities, will enjoy a significant competitive advantage and be
best-positioned to accommodate market demand.
Our Competitive Strengths
We believe the following key competitive strengths position us to efficiently scale our
business, capitalize on the growing demand for data center space and interconnection services,
and thereby grow our cash flow.
High Quality Data Center Portfolio.
As of December 31, 2010, our property portfolio included
11 operating data center facilities, one data center under construction and one development site.
Much of our data center portfolio has been recently constructed. Specifically, since January 1,
2006, we have redeveloped or developed 655,620 NRSF into data center space, or approximately
58.5% of our current data center portfolio. Based upon our portfolio as of December 31, 2010 and
including the completion of the 102,686 NRSF of data center space under construction at that
time, 62.0% of our data center portfolio will have been built since January 1, 2006. Our
facilities have advanced power and cooling infrastructure with additional power capacity to
support continued growth.
Significant Network Density.
Many of our data centers are points of dense network
interconnection that provide our customers with valuable networking opportunities that help us
retain existing customers and attract new ones. We believe that the network connectivity at these
data centers provides us with a significant competitive advantage because network-dense
facilities offering high levels of connectivity typically take many years to establish. Our
portfolio houses over 200 unique network providers, which includes over 100 unique network
providers at our One Wilshire property. To facilitate access to these networking opportunities,
we provide services enabling interconnection among our data center customers including private
cross connections and publicly-switched peering services. Our private cross connection services
entail installing fiber, or other connection media, between two customer spaces. Our
publicly-switched peering services allow our customers to exchange digitalized information with
each other by connecting to our Any2 Exchange
®
networking switch. Currently, we actively manage
over 9,000 interconnections across our portfolio.
Expansion Capability.
By leasing readily available data center space and expanding our
operating data center space, we anticipate that we will be able to meet the growing demand from
our existing and prospective customers. Our data center facilities currently have 220,185 NRSF of
space readily available for lease. We also have the ability to expand our operating data center
square footage by approximately 86.2%, or 973,590 NRSF through the development or redevelopment
of (1) 102,686 NRSF space under construction, (2) 326,820 NRSF of vacant space, (3) 148,234 NRSF
of currently operating space, and (4) 395,850 NRSF of new data center space on land that we
currently own at our Coronado-Stender properties of which 50,600 NRSF of unconditioned core and
shell space was under construction as of December 31, 2010.
Facilities in Key Markets.
Our portfolio is concentrated in some of the largest and most
important U.S. metropolitan markets. As of December 31, 2010, over 80% of our leased operating
NRSF, accounting for over 90% of our annualized rent, was located in five of the six North
American markets identified by Tier1Research, LLC as markets of high data center demand. Our data
centers are located in Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago,
Boston, New York City and Miami. These locations offer access to the abundant power required to
run and cool the facilities. Many of our facilities are also situated in close proximity to
hundreds of businesses and corporations, which drives demand for our data center space and
interconnection services. We expect to continue benefitting from this proximity as customers seek
new, high-quality data center space in our markets.
5
Diversified Customer Base.
We have a diverse, global base of over 630 customers, which we
believe is a reflection of our strong reputation and proven track record, as well as our
customers trust in our ability to house their mission-critical applications and vital
communications technology. As of December 31, 2010, one customer represented 12.9% of our
annualized rent and our top ten customers represented 36.1% of our annualized rent. Our diverse
customer base spans many industries and includes:
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Global Telecommunications Carriers and Internet Service Providers:
AT&T Inc., British
Telecom (BT Group Plc.), China
Netcom Group Corp., China Unicom (Hong Kong) Limited, Internap Network Services Corp., Japan
Telecom Co., Ltd., Korea Telecom Corporation, Singapore Telecom Ltd., Sprint Nextel Corporation,
Tata Communications Ltd., Telmex U.S.A., L.L.C. and Verizon Communications Inc.;
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Enterprise Companies, Financial and Educational Institutions and Government Agencies:
Computer Science Corporation, the Government of the District of Columbia, Macmillan Inc.,
Microsoft Corporation, The NASDAQ OMX Group, Inc., NYSE Euronext and the University of Southern
California; and
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Media and Content Providers:
Akamai Technologies, Inc., CDNetworks Co. Ltd., DreamWorks
Animation SKG, Inc., Facebook, Inc., Google Inc., NBC Universal Inc., Sony Pictures Imageworks
Inc. and Warner Brothers Entertainment, Inc.
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Experienced Management Team.
Our management team has significant experience in the real
estate, communications and technology industries. Notably, our Chief Executive Officer has over
22 years of experience in the acquisition, financing and operation of commercial real estate,
which includes over 11 years in the data center industry and five years at publicly traded REITs.
Additionally, our Chief Financial Officer has approximately 23 years of financial experience,
including five years with a publicly traded REIT where he served as the Managing Director and
Chief Accounting Officer and 18 years in public accounting with significant history as a partner
with KPMG and Arthur Andersen, where he served as the Partner in charge of the real estate
practice in Denver, Colorado.
Balance Sheet Positioned to Fund Continued Growth.
With the cash remaining from our IPO, we
believe that we are conservatively capitalized and that we have sufficient funds and available
capacity to pursue our anticipated redevelopment and development plans. As of December 31, 2010,
we had approximately $125.6 million of total long-term debt (excluding a $0.7 million fair value
of debt adjustment resulting from our acquisition of the CoreSite Acquired Properties in
connection with our IPO) equal to approximately 14.5% of the undepreciated book value of our
total assets. In addition, as of December 31, 2010, we had $86.2 million of cash available on our
balance sheet and the ability to borrow up to an additional $100.8 million under a $110.0 million
revolving credit facility, subject to satisfying certain financial covenants, which we currently
meet. We believe this available capital will be sufficient to fund our general corporate needs,
including the completion of 102,686 NRSF of data center space under construction as of December
31, 2010 and the redevelopment or development of an additional 72,946 NRSF of space prior to
December 31, 2011.
Business and Growth Strategies
Our business objective is to continue growing our position as a provider of strategically
located data center space in North America. The key elements of our strategy are as follows:
Increase Cash Flow of Our In-Place Data Center Space
. We actively manage and lease our
properties to increase cash flow by:
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Increasing Rents.
Approximately 93% of our annualized rent as of December 31, 2010 was
derived from data center leases. Additionally, the occupancy rate of our data centers has
remained strong with over 80% of our data center operating space under lease as of December
31, 2010. We retained approximately 79% of our data center leases that expired during the
year ended December 31, 2010, while increasing rents under data center leases renewed by an
average of 27.3% on a GAAP basis.
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Leasing up Available Space and Power.
We have the ability to increase both our revenue
and our revenue per square foot by leasing additional space and power to new and existing
data center customers. As of December 31, 2010, substantially all of our data center
facilities offered our customers the ability to increase their square footage under lease as
well as the amount of power they use per square foot. In total, our existing data center
facilities have 220,185 NRSF of space available for lease. We believe this space, together
with available power, enables us to generate incremental revenue within our existing data
center footprint without necessitating extensive capital expenditures.
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Capitalize on Embedded Expansion Opportunities.
Our portfolio includes 379,106 NRSF of
vacant space that can be redeveloped into data center space. We believe that redevelopment
provides attractive risk-adjusted returns because by leveraging existing in-place infrastructure
and entitlements we are typically able to deliver redevelopment space at a lower cost and faster
time-to-market than ground-up development. In many cases we are able to strategically deploy
capital by redeveloping space in incremental phases to meet customer demand.
6
In addition to our redevelopment space, as of December 31, 2010, our portfolio included the
Coronado-Stender Business Park, a 15.75-acre property housing seven buildings in Santa Clara,
California. The Coronado-Stender Business Park currently includes:
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2901 Coronado, a 50,000 NRSF data center on 3.14 acres, representing the first phase of
our development at the Coronado-Stender Business Park, which we completed during the second
quarter of 2010. During March 2010, we fully leased this
space to a leading online social networking company pursuant to a weighted average 6.5 year
lease;
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2972 Stender, a 50,400 NRSF data center under construction on 3.51 acres, which
represents the second data center building in our development at the Coronado-Stender
Business Park. Since obtaining the approved mitigated negative declaration from the City of
Santa Clara, we have elected to construct the entire NRSF entitled for 2972 Stender,
comprised of the initial 50,400 NRSF of data center space plus an incremental 50,600 NRSF of
unconditioned core and shell space held for potential future development into data center
space, for a total of up to 101,000 NRSF of data center space;
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the Coronado-Stender Properties, a 9.1 acre development site with five buildings
consisting of 78,800 NRSF of office and light-industrial operating space and 50,400 NRSF of
vacant space on land held for development, portions of which generate revenue under
short-term leases. This development site currently provides us with the ability to develop
additional data center space in one of the fastest growing and most important data center
markets in North America. We have the ability to develop up to 345,250 NRSF of data center
space at this property.
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The following table summarizes the redevelopment and development opportunities throughout
our portfolio as of December 31, 2010.
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Currently
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Currently Operating
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Operating
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Vacant Redevelopment/
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Redevelopment/
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NRSF
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Development NRSF
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Total
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Development NRSF
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Data
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Office & Light
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Under
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Facility
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Facilities
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Center
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Industrial
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Total
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Construction
(1)
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Near-Term
(2)
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Long-Term
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NRSF
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Near-Term
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Long-Term
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Los Angeles
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One Wilshire*
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156,521
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7,500
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164,021
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164,021
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900 N. Alameda
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281,078
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8,360
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289,438
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144,721
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434,159
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102,951
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Los Angeles Total
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437,599
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15,860
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453,459
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144,721
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598,180
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102,951
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San Francisco Bay
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55 S. Market
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84,045
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205,846
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289,891
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289,891
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2901 Coronado
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50,000
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50,000
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|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
1656 McCarthy
|
|
|
76,676
|
|
|
|
|
|
|
|
76,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,676
|
|
|
|
|
|
|
|
|
|
Coronado-Stender Properties
(3)
|
|
|
|
|
|
|
78,800
|
|
|
|
78,800
|
|
|
|
|
|
|
|
|
|
|
|
50,400
|
|
|
|
129,200
|
|
|
|
|
|
|
|
78,800
|
|
2972 Stender
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,400
|
|
|
|
|
|
|
|
|
|
|
|
50,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Francisco Bay Total
|
|
|
210,721
|
|
|
|
284,646
|
|
|
|
495,367
|
|
|
|
50,400
|
|
|
|
|
|
|
|
50,400
|
|
|
|
596,167
|
|
|
|
|
|
|
|
78,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12100 Sunrise Valley
(5)
|
|
|
116,498
|
|
|
|
60,539
|
|
|
|
177,037
|
|
|
|
52,286
|
|
|
|
33,446
|
|
|
|
|
|
|
|
262,769
|
|
|
|
|
|
|
|
|
|
1275 K Street*
|
|
|
22,137
|
|
|
|
|
|
|
|
22,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern Virginia Total
|
|
|
138,635
|
|
|
|
60,539
|
|
|
|
199,174
|
|
|
|
52,286
|
|
|
|
33,446
|
|
|
|
|
|
|
|
284,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chicago
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427 S. LaSalle
(6)
|
|
|
129,790
|
|
|
|
45,283
|
|
|
|
175,073
|
|
|
|
|
|
|
|
|
|
|
|
5,309
|
|
|
|
180,382
|
|
|
|
22,000
|
|
|
|
23,283
|
|
Boston
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70 Innerbelt
(7)
|
|
|
133,646
|
|
|
|
13,063
|
|
|
|
146,709
|
|
|
|
|
|
|
|
17,500
|
|
|
|
112,397
|
|
|
|
276,606
|
|
|
|
|
|
|
|
|
|
New York
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 Avenue of the Americas*
|
|
|
48,404
|
|
|
|
|
|
|
|
48,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,404
|
|
|
|
|
|
|
|
|
|
Miami
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2115 NW 22nd Street
|
|
|
30,176
|
|
|
|
1,641
|
|
|
|
31,817
|
|
|
|
|
|
|
|
|
|
|
|
13,447
|
|
|
|
45,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
1,128,971
|
|
|
|
421,032
|
|
|
|
1,550,003
|
|
|
|
102,686
|
|
|
|
50,946
|
|
|
|
326,274
|
|
|
|
2,029,909
|
|
|
|
22,000
|
|
|
|
205,034
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
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 December 31, 2010 but prior to December 31, 2011.
|
|
(3)
|
|
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. This is in addition to the 50,400 NRSF of data center space and 50,600 NRSF of
unconditioned core and shell space under construction at 2972 Stender.
|
|
(4)
|
|
As of December 31, 2010, we were under construction on 50,400 NRSF of data center space. We
are also developing an incremental 50,600 NRSF of unconditioned core and shell space that we
intend to hold for potential future development into data center space, subject to our
assessment of market demand and alternative uses of our capital.
|
|
(5)
|
|
The remaining 85,732 NRSF of vacant space will be redeveloped into data center space in two
phases. The first phase commenced in the fourth quarter of 2010 and is expected to cost
approximately $30.5 million.
|
|
(6)
|
|
We plan to redevelop 22,000 NRSF on the fifth floor to data center space immediately
following the expiration of an existing office lease for that space which expires April 30,
2011.
|
|
(7)
|
|
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.
|
7
Selectively Pursue Acquisition and Development Opportunities in New and Existing Markets.
We are evaluating
opportunities to acquire or develop data center space with abundant power and/or dense
points of interconnection in key markets that will expand our customer base and broaden our
geographic footprint. Such acquisitions may entail subsequent redevelopment or development which
requires significant capital expenditures. We will also continue to implement the hub-and-spoke
strategy that we have successfully deployed in our three largest markets, namely the Los
Angeles, San Francisco Bay and Northern Virginia areas. In these markets, we have extended our
data center footprint by connecting our newer facilities, the spokes, to our established data
centers, our hubs, which allows our customers leasing space at the spokes to leverage the
significant interconnection capabilities of our hubs. In order to deploy our hub-and-spoke
strategy, we typically rely on third-party providers of network connectivity to establish highly
reliable network connectivity within and between certain of our data centers, but we are not
substantially dependent upon any one such service provider.
Leverage Existing Customer Relationships and Reach New Customers.
Our strong customer and
industry relationships, combined with our national footprint and sales force, afford us insight
into the size, timing and location of customers planned growth. We have historically been
successful in leveraging this market visibility to expand our footprint and customer base in
existing and new markets. We intend to continue to strengthen our relationship with existing
customers, including the pursuit of build-to-suit opportunities, and to expand and diversify our
customer base by targeting growing enterprise customers and segments, such as healthcare,
financial services, media and entertainment companies, as well as local, state and federal
governments and agencies.
Our Portfolio
As of December 31, 2010, our property portfolio included 11 operating data center
facilities, one data center under construction and one development site, which collectively
comprise over 2.0 million NRSF, of which approximately 1.1 million NRSF is existing data center
space. These properties include 315,261 NRSF of space readily available for lease, of which
220,185 NRSF is available for lease as data center space. As of December 31, 2010, we had the
ability to expand our operating data center square footage by approximately 86.2%, or 973,590
NRSF through the development or redevelopment of (1) 102,686 NRSF space under construction, (2)
326,820 NRSF of vacant space, (3) 148,234 NRSF of currently operating space, and (4) 395,850 NRSF
of new data center space on land that we currently own at our Coronado-Stender properties of
which 50,600 NRSF of unconditioned core and shell space was under construction as of December 31,
2010. 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 positions us to significantly increase our cash flows.
We will 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 leasing activity during the three months
ended December 31, 2010:
|
|
|
|
|
|
|
NRSF
|
|
Total leases signed but not yet commenced as of September 30, 2010
|
|
|
14,968
|
|
Leases signed during the three months ended December 31, 2010
|
|
|
41,501
|
|
New leases signed during the three months ended December 31, 2010 which have commenced
|
|
|
(5,694
|
)
|
Leases signed in previous periods which commenced during the three months ended December 31, 2010
|
|
|
(11,509
|
)
|
|
|
|
|
Total leases signed but not yet commenced as of December 31, 2010
|
|
|
39,266
|
|
|
|
|
|
During the three months ended December 31, 2010, we increased our operating data center
space by 20,955 NRSF with the completion of our recent redevelopments at 900 N. Alameda in Los
Angeles and 1656 McCarthy in the San Francisco Bay area. We completed this space at a cost of
approximately $6.1 million. We also completed the redevelopment of 22,189 NRSF of office space at
our 12100 Sunrise Valley facility to accommodate the needs of data center customers.
8
The following table provides an overview of our properties as of December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NRSF
|
|
|
|
|
|
|
|
|
|
Operating
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Light-
|
|
|
|
|
|
Redevelopment and
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Center
(
2)
|
|
|
Industrial
(
3)
|
|
|
Total
|
|
|
Development
(
4)
|
|
|
|
|
|
|
Acquisition
|
|
Annualized
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
Under
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Market/Facilities
|
|
Date
(
5)
|
|
Rent ($000)
(
6)
|
|
|
Total
|
|
|
Leased
(
7)
|
|
|
Total
|
|
|
Leased
(
7)
|
|
|
Total
(
8)
|
|
|
Leased
(
7)
|
|
|
Construction
(9)
|
|
|
Vacant
|
|
|
Total
|
|
|
Portfolio
|
|
Los Angeles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Wilshire*
|
|
Aug. 2007
|
|
$
|
19,778
|
|
|
|
156,521
|
|
|
|
64.0
|
%
|
|
|
7,500
|
|
|
|
54.6
|
%
|
|
|
164,021
|
|
|
|
63.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,021
|
|
900 N. Alameda
(10)
|
|
Oct. 2006
|
|
|
12,322
|
|
|
|
281,078
|
|
|
|
89.7
|
|
|
|
8,360
|
|
|
|
16.9
|
|
|
|
289,438
|
|
|
|
87.6
|
|
|
|
|
|
|
|
144,721
|
|
|
|
144,721
|
|
|
|
434,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles Total
|
|
|
|
|
32,100
|
|
|
|
437,599
|
|
|
|
80.5
|
|
|
|
15,860
|
|
|
|
34.8
|
|
|
|
453,459
|
|
|
|
78.9
|
|
|
|
|
|
|
|
144,721
|
|
|
|
144,721
|
|
|
|
598,180
|
|
San Francisco Bay
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 S. Market
|
|
Feb. 2000
|
|
|
11,064
|
|
|
|
84,045
|
|
|
|
88.7
|
|
|
|
205,846
|
|
|
|
85.0
|
|
|
|
289,891
|
|
|
|
86.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,891
|
|
2901 Coronado
|
|
Feb. 2007
|
|
|
8,820
|
|
|
|
50,000
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
1656 McCarthy
|
|
Dec. 2006
|
|
|
6,939
|
|
|
|
76,676
|
|
|
|
82.9
|
|
|
|
|
|
|
|
|
|
|
|
76,676
|
|
|
|
82.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,676
|
|
Coronado-Stender Properties
(11)
|
|
Feb. 2007
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
78,800
|
|
|
|
74.3
|
|
|
|
78,800
|
|
|
|
74.3
|
|
|
|
|
|
|
|
50,400
|
|
|
|
50,400
|
|
|
|
129,200
|
|
2972 Stender
(12)
|
|
Feb. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,400
|
|
|
|
|
|
|
|
50,400
|
|
|
|
50,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Francisco Bay Total
|
|
|
|
|
27,504
|
|
|
|
210,721
|
|
|
|
89.3
|
|
|
|
284,646
|
|
|
|
82.1
|
|
|
|
495,367
|
|
|
|
85.1
|
|
|
|
50,400
|
|
|
|
50,400
|
|
|
|
100,800
|
|
|
|
596,167
|
|
Northern Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12100 Sunrise Valley
|
|
Dec. 2007
|
|
|
10,136
|
|
|
|
116,498
|
|
|
|
75.9
|
|
|
|
60,539
|
|
|
|
64.4
|
|
|
|
177,037
|
|
|
|
72.0
|
|
|
|
52,286
|
|
|
|
33,446
|
|
|
|
85,732
|
|
|
|
262,769
|
|
1275 K Street*
|
|
June 2006
|
|
|
1,881
|
|
|
|
22,137
|
|
|
|
86.0
|
|
|
|
|
|
|
|
|
|
|
|
22,137
|
|
|
|
86.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern Virginia Total
|
|
|
|
|
12,017
|
|
|
|
138,635
|
|
|
|
77.5
|
|
|
|
60,539
|
|
|
|
64.4
|
|
|
|
199,174
|
|
|
|
73.5
|
|
|
|
52,286
|
|
|
|
33,446
|
|
|
|
85,732
|
|
|
|
284,906
|
|
Chicago
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427 S. LaSalle
|
|
Feb. 2007
|
|
|
6,399
|
|
|
|
129,790
|
|
|
|
76.3
|
|
|
|
45,283
|
|
|
|
100.0
|
|
|
|
175,073
|
|
|
|
82.4
|
|
|
|
|
|
|
|
5,309
|
|
|
|
5,309
|
|
|
|
180,382
|
|
Boston
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70 Innerbelt
|
|
Apr. 2007
|
|
|
5,998
|
|
|
|
133,646
|
|
|
|
84.0
|
|
|
|
13,063
|
|
|
|
16.2
|
|
|
|
146,709
|
|
|
|
78.0
|
|
|
|
|
|
|
|
129,897
|
|
|
|
129,897
|
|
|
|
276,606
|
|
New York
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 Avenue of the Americas*
|
|
June 2007
|
|
|
4,101
|
|
|
|
48,404
|
|
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
48,404
|
|
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,404
|
|
Miami
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2115 NW 22nd Street
|
|
June 2006
|
|
|
1,245
|
|
|
|
30,176
|
|
|
|
50.1
|
|
|
|
1,641
|
|
|
|
100.0
|
|
|
|
31,817
|
|
|
|
52.6
|
|
|
|
|
|
|
|
13,447
|
|
|
|
13,447
|
|
|
|
45,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
|
$
|
89,364
|
|
|
|
1,128,971
|
|
|
|
80.5
|
%
|
|
|
421,032
|
|
|
|
77.7
|
%
|
|
|
1,550,003
|
|
|
|
79.7
|
%
|
|
|
102,686
|
|
|
|
377,220
|
|
|
|
479,906
|
|
|
|
2,029,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
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 managements 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 include a
customers proportionate share of the required data center support space (such as the
mechanical, telecommunications and utility rooms) and building common areas.
|
|
(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 the Funds or their affiliates 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 December 31,
2010 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 $95,440,000 as of December 31, 2010, which
reflects the addition of $6,076,000 in operating expense reimbursements to contractual net
rent under modified gross and triple-net leases.
|
|
(7)
|
|
Includes customer leases that have commenced as of December 31, 2010. The percent leased is
determined based on leased square feet as a proportion of total operating NRSF.
|
|
(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. The entire 102,686 NRSF
under construction as of December 31, 2010 was data center space.
|
|
(10)
|
|
In addition to the completion of 16,126 NRSF of data center space during the period, we also
redeveloped 8,262 NRSF of support space that was previously classified as office space. An
additional 6,984 NRSF of support space was allocated to existing leases as part of this
re-classification. This absorption is in addition to the 4,328 NRSF of new leases that
commenced at this facility in the fourth quarter of 2010.
|
|
(11)
|
|
The Coronado-Stender properties 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 under construction at 2972 Stender.
|
|
(12)
|
|
We are under construction on 50,400 NRSF of data center space at this property. We are also
developing an incremental 50,600 NRSF of unconditioned core and shell space held for potential
future development into data center space, subject to our assessment of market demand and
alternative uses of our capital.
|
9
The following table provides an overview of our properties in operation as of June 30, 2010.
For comparison purposes relative to the property table above, the table below excludes from the
operating pool any space deliveries that occurred after June 30, 2010, as well as any leasing
activity within those spaces:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating NRSF
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office and Light-
|
|
|
|
|
|
|
|
|
|
|
|
|
Data Center
|
|
|
Industrial
|
|
|
Total
|
|
|
|
Acquisition
|
|
Annualized Rent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
Market/Facilities
|
|
Date
|
|
($000)
|
|
|
Total
|
|
|
Leased
|
|
|
Total
|
|
|
Leased
|
|
|
Total
|
|
|
Leased
|
|
Los Angeles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Wilshire*
|
|
Aug. 2007
|
|
$
|
19,778
|
|
|
|
156,521
|
|
|
|
64.0
|
%
|
|
|
7,500
|
|
|
|
54.6
|
%
|
|
|
164,021
|
|
|
|
63.6
|
%
|
900 N. Alameda
|
|
Oct. 2006
|
|
|
12,322
|
|
|
|
264,952
|
|
|
|
95.2
|
|
|
|
8,360
|
|
|
|
16.9
|
|
|
|
273,312
|
|
|
|
92.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Los Angeles Total
|
|
|
|
|
32,100
|
|
|
|
421,473
|
|
|
|
83.6
|
|
|
|
15,860
|
|
|
|
34.8
|
|
|
|
437,333
|
|
|
|
81.8
|
|
San Francisco Bay
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 S. Market
|
|
Feb. 2000
|
|
|
11,064
|
|
|
|
84,045
|
|
|
|
88.7
|
|
|
|
205,846
|
|
|
|
85.0
|
|
|
|
289,891
|
|
|
|
86.1
|
|
2901 Coronado
|
|
Feb. 2007
|
|
|
8,820
|
|
|
|
50,000
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
100.0
|
|
1656 McCarthy
|
|
Dec. 2006
|
|
|
6,939
|
|
|
|
71,847
|
|
|
|
88.5
|
|
|
|
|
|
|
|
|
|
|
|
71,847
|
|
|
|
88.5
|
|
Coronado-Stender Properties
|
|
Feb. 2007
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
|
78,800
|
|
|
|
74.3
|
|
|
|
78,800
|
|
|
|
74.3
|
|
2972 Stender
|
|
Feb. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
San Francisco Bay Total
|
|
|
|
|
27,504
|
|
|
|
205,892
|
|
|
|
91.4
|
|
|
|
284,646
|
|
|
|
82.1
|
|
|
|
490,538
|
|
|
|
86.0
|
|
Northern Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12100 Sunrise Valley
|
|
Dec. 2007
|
|
|
10,032
|
|
|
|
116,498
|
|
|
|
75.9
|
|
|
|
38,350
|
|
|
|
90.2
|
|
|
|
154,848
|
|
|
|
79.4
|
|
1275 K Street*
|
|
June 2006
|
|
|
1,881
|
|
|
|
22,137
|
|
|
|
86.0
|
|
|
|
|
|
|
|
|
|
|
|
22,137
|
|
|
|
86.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northern Virginia Total
|
|
|
|
|
11,913
|
|
|
|
138,635
|
|
|
|
77.5
|
|
|
|
38,350
|
|
|
|
90.2
|
|
|
|
176,985
|
|
|
|
80.3
|
|
Chicago
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427 S. LaSalle
|
|
Feb. 2007
|
|
|
6,399
|
|
|
|
129,790
|
|
|
|
76.3
|
|
|
|
45,283
|
|
|
|
100.0
|
|
|
|
175,073
|
|
|
|
82.4
|
|
Boston
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70 Innerbelt
|
|
Apr. 2007
|
|
|
5,963
|
|
|
|
119,567
|
|
|
|
93.9
|
|
|
|
2,024
|
|
|
|
73.4
|
|
|
|
121,591
|
|
|
|
93.5
|
|
New York
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 Avenue of the Americas*
|
|
June 2007
|
|
|
4,101
|
|
|
|
48,404
|
|
|
|
71.4
|
|
|
|
|
|
|
|
|
|
|
|
48,404
|
|
|
|
71.4
|
|
Miami
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2115 NW 22nd Street
|
|
June 2006
|
|
|
1,245
|
|
|
|
30,176
|
|
|
|
50.1
|
|
|
|
1,641
|
|
|
|
100.0
|
|
|
|
31,817
|
|
|
|
52.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities at
December 31, 2010
|
|
|
|
$
|
89,225
|
|
|
|
1,093,937
|
|
|
|
83.1
|
%
|
|
|
387,804
|
|
|
|
83.1
|
%
|
|
|
1,481,741
|
|
|
|
83.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities at
June 30, 2010
|
|
|
|
$
|
85,695
|
|
|
|
|
|
|
|
82.4
|
%
|
|
|
|
|
|
|
78.2
|
%
|
|
|
|
|
|
|
81.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Indicates properties in which we hold a leasehold interest.
|
10
Customer Diversification
As of December 31, 2010, our portfolio was leased to over 630 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 December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
Remaining
|
|
|
|
|
|
Number
|
|
Total
|
|
|
of Total
|
|
|
Annualized
|
|
|
of
|
|
|
Lease
|
|
|
|
|
|
of
|
|
Leased
|
|
|
Operating
|
|
|
Rent
|
|
|
Annualized
|
|
|
Term in
|
|
|
|
Customer
|
|
Locations
|
|
NRSF
(
1)
|
|
|
NRSF
(
2)
|
|
|
($000)
(
3)
|
|
|
Rent
(
4)
|
|
|
Months
(
5)
|
|
1
|
|
Facebook, Inc.
|
|
3
|
|
|
74,112
|
|
|
|
4.8
|
%
|
|
$
|
11,554
|
|
|
|
12.9
|
%
|
|
|
57
|
|
2
|
|
General Services Administration-IRS*
(6)
|
|
1
|
|
|
132,370
|
|
|
|
8.5
|
|
|
|
3,427
|
|
|
|
3.8
|
|
|
|
17
|
|
3
|
|
Sprint Communications Corporation
(7)
|
|
3
|
|
|
104,837
|
|
|
|
6.8
|
|
|
|
3,260
|
|
|
|
3.6
|
|
|
|
13
|
|
4
|
|
Verizon Communications
|
|
7
|
|
|
73,962
|
|
|
|
4.8
|
|
|
|
2,454
|
|
|
|
2.7
|
|
|
|
50
|
|
5
|
|
Govt of District of Columbia
|
|
2
|
|
|
22,118
|
|
|
|
1.4
|
|
|
|
2,158
|
|
|
|
2.4
|
|
|
|
31
|
|
6
|
|
Tata Communications
|
|
2
|
|
|
52,973
|
|
|
|
3.4
|
|
|
|
2,101
|
|
|
|
2.4
|
|
|
|
14
|
|
7
|
|
Nuance Communications
(8)
|
|
1
|
|
|
19,211
|
|
|
|
1.2
|
|
|
|
2,050
|
|
|
|
2.3
|
|
|
|
94
|
|
8
|
|
Akamai Technologies
(9)
|
|
4
|
|
|
17,738
|
|
|
|
1.1
|
|
|
|
1,998
|
|
|
|
2.2
|
|
|
|
12
|
|
9
|
|
Computer Sciences Corporation
|
|
1
|
|
|
18,950
|
|
|
|
1.2
|
|
|
|
1,688
|
|
|
|
1.9
|
|
|
|
74
|
|
10
|
|
NBC Universal
|
|
1
|
|
|
17,901
|
|
|
|
1.2
|
|
|
|
1,669
|
|
|
|
1.9
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total/Weighted Average
|
|
|
|
|
534,172
|
|
|
|
34.4
|
%
|
|
$
|
32,359
|
|
|
|
36.1
|
%
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
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 December 31, 2010. 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 customers total leased square feet divided by the total operating NRSF in the
portfolio which, as of December 31, 2010, consisted of 1,550,003 NRSF.
|
|
(3)
|
|
Represents the monthly contractual rent under existing customer leases as of December 31,
2010 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 customers total annualized rent divided by the total annualized rent in the
portfolio as of December 31, 2010, which was approximately $89,363,637.
|
|
(5)
|
|
Weighted average based on percentage of total annualized rent expiring and is as of December
31, 2010.
|
|
(6)
|
|
The data presented represents an interim lease in place that expires in May 2012. 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.
|
|
(7)
|
|
Sprints 102,951 NRSF lease at 900 N. Alameda is scheduled to expire in the fourth quarter of
2011. We do not expect the customer to renew this lease. Upon expiration, Sprint would no
longer rank in the top 10 among our customers.
|
|
(8)
|
|
In the third quarter of 2010, we signed an additional lease with the customer
that commenced in the fourth quarter of 2010. Upon full commencement of that lease, Nuance Communications
will become our sixth largest customer in terms of annualized rent, with 19,211 NRSF leased
and an annualized rent of $2,177,892.
|
|
(9)
|
|
In the third quarter of 2010, we signed two additional leases with the customer,
a portion of which commence following Dec 31, 2010. Upon full commencement of those leases, Akamai will
be our fourth largest customer in terms of annualized rent, with 29,091 NRSF leased and an
annualized rent of $3,159,841.
|
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 December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
Number
|
|
|
Percentage
|
|
|
Operating
|
|
|
of Total
|
|
|
|
|
|
|
of
|
|
|
|
of
|
|
|
of All
|
|
|
NRSF of
|
|
|
Operating
|
|
|
Annualized
|
|
|
Annualized
|
|
Square Feet Under Lease
(1)
|
|
Leases
(
2)
|
|
|
Leases
|
|
|
Leases
(
3)
|
|
|
NRSF
|
|
|
Rent ($000)
(
4)
|
|
|
Rent
|
|
Available
(5)
|
|
|
|
|
|
|
|
%
|
|
|
314,055
|
|
|
|
20.3
|
%
|
|
$
|
|
|
|
|
|
%
|
1,000 or less
|
|
|
896
|
|
|
|
86.1
|
|
|
|
149,456
|
|
|
|
9.6
|
|
|
|
24,534
|
|
|
|
27.5
|
|
1,001 - 2,000
|
|
|
66
|
|
|
|
6.3
|
|
|
|
95,677
|
|
|
|
6.2
|
|
|
|
11,151
|
|
|
|
12.5
|
|
2,001 - 5,000
|
|
|
46
|
|
|
|
4.4
|
|
|
|
129,983
|
|
|
|
8.4
|
|
|
|
10,887
|
|
|
|
12.2
|
|
5,001 - 10,000
|
|
|
12
|
|
|
|
1.2
|
|
|
|
83,209
|
|
|
|
5.4
|
|
|
|
7,141
|
|
|
|
8.0
|
|
10,001 - 25,000
|
|
|
12
|
|
|
|
1.1
|
|
|
|
203,180
|
|
|
|
13.1
|
|
|
|
13,801
|
|
|
|
15.4
|
|
Greater than 25,000
|
|
|
9
|
|
|
|
0.9
|
|
|
|
574,443
|
|
|
|
37.0
|
|
|
|
21,850
|
|
|
|
24.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Total
|
|
|
1,041
|
|
|
|
100.0
|
%
|
|
|
1,550,003
|
|
|
|
100.0
|
%
|
|
$
|
89,364
|
|
|
|
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 managements estimate of space available for lease to third parties 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.
|
|
(4)
|
|
Represents the monthly contractual rent under existing customer leases as of December 31,
2010 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 379,106 vacant NRSF held for redevelopment at December 31, 2010.
|
11
Lease Expirations
The following table sets forth a summary schedule of the expirations for leases in place as
of December 31, 2010, plus available space for each of the ten full calendar years beginning
January 1, 2011 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 December 31, 2010
(6)
|
|
|
|
|
|
|
314,055
|
|
|
|
20.3
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
2011
(7)
|
|
|
525
|
|
|
|
325,772
|
|
|
|
21.0
|
|
|
|
24,235
|
|
|
|
27.1
|
|
|
|
74.39
|
|
|
|
24,519
|
|
|
|
75.26
|
|
2012
(8)
|
|
|
227
|
|
|
|
382,122
|
|
|
|
24.7
|
|
|
|
25,076
|
|
|
|
28.1
|
|
|
|
65.62
|
|
|
|
26,035
|
|
|
|
68.13
|
|
2013
|
|
|
172
|
|
|
|
155,293
|
|
|
|
10.0
|
|
|
|
14,974
|
|
|
|
16.8
|
|
|
|
96.42
|
|
|
|
16,090
|
|
|
|
103.61
|
|
2014
|
|
|
47
|
|
|
|
46,782
|
|
|
|
3.0
|
|
|
|
4,391
|
|
|
|
4.9
|
|
|
|
93.86
|
|
|
|
4,887
|
|
|
|
104.46
|
|
2015
|
|
|
26
|
|
|
|
54,631
|
|
|
|
3.5
|
|
|
|
1,649
|
|
|
|
1.8
|
|
|
|
30.18
|
|
|
|
1,866
|
|
|
|
34.16
|
|
2016
(9)
|
|
|
10
|
|
|
|
85,728
|
|
|
|
5.5
|
|
|
|
5,945
|
|
|
|
6.7
|
|
|
|
69.35
|
|
|
|
7,190
|
|
|
|
83.87
|
|
2017
|
|
|
21
|
|
|
|
61,403
|
|
|
|
4.0
|
|
|
|
8,622
|
|
|
|
9.6
|
|
|
|
140.42
|
|
|
|
10,512
|
|
|
|
171.20
|
|
2018
|
|
|
5
|
|
|
|
23,432
|
|
|
|
1.5
|
|
|
|
2,452
|
|
|
|
2.7
|
|
|
|
104.64
|
|
|
|
3,275
|
|
|
|
139.77
|
|
2019
|
|
|
1
|
|
|
|
71,062
|
|
|
|
4.6
|
|
|
|
1,233
|
|
|
|
1.4
|
|
|
|
17.35
|
|
|
|
1,445
|
|
|
|
20.33
|
|
2020-Thereafter
|
|
|
7
|
|
|
|
29,723
|
|
|
|
1.9
|
|
|
|
787
|
|
|
|
0.9
|
|
|
|
26.48
|
|
|
|
1,280
|
|
|
|
43.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio Total / Weighted Average
|
|
|
1,041
|
|
|
|
1,550,003
|
|
|
|
100.0
|
%
|
|
$
|
89,364
|
|
|
|
100.0
|
%
|
|
$
|
72.30
|
|
|
$
|
97,099
|
|
|
$
|
78.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 December 31,
2010 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 December
31, 2010 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 highlights the rent growth inherent in the existing
base of lease agreements.
|
|
(6)
|
|
Excludes approximately 379,106 vacant NRSF held for redevelopment at December 31, 2010.
|
|
(7)
|
|
Includes a lease with Sprint at 900 N. Alameda for 102,951 NRSF scheduled to expire in the
fourth quarter of 2011 and a lease with a professional services company at 427 S. LaSalle for
45,283 NRSF expiring in the second quarter of 2011. We anticipate redeveloping the subject
spaces as data center space.
|
|
(8)
|
|
Includes an office lease with General Services Administration IRS, which is an interim
lease in place that expires on May 31, 2012. 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.
|
|
(9)
|
|
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.
|
Competition
We compete with numerous developers, owners and operators of technology-related real estate
and data centers, many of which own properties similar to ours in the same markets in which our
properties are located, including Digital Realty Trust, Inc., Dupont Fabros Technology, Inc.,
Equinix, Inc., Terremark Worldwide, Inc., Savvis, Inc., Telx Group Inc., SABEY Corporation and
Quality Technology Services. In addition, we may face competition from new entrants into the data
center market. Some of our competitors and potential competitors may have significant advantages
over us, including greater name recognition, longer operating histories, pre-existing
relationships with current or potential customers, significantly greater financial, marketing and
other resources, and access to less expensive power, all of which could allow them to respond
more quickly to new or changing opportunities. If our competitors offer space at rental rates
below current market rates, or below the rental rates we currently charge our customers, we may
lose potential customers and we may be pressured to reduce our rental rates below those we
currently charge in order to retain customers when our customers leases expire.
As a developer of data center space, we also compete for the services of key third-party
providers of services, including engineers and contractors with expertise in the development of
data centers. The competition for the services of specialized contractors and other third-party
providers required for the development of data centers is intense, increasing the cost of
engaging such providers and the risk of delays in completing our development projects.
In addition, we face competition from real estate developers in our sector and in other
industries for the acquisition of additional properties suitable for the development of data
centers. Such competition may reduce the number of properties available for acquisition, increase
the price of these properties and reduce the demand for data center space in the markets we seek
to serve.
12
Regulation
General
Data centers in our markets are subject to various laws, ordinances and regulations,
including regulations relating to common areas. We believe that each of our properties has the
necessary permits and approvals to operate its business.
Americans with Disabilities Act
Our properties must comply with Title III of the American with Disabilities Act, or ADA, to
the extent that such properties are places of public accommodation or commercial facilities
as defined by the ADA. The ADA requires properties that are places of public accommodation to,
among other things, remove existing barriers to access by persons with disabilities where such
removal is readily achievable. The ADA also requires places of public accommodation as well as
commercial facilities undergoing new construction or alterations to conform to the ADA
Accessibility Guidelines, which provide design standards that permit accessibility by individuals
with disabilities. Further, if entities on our properties offer certain examinations or courses
(i.e., those related to applications, licensing, certification, or credentialing for secondary or
postsecondary education, professional, or trade purposes), they must be offered in an accessible
place and manner or with alternative accessible arrangements. We believe that our properties are
in substantial compliance with the ADA and that we will not be required to make substantial
capital expenditures to those properties to address the requirements of the ADA. However,
noncompliance with the ADA could result in imposition of monetary damages and civil penalties in
lawsuits brought by the Attorney General or an award of attorneys fees to private litigants. The
obligation to make readily achievable accommodations as required by the ADA is an ongoing one,
and we will continue to assess our properties and make alterations as appropriate.
Environmental Matters
Under various federal, state and local laws and regulations relating to the protection of
the environment, a current or previous owner or operator of real estate may be liable for
contamination resulting from the presence or discharge of hazardous or toxic substances at that
property, and may be required to investigate and clean up such contamination at that property or
emanating from that property. Such laws and regulations often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of the contaminants,
and a party may be liable for all of the cleanup costs, even when more than one person was
responsible for the contamination. Previous owners used some of our properties for industrial and
retail purposes, so those properties may contain some level of environmental contamination. The
presence of contamination or the failure to remediate contamination at our properties may expose
us to third-party liability or materially adversely affect our ability to sell, lease or develop
the real estate or to borrow using the real estate as collateral. In addition, we could incur
costs to comply with such laws and regulations, the violation of which could lead to substantial
fines and penalties.
Environmental laws and regulations also require that asbestos-containing building materials
be properly managed and maintained and may impose fines and penalties on building owners or
operators for failure to comply with these requirements. Further, third parties could potentially
seek recovery from owners or operators for personal injury associated with exposure to
asbestos-containing building materials.
In addition, certain of our customers, particularly those leasing light-industrial space
from us, routinely handle hazardous substances and wastes as part of their operations at our
properties. Environmental laws and regulations subject our customers, and potentially us, to
liability resulting from these activities or from previous industrial or other uses of those
properties. Environmental liabilities could also affect a customers ability to make rental
payments to us. We require our customers to comply with these environmental laws and regulations
and to indemnify us for any related liabilities.
Independent environmental consultants have conducted Phase I or similar environmental site
assessments on all owned properties in our portfolio. Each of the site assessments has been
either completed or updated since 2005. Site assessments are intended to collect and evaluate
information regarding the environmental condition of the surveyed property and surrounding
properties. These assessments do not generally include soil sampling, subsurface investigations
or asbestos sampling. Although prior commercial or industrial operations at some of our
properties may have released hazardous materials and some of our properties contain or may
contain asbestos-containing building materials, none of the recent site assessments revealed any
past or present environmental liability that we believe would have a material adverse effect on
our business, assets or results of operations. However, the assessments may have failed to reveal
all environmental conditions, liabilities or compliance concerns. Material environmental
conditions, liabilities or compliance concerns may have arisen after the reviews were completed
or may arise in the future; and future laws, ordinances or regulations may impose material
additional environmental liability. See Risk FactorsRisks Related to the Real Estate
IndustryEnvironmental problems are possible and can be costly.
Insurance
We carry comprehensive liability, fire, extended coverage, earthquake, business
interruption, rental loss, and umbrella liability insurance covering all of the properties in our
portfolio augmented by excess liability coverage in an amount that we believe to be appropriate.
We select policy specifications and insured limits which we believe to be appropriate given the
relative risk of loss, the cost of the coverage and industry practice and, in the opinion of our
companys management, the properties in our portfolio are currently adequately insured. We do not
carry insurance for generally uninsured losses such as loss from riots, war or acts of God. In
addition, we carry earthquake insurance on our properties in an amount and with deductibles which
we believe are commercially reasonable. Certain of the properties in our portfolio are located in
areas believed to be seismically active. Potential losses to our properties may not be covered by
insurance or may exceed our policy coverage limits. See Risk Factors.
13
Employees
As of December 31, 2010, we had 179 full-time and part-time employees of which 125 employees
are salaried, and we pay the remainder on an hourly basis. None of our employees are members of
labor unions and we believe that our relations with employees are good.
Offices
Our corporate offices are located at 1050 17th Street, Suite 800, Denver, CO 80265. We
believe that our current offices are adequate for our present and future business operations.
How to Obtain Our SEC Filings
All reports we file with the SEC are available free of charge via EDGAR through the SEC
website at www.sec.gov. In addition, the public may read and copy materials we file with the SEC
at the SECs public reference room located at 100 F Street, N.E., Washington, D.C. 20549. We also
provide copies of our Forms 8-K, 10-K, 10-Q, Proxy, Annual Report and amendments to those
documents at no charge to investors upon request and make electronic copies of such reports
available through our website at www.coresite.com as soon as reasonably practicable after filing
such material with the SEC. The information found on, or otherwise accessible through, our
website is not incorporated by reference into, nor does it form a part of, this Annual Report on
Form 10-K, or any other document that we file with the SEC.
Financial Information
For required financial information related to our operations, please refer to our
consolidated financial statements, including the notes thereto, included with this Annual Report
on Form 10-K.
Any of the following risks could materially and adversely affect
our business, results of operations or financial condition. The risks and uncertainties described
below are those that we currently believe may materially affect our company. Additional risks and
uncertainties that we are unaware of or that we currently deem immaterial also may become important
factors that affect our company.
Risks Related to Our Business and Operations
Our portfolio of properties consists primarily of data centers geographically concentrated in
certain markets and any adverse developments in local economic conditions or the demand for data
center space in these markets may negatively impact our operating results.
Our portfolio of properties consists primarily of data centers geographically concentrated
in Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago, Boston, New York City
and Miami. These markets comprised 35.9%, 30.8%, 13.4%, 7.2%, 6.7%, 4.6% and 1.4%, respectively,
of our annualized rent as of December 31, 2010. As such, we are susceptible to local economic
conditions and the supply of and demand for data center space in these markets. If there is a
downturn in the economy or an oversupply of or decrease in demand for data centers in these
markets, our business could be materially adversely affected to a greater extent than if we owned
a real estate portfolio that was more diversified in terms of both geography and industry focus.
We have experienced significant losses and we cannot assure you that we will achieve profitability.
For fiscal years 2008 and 2009, our Predecessor, on a consolidated basis, had net losses of
$13.9 million and $7.0 million, respectively. For the year ended December 31, 2010, the Company
had a net loss of $12.3 million. Our ability to achieve profitability is dependent upon a number
of risks and uncertainties, many of which are beyond our control. We cannot assure you that we
will be successful in executing our business strategy and become profitable. Our failure to do so
could have a material adverse effect on the price of our common stock and our ability to satisfy
our obligations, including making payments on our indebtedness. Even if we achieve profitability,
given the competitive nature of the industry in which we operate, we may not be able to sustain
or increase profitability on a quarterly or annual basis.
14
We face significant competition and may be unable to lease vacant space, renew existing leases or
release space as leases expire, which may have a material adverse effect on our business and
results of operations.
We compete with numerous developers, owners and operators of technology-related real estate
and data centers, many of which own properties similar to ours in the same markets, including
Digital Realty Trust, Inc., Dupont Fabros Technology, Inc., Equinix, Inc., Terremark Worldwide,
Inc., Savvis, Inc. and Telx Group, Inc. In addition, we may face competition from new entrants
into the data center market. Some of our competitors have significant advantages over us,
including greater name recognition, longer operating histories, lower operating costs,
pre-existing relationships with current or potential customers, greater financial, marketing and
other resources, and access to less expensive power. These advantages could allow our competitors
to respond more quickly or effectively to strategic opportunities or changes in our industries or
markets. If our competitors offer data center space that our existing or potential customers
perceive to be superior to ours based on numerous factors, including power, security
considerations, location or network connectivity, or if they offer rental rates below our or
current market rates, we may lose existing or potential customers, incur costs to improve our
properties or be forced reduce our rental rates. This risk is compounded by the fact that a
significant percentage of our customer leases expire every year. For example, as of December 31,
2010, leases representing 27.1%, 28.1% and 16.8% of our annualized rent will expire during 2011,
2012 and 2013, respectively. If the rental rates for our properties decrease, our existing
customers do not renew their leases or we are unable to lease vacant data center space or
re-lease data center space for which leases are scheduled to expire, our business and results of
operations could be materially adversely affected.
Our success depends on key personnel whose continued service is not guaranteed and we may not be
able to retain or attract knowledgeable, experienced and qualified personnel.
We depend on the efforts of key personnel, particularly Mr. Thomas M. Ray, our President and
Chief Executive Officer, and Jeffrey Finnin, our Chief Financial Officer. Our reputation and
relationships with existing and potential customers, industry personnel and key lenders are the
direct result of a significant investment of time and effort by our key personnel to build
credibility in a highly specialized industry. Many of our senior executives have extensive
experience and strong reputations in the real estate and technology industries, which aid us in
capitalizing on strategic opportunities and negotiating with customers. While we believe that we
will be able to find suitable replacements for key personnel who may depart from time to time,
the loss of their services could diminish our business and investment opportunities and our
customer, industry and lender relationships, which could have a material adverse effect on our
operations.
In addition, our success depends, to a significant degree, on being able to employ and
retain personnel who have the expertise required to successfully acquire, develop and operate
high-quality data centers. Personnel with these skill sets are in limited supply so the demand
and competition for such expertise is intense. We cannot assure you that we will be able to hire
and retain a sufficient number of qualified employees at reasonable compensation levels to
support our growth and maintain the high level of quality service our customers expect, and any
failure to do so could have a material adverse effect on our business.
We are continuing to invest in our expansion efforts, but we may not have sufficient customer
demand in the future to realize expected returns on these investments.
As part of our growth strategy, we intend to commit substantial operational and financial
resources to develop new data centers and expand existing ones. However, we typically do not
require pre-leasing commitments from customers before we develop or expand a data center, and we
may not have sufficient customer demand to support the new data center space when completed. A
lack of customer demand for data center space or excess capacity in the data center market could
impair our ability to achieve our expected rate of return on our investment, which could have a
material adverse effect on our financial condition, operating results and the market price of our
common stock.
Any failure of our physical infrastructure or services could lead to significant costs and
disruptions that could reduce our revenues, harm our business reputation and have a material
adverse effect on our financial results.
Our business depends on providing customers with highly reliable service. We may fail to
provide such service as a result of numerous factors, including:
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improper building maintenance by our landlords in the buildings that we lease;
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physical or electronic security breaches;
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fire, earthquake, hurricane, flood and other natural disasters;
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war, terrorism and any related conflicts or similar events worldwide; and
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sabotage and vandalism.
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Problems at one or more of our data centers, whether or not within our control, could result
in service interruptions or equipment damage. We provide service level commitments to
substantially all of our customers. As a result, service interruptions or equipment damage in our
data centers could result in credits to these customers. In addition, although we have given such
credits to our customers in the past, there can be no assurance that our customers will accept
these credits as compensation in the future. Service interruptions and equipment failures may
also expose us to additional legal liability and damage our brand image and reputation.
Significant or frequent service interruptions could cause our customers to terminate or not renew
their leases. In addition, we may be unable to attract new customers if we have a reputation for
significant or frequent service disruptions in our data centers.
Even if we have additional space available for lease at any one of our data centers, our ability to
lease this space to existing or new customers could be constrained by our access to sufficient
electrical power.
Our properties have access to a finite amount of power, which limits the extent to which we
can lease additional space for use at our data centers. As current and future customers increase
their power footprint in our facilities over time, the remaining available power for future
customers could limit our ability to increase occupancy rates or network density within our
existing facilities.
Furthermore, at certain of our data centers, our aggregate maximum contractual obligation to
provide power and cooling to our customers may exceed the physical capacity at such data centers
if customers were to quickly increase their demand for power and cooling. If we are not able to
increase the available power and/or cooling or move the customer to another location within our
data centers with sufficient power and cooling to meet such demand, we could lose the customer as
well as have liability under our leases. Any such material loss of customers or material
liability could adversely affect our results of operations.
To fund our growth strategy and refinance our indebtedness, we depend on external sources of
capital, which may not be available to us on commercially reasonable terms or at all.
In order to maintain our qualification as a REIT, we are required under the Internal Revenue
Code (the Code) to distribute at least 90% of our net taxable income annually, determined
without regard to the dividends paid deduction and excluding any net capital gains. We will also
be subject to income tax at regular corporate rates to the extent that we distribute less than
100% of our net taxable income, including any net capital gains. These distribution requirements
may limit our ability to fund future capital needs, including any necessary acquisition
financing, from operating cash flow. Consequently, we intend to rely on third-party sources for
debt or equity financing to fund our growth strategy. In addition, we may need external sources
of capital to refinance our indebtedness at maturity. We may not be able to obtain such financing
or refinancing on favorable terms or at all. Our access to third-party sources of capital
depends, in part, on:
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general market conditions;
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the markets perception of our growth potential;
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our then current debt levels;
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our historical and expected future earnings, cash flow and cash distributions; and
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the market price per share of our common stock.
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In addition, our ability to access additional capital may be limited by the terms of our
existing indebtedness, which restricts our incurrence of additional debt. If we cannot obtain
capital when needed, we may not be able to acquire or develop properties when strategic
opportunities arise or refinance our debt at maturity, which could have a material adverse effect
on our business.
Our expenses may not decrease if our revenue decreases.
Most of the expenses associated with our business, such as debt service payments, real
estate, personal and ad valorem taxes, insurance, utilities, employee wages and benefits and
corporate expenses are relatively inflexible and do not necessarily decrease in tandem with a
reduction in revenue from our business. Our expenses will also be affected by inflationary
increases and certain of our costs may exceed the rate of inflation in any given period. As a
result, we may not be able to fully offset our costs by higher lease rates, which could have a
material adverse effect on our results of operations.
We depend on third parties to provide network connectivity within and between certain of our data
centers, and any delays or disruptions in this connectivity may adversely affect our operating
results and cash flow.
We depend upon carriers and other network providers to deliver network connectivity to
customers within our data centers as well as the fiber network interconnection between our data
centers. Our hub-and-spoke approach makes us dependent on these third parties to provide these
services between our data centers. We cannot assure you that any network provider will elect to
offer its services within new data centers that we develop or that once a network provider
decides to provide connectivity to or between our data centers, it will continue to do so for
any period of time. A significant interruption in or loss of these services could impair our
ability to attract and retain customers and have a material adverse effect on our business.
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Enabling connectivity within and between our data centers requires construction and
operation of a sophisticated redundant fiber network. The construction required to connect our
data centers is complex and may involve factors outside of our control, including the
availability of construction resources. If highly reliable connectivity within and between
certain of our data centers is not established, is materially delayed, is discontinued or fails,
our reputation could be harmed, which could have a material adverse effect on our ability to
attract new customers or retain existing ones.
Our data center infrastructure may become obsolete and we may not be able to upgrade our power and
cooling systems cost-effectively or at all.
The markets for the data centers that we own and operate, as well as the industries in which
our customers operate, are characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and changing customer demands. Our ability to
deliver technologically sophisticated power and cooling are significant factors in our customers
decisions to rent space in our data centers. Our data center infrastructure may become obsolete
due to the development of new systems to deliver power to, or eliminate heat from, the servers
and other customer equipment that we house. Additionally, our data center infrastructure could
become obsolete as a result of the development of new technology that requires levels of power
and cooling that our facilities are not designed to provide. Our power and cooling systems are
also difficult and expensive to upgrade. Accordingly, we may not be able to efficiently upgrade
or change these systems to meet new demands without incurring significant costs that we may not
be able to pass on to our customers. The obsolescence of our power and cooling systems would have
a material adverse effect on our business. In addition, evolving customer demand could require
services or infrastructure improvements that we do not provide or that would be difficult or
expensive for us to provide in our current data centers, and we may be unable to adequately adapt
our properties or acquire new properties that can compete successfully. We risk losing customers
to our competitors if we are unable to adapt to this rapidly evolving marketplace.
Furthermore, potential future regulations that apply to industries we serve may require
customers in those industries to seek specific requirements from their data centers that we are
unable to provide. These may include physical security requirements applicable to the defense
industry and government contractors and privacy and security regulations applicable to the
financial services and health care industries. If such regulations were adopted, we could lose
some customers or be unable to attract new customers in certain industries, which would have a
material adverse effect on our results of operations.
Potential losses to our properties may not be covered by insurance or may exceed our policy
coverage limits.
We do not carry insurance for generally uninsured losses, such as losses from riots, war,
terrorist attacks or acts of God. The properties in our portfolio located in California are
subject to higher risks from earthquakes and our property in Miami is potentially subject to
greater risks arising from tropical storms, hurricanes and floods. Together, these properties
represented approximately 68.1% of total annualized rent as of December 31, 2010. While we do
carry earthquake, hurricane and flood insurance on our properties, the amount of our insurance
coverage may not be sufficient to fully cover such losses. In addition, we may discontinue
earthquake, hurricane or flood insurance on some or all of our properties in the future if the
cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage
relative to the risk of loss.
If we experience a loss which is uninsured or which exceeds our policy coverage limits, we
could lose the capital invested in the damaged properties as well as the anticipated future cash
flows from those properties. In addition, if the damaged properties are subject to recourse
indebtedness, we would continue to be liable for the indebtedness, even if these properties were
irreparably damaged.
In addition, even if damage to our properties is covered by insurance, a disruption of our
business caused by a casualty event may result in the loss of business or customers. We carry a
limited amount of business interruption insurance, but such insurance may not fully compensate us
for the loss of business or customers due to an interruption caused by a casualty event.
The recent disruption in the financial markets makes it more difficult to evaluate the
stability and net assets or capitalization of insurance companies, and any insurers ability to
meet its claim payment obligations. A failure of an insurance company to make payments to us upon
an event of loss covered by an insurance policy could have a material adverse effect on our
business and financial condition.
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A small number of customers account for a significant portion of our revenues, and the loss of any
of these customers could significantly harm our business, financial condition and results of
operations.
Our top ten customers accounted for approximately 36.1% of our total annualized rent as of
December 31, 2010. During the second quarter of 2010, we expanded our relationship with our
largest customer, Facebook, Inc. This customer represented 12.9% of our annualized rent as of
December 31, 2010. We currently depend, and expect to continue to depend, upon a relatively small
number of customers for a significant percentage of our net revenue. Some of our customers may
experience a downturn in their businesses or other factors that may weaken their financial
condition and result in them failing to make timely rental payments, defaulting on their leases,
reducing the level of interconnection services they obtain or the amount of space they lease from
us or terminating their relationship with us. The loss of one or more of our significant
customers or a customer exerting significant pricing pressure on us could also have a material
adverse effect on our results of operations.
In addition, our largest customers may choose to develop new data centers or expand existing
data centers of their own. In the event that any of our key customers were to do so, it could
result in a loss of business to us or increase pricing pressure on us. If we lose a customer,
there is no guarantee that we would be able to replace that customer at a competitive rate or at
all.
Some of our largest customers may also compete with one another in various aspects of their
businesses. The competitive pressures on our customers may have a negative impact on our
operations. For instance, one customer could determine that it is not in that customers interest
to house mission-critical servers in a facility operated by the same company that relies on a key
competitor for a significant part of its annual revenue. Our loss of a large customer for this or
any other reason could have a material adverse effect on our results of operations.
We are dependent upon third-party suppliers for power and certain other services, and we are
vulnerable to service failures of our third-party suppliers and to price increases by such
suppliers.
We rely on third parties to provide power to our data centers, and we cannot ensure that
these third parties will deliver such power in adequate quantities or on a consistent basis. If
the amount of power available to us is inadequate to support our customer requirements, we may be
unable to satisfy our obligations to our customers or grow our business. In addition, our data
centers are susceptible to power shortages and planned or unplanned power outages caused by these
shortages. While we attempt to limit exposure to power shortages by using backup generators and
batteries, power outages may last beyond our backup and alternative power arrangements, which
would harm our customers and our business. In the past, a limited number of our customers have
experienced temporary losses of power. Pursuant to the terms of some of our customer leases,
continuous or chronic power outages may give certain of our tenants the right to terminate their
leases or cause us to incur financial obligations in connection with a power loss. In addition,
any loss of services or equipment damage could reduce the confidence of our customers in our
services thereby impairing our ability to attract and retain customers, which would adversely
affect both our ability to generate revenues and our operating results.
In addition, we may be subject to risks and unanticipated costs associated with obtaining
power from various utility companies. Municipal utilities in areas experiencing financial
distress may increase rates to compensate for financial shortfalls unrelated to either the cost
of production or the demand for electricity. Other utilities that serve our data centers may be
dependent on, and sensitive to price increases for, a particular type of fuel, such as coal, oil
or natural gas. In addition, the price of these fuels and the electricity generated from them
could increase as a result of proposed legislative measures related to climate change or efforts
to regulate carbon emissions. In any of these cases, increases in the cost of power at any of our
data centers would put those locations at a competitive disadvantage relative to data centers
served by utilities that can provide less expensive power.
We may be unable to identify and complete acquisitions and successfully operate acquired
properties.
We continually evaluate the market for available properties and may acquire data centers or
properties suited for data center development when opportunities exist. Our ability to acquire
properties on favorable terms and successfully develop and operate them involves significant
risks including, but not limited to:
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we may be unable to acquire a desired property because of competition from other data
center companies or real estate investors with more capital;
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even if we are able to acquire a desired property, competition from other potential
acquirors may significantly increase the purchase price of such property;
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we may be unable to realize the intended benefits from acquisitions or achieve anticipated
operating or financial results;
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we may be unable to finance the acquisition on favorable terms or at all;
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we may underestimate the costs to make necessary improvements to acquired properties;
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we may be unable to quickly and efficiently integrate new acquisitions into our
existing operations resulting in disruptions to our operations or the diversion of our
managements attention;
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acquired properties may be subject to reassessment, which may result in higher than
expected tax payments;
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we may not be able to access sufficient power on favorable terms or at all; and
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market conditions may result in higher than expected vacancy rates and lower than expected
rental rates.
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In the past we have acquired properties that did not perform up to our expectations and
there can be no assurance that this will not happen again. If we are unable to successfully
acquire, redevelop, develop and operate data center properties, our ability to grow our business,
compete and meet market expectations will be significantly impaired, which would have a material
adverse effect on the price of our common stock.
18
We may be subject to unknown or contingent liabilities related to properties or businesses that we
acquire for which we may have limited or no recourse against the sellers.
Assets and entities that we have acquired or may acquire in the future, including the
properties contributed by the Funds or their affiliates, may be subject to unknown or contingent
liabilities for which we may have limited or no recourse against the sellers. Unknown or
contingent liabilities might include liabilities for clean-up or remediation of environmental
conditions, claims of customers, vendors or other persons dealing with the acquired entities, tax
liabilities and other liabilities whether incurred in the ordinary course of business or
otherwise. In the future we may enter into transactions with limited representations and
warranties or with representations and warranties that do not survive the closing of the
transactions, in which event we would have no or limited recourse against the sellers of such
properties. While we usually require the sellers to indemnify us with respect to breaches of
representations and warranties that survive, such indemnification (including the indemnification
by the Funds or their affiliates) is often limited and subject to various materiality thresholds,
a significant deductible or an aggregate cap on losses.
For example, under the contribution agreement pursuant to which the Funds or their
affiliates contributed the properties that comprise our portfolio to the operating partnership,
each of the Funds or their affiliates made certain representations and warranties as to certain
material matters related to the property being contributed by such fund or affiliate such as
title to any owned property, compliance with laws (including environmental laws) and the
enforceability of certain material customer contracts and leases. In the event that such
representations and warranties are not true and correct when made and as of the date the offering
was priced, the party that contributed the property to which such losses relate will indemnify
the operating partnership for any resulting losses, but only to the extent the amount of losses
exceeds 1% of the aggregate value of the operating partnership units received by all of the Funds
or their affiliates (based upon the initial offering price) and provided that the liability of
each contributor will be limited to 10% of the value of the operating partnership units (based
upon the initial offering price) received by such contributor (adjusted for any operating
partnership units purchased by us from the Funds or their affiliates at closing) in connection
with the restructuring transactions and with respect to any liability that arises from a specific
contributed property, the indemnification by such Fund or its affiliate will be limited to 10% of
the value of the operating partnership units issued in respect of such contributed property. As a
result, we will be solely responsible and will not be able to seek indemnification from the Funds
or their affiliates to the extent that any losses do not meet this minimum threshold amount or
exceed the maximum threshold amount. In addition, the representations and warranties made by the
Funds or their affiliates will only survive for a period of one year after the completion of the
IPO and in the event that we do not become aware of a breach until after the end of such period
or if we otherwise fail to assert a claim prior to such date, we will have no further recourse
against the contributors.
As a result, there is no guarantee that we will recover any amounts with respect to losses
due to breaches by the sellers of their representations and warranties. In addition, the total
amount of costs and expenses that we may incur with respect to liabilities associated with
acquired properties and entities may exceed our expectations, which may adversely affect our
operating results and financial condition. Finally, indemnification agreements between us and the
sellers typically provide that the sellers will retain certain specified liabilities relating to
the assets and entities acquired by us. While the sellers are generally contractually obligated
to pay all losses and other expenses relating to such retained liabilities, there can be no
guarantee that such arrangements will not require us to incur losses or other expenses as well.
Our growth depends on the successful redevelopment and development of our properties and any delays
or unexpected costs associated with such projects may harm our growth prospects, future operating
results and financial condition.
As of December 31, 2010, we had the ability to expand our operating data center square
footage by approximately 86.2%, or 973,590 NRSF through the development or redevelopment of (1)
102,686 NRSF space under construction, (2) 326,820 NRSF of vacant space, (3) 148,234 NRSF of
currently operating space, and (4) 395,850 NRSF of new data center space on land that we
currently own at our Coronado-Stender properties of which 50,600 NRSF of unconditioned core and
shell space was under construction as of December 31, 2010. Our growth depends upon the
successful completion of the redevelopment and development of this space and similar projects in
the future. Current and future redevelopment and development projects and expansion into new markets will involve substantial
planning, allocation of significant company resources and certain risks, including risks related
to financing, zoning, regulatory approvals, construction costs and delays. These projects will
also require us to carefully select and rely on the experience of one or more general contractors
and associated subcontractors during the construction process. Should a general contractor or
significant subcontractor experience financial or other problems during the construction process,
we could experience significant delays, increased costs to complete the project and other
negative impacts to our expected returns. Site selection in current and expansion markets is also a critical factor in our
expansion plans, and there may not be suitable properties available in our markets at a location
that is attractive to our customers and has the necessary combination of access to multiple
network providers, a significant supply of electrical power, high ceilings and the ability to
sustain heavy floor loading. Furthermore, while we may prefer to locate new data centers adjacent
to our existing data centers, we may be limited by the inventory and location of suitable
properties.
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In addition, we will be subject to risks and, potentially, unanticipated costs associated
with obtaining access to a sufficient amount of power from local utilities, including the need,
in some cases, to develop utility substations on our properties in order to accommodate our power
needs, constraints on the amount of electricity that a particular localitys power grid is
capable of providing at any given time, and risks associated with the negotiation of long-term
power contracts with utility providers. We cannot assure you that we will be able to successfully
negotiate such contracts on acceptable terms or at all. Any inability to negotiate utility
contracts on a timely basis or on acceptable financial terms or in volumes sufficient to supply
the requisite power for our development properties would have a material negative impact on our
growth and future results of operations and financial condition.
These and other risks could result in delays or increased costs or prevent the completion of
our redevelopment and development projects, any of which could have a material adverse effect on
our financial condition, results of operations, cash flow, the trading price of our common stock
and our ability to satisfy our debt service obligations or pay dividends.
We do not own all of the buildings in which our data centers are located. Instead, we lease certain
of our data center space and the ability to renew these leases could be a significant risk to our
ongoing operations.
We do not own the buildings for three of our data centers and our business could be harmed
if we are unable to renew the leases for these data centers at favorable terms or at all. The
following table summarizes the remaining primary term and renewal rights associated with each of
our leased properties:
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Property
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Current Lease Term Expiration
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Renewal Rights
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Base Rent Increases at Renewal
(1)
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32 Avenue of the Americas
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Apr. 2023
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2 x 5 yrs
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FMR
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One Wilshire
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July 2017
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3 x 5 yrs
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103% of previous monthly base rent
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1275 K Street
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May 2016
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3 x 5 yrs
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Greater of 103% of previous monthly base rent or 95% of FMR
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(1)
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FMR represents fair market rent as determined by mutual agreement between landlord and
tenant, or in the case of a disagreement, mutal agreement by third party appraisers.
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When the primary term of our leases expire, we have the right to extend the terms of our
leases as indicated above. For two of these leases, the rent will be determined based on the fair
market value of rental rates for this property and the then prevailing rental rates may be higher
than rental rates under the applicable lease. To maintain the operating profitability associated
with our present cost structure, we must increase revenues within existing data centers to offset
the anticipated increase in lease payments at the end of the original and renewal terms. Failure
to increase revenues to sufficiently offset these projected higher costs would adversely impact
our operating income. Upon the end of our renewal options, we would have to renegotiate our lease
terms with the landlord.
If we are not able to renew the lease at any of our data centers, the costs of relocating
the equipment in such data centers and redeveloping a new location into a high-quality data
center could be prohibitive. In addition, we could lose customers due to the disruptions in their
operations caused by the relocation. We could also lose those customers that choose our data
centers based on their locations.
Our level of indebtedness and debt service obligations could have adverse effects on our business.
As of December 31, 2010, we had a total indebtedness of approximately $125.6 million
(excluding a $0.7 million fair value of debt adjustment resulting from our acquisition of the
CoreSite Acquired Properties), all of which is secured indebtedness. We also have the ability to
borrow up to an additional $100.8 million under our $110.0 million revolving credit facility,
subject to satisfying certain financial tests, all of which, if incurred, will be secured
indebtedness. While there are limits in our revolving credit facility and our mortgage loan
agreements on the amount of debt that we may incur, and additional limits on our indebtedness may
be imposed by future agreements or by a policy adopted by our Board of Directors, we have the
ability to increase our indebtedness over current levels. A substantial increase in our
indebtedness may have adverse consequences for our business, results of operations and financial
condition because it could, among other things:
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require us to dedicate a substantial portion of our cash flow from operations to make
principal and interest payments on our indebtedness, thereby reducing our cash flow available
to fund working capital, capital expenditures and other general corporate purposes, including
to pay dividends on our common stock as currently contemplated or necessary to maintain our
qualification as a REIT;
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make it more difficult for us to satisfy our financial obligations, including
borrowings under our new revolving credit facility;
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increase our vulnerability to general adverse economic and industry conditions;
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expose us to increases in interest rates for our variable rate debt;
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limit our ability to borrow additional funds on favorable terms or at all to expand our
business or ease liquidity constraints;
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limit our ability to refinance all or a portion of our indebtedness on or before
maturity on the same or more favorable terms or at all;
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limit our flexibility in planning for, or reacting to, changes in our business and our
industry;
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place us at a competitive disadvantage relative to competitors that have less
indebtedness; and
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require us to dispose of one or more of our properties at disadvantageous prices or
raise equity that may dilute the value of our common stock in order to service our
indebtedness or to raise funds to pay such indebtedness at maturity.
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The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing
operational flexibility and creating default risks.
The agreements governing our indebtedness contain covenants that place restrictions on us
and our subsidiaries. These covenants may restrict, among other things, our and our subsidiaries
ability to:
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merge, consolidate or transfer all or substantially all of our or our subsidiaries
assets;
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incur additional debt or issue preferred stock;
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make certain investments or acquisitions;
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create liens on our or our subsidiaries assets;
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make capital expenditures;
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pay dividends on or repurchase our capital stock;
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enter into transactions with affiliates;
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issue or sell stock of our subsidiaries; and
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change the nature of our business.
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These covenants could impair our ability to grow our business, take advantage of attractive
business opportunities or successfully compete. In addition, our new revolving credit facility
will require us to maintain specified financial ratios and satisfy financial condition tests. Our
ability to comply with these ratios or tests may be affected by events beyond our control,
including prevailing economic, financial and industry conditions. A breach of any of these
covenants or covenants under any other agreements governing our indebtedness could result in an
event of default. Cross-default provisions in our debt agreements could cause an event of default
under one debt agreement to trigger an event of default under our other debt agreements. Upon the
occurrence of an event of default under any of our debt agreements, the lenders could elect to
declare all outstanding debt under such agreements to be immediately due and payable. If we were
unable to repay or refinance the accelerated debt, the lenders could proceed against any assets
pledged to secure that debt, including foreclosing on or requiring the sale of our data centers,
and our assets may not be sufficient to repay such debt in full.
Failure to hedge effectively against interest rate changes may adversely affect results of
operations.
We seek to manage our exposure to interest rate volatility by using interest rate hedging
arrangements, such as interest cap and interest rate swap agreements. These agreements involve
risks, such as the risk that counterparties may fail to honor their obligations under these
arrangements, that these arrangements may not be effective in reducing our exposure to interest
rate changes and that a court could rule that such an agreement is not legally enforceable. Our
policy is to use derivatives only to hedge interest rate risks related to our borrowings, not for
speculative or trading purposes, and to enter into contracts only with major financial
institutions based on their credit ratings and other factors. However, we may choose to change
this policy in the future. Hedging may reduce the overall returns on our investments. Failure to
hedge effectively against interest rate changes may materially adversely affect our results of
operations.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the
loss of our investment in any property subject to mortgage debt.
As of December 31, 2010, our 427 S. LaSalle property was subject to $40.0 million of secured
indebtedness, our 55 S. Market property was subject to a $60.0 million mortgage loan and our
12100 Sunrise Valley property was subject to a $32.0 million secured construction loan, of which
$25.6 million was outstanding. In addition, borrowings under our revolving credit facility will
be secured by a lien on certain of our properties. Incurring mortgage and other secured debt
obligations increases our
risk of property losses because defaults on secured indebtedness may result in foreclosure
actions initiated by lenders and ultimately our loss of the property securing any loans for which
we are in default. For tax purposes, a foreclosure of any of our properties would be treated as a
sale of the property for a purchase price equal to the outstanding balance of the debt secured by
the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax
basis in the property, we would recognize taxable income on foreclosure, but would not receive
any cash proceeds, which could hinder our ability to meet the REIT distribution requirements
imposed by the Code. As we execute our business plan, we may assume or incur new mortgage
indebtedness on our existing properties or properties that we acquire in the future. Any default
under any one of our mortgage debt obligations may increase the risk of our default on our other
indebtedness.
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Our failure to develop and maintain a diverse customer base could harm our business and adversely
affect our results of operations.
Our ability to increase occupancy rates in our data centers and grow our business is, in
part, dependent upon our ability to market our data center space to a diverse customer base. A
more diverse customer base in our data centers creates more networking interconnection
opportunities that are valued by our customers, which we believe has generated and will continue
to generate incremental revenues in the long-term. Attracting and retaining this diverse customer
base will depend on many factors, including the density of interconnection, the operating
reliability and security of our data centers, and our ability to market our services effectively
across different customer segments. If we fail to maintain a diverse customer base, our business
and results of operations may be adversely affected.
Certain of the properties in our portfolio have been owned or operated for a limited period of
time, and we may not be aware of characteristics or deficiencies involving any one or all of them.
As of December 31, 2010, our portfolio of properties consisted of 11 operating data center
facilities, one data center under construction and one development site. Nine of our properties
were acquired or developed by the Funds or their affiliates less than four years prior to the
date of our IPO, including one facility, 2901 Coronado, which was completed during the second
quarter of 2010. Because these properties have been in operation for a relatively short period of
time, we may be unaware of characteristics of or deficiencies in such properties that could
adversely affect their valuation or revenue potential and such properties may not ultimately
perform up to our expectations.
We may be vulnerable to security breaches which could disrupt our operations and have a material
adverse effect on our financial performance and operating results.
A party who is able to compromise the security measures on our networks or the security of
our infrastructure could misappropriate our proprietary information and the personal information
of our customers and cause interruptions or malfunctions in our or our customers operations. We
may be required to expend significant financial resources to protect against such threats or to
alleviate problems caused by security breaches. As techniques used to breach security change
frequently and are generally not recognized until launched against a target, we may not be able
to implement security measures in a timely manner or, if and when implemented, these measures
could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits,
loss of existing or potential customers, harm to our reputation and increases in our security
costs, which could have a material adverse effect on our financial performance and operating
results.
Our tax protection agreements could limit our ability to sell or otherwise dispose of certain
properties.
We have agreed with each of the Funds or their affiliates that have directly or indirectly
contributed their interests in the properties in our portfolio to our operating partnership that
if we directly or indirectly sell, convey, transfer or otherwise dispose of all or any portion of
these interests in a taxable transaction, we will make an interest-free loan to the contributors
in an amount equal to the contributors tax liabilities, based on an assumed tax rate. Any such
loan would be repayable out of the after tax-proceeds (based on an assumed tax rate) of any
distribution from the operating partnership to, or any sale of operating partnership units (or
common stock issued by us in exchange for such units) by, the recipient of such loan, and would
be non-recourse to the borrower other than with respect to such proceeds. These tax protection
provisions apply for a period expiring on the earlier of (i) the seventh anniversary of the
completion of our IPO and (ii) the date on which these contributors (or certain transferees)
dispose in certain taxable transactions of 90% of the operating partnership units that were
issued to them in connection with the contribution of these properties.
Increases in our property and other state and local taxes could adversely affect our ability to
make distributions to our stockholders if they cannot be passed on to our customers.
We are subject to a variety of state and local taxes, including real and personal property
taxes and sales and use taxes that may increase materially due to factors outside our control. In
particular, taxes on our properties may increase as tax rates change and as the properties are
assessed or reassessed by taxing authorities. We have been notified by local taxing authorities
that the assessed values of certain of our properties have increased. We plan to appeal these
increased assessments, but we may not be successful in our efforts. Furthermore, some of our
properties may be reassessed retroactively to the date we or the Funds acquired the property,
which could require us to make cumulative payments for multiple years. Our leases with our
customers generally do not allow us to increase their rent as a result of an increase in property
or other taxes. If property or other taxes increase and we cannot pass these increases on to our
customers through increased rent for new leases or upon lease renewals, our result of operations,
cash flow and ability to make distributions to our stockholders would be adversely affected.
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Risks Related to the Real Estate Industry
Illiquidity of real estate investments, particularly our data centers, could significantly impede
our ability to respond to adverse changes in the performance of our properties, which could harm
our financial condition.
Because real estate investments are relatively illiquid, our ability to promptly sell one or
more properties in our portfolio in response to adverse changes in the real estate market or in
the performance of such properties may be limited, thus harming our financial condition. The real
estate market is affected by many factors that are beyond our control, including:
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adverse changes in national and local economic and market conditions;
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changes in interest rates and in the availability, cost and terms of debt financing;
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changes in governmental laws and regulations, fiscal policies and zoning ordinances and
costs of compliance therewith;
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the ongoing cost of capital improvements that are not passed onto our customers,
particularly in older structures;
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changes in operating expenses; and
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civil unrest, acts of war, terrorist attacks and natural disasters, including
earthquakes and floods, which may result in uninsured and underinsured losses.
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The risks associated with the illiquidity of real estate investments are even greater for
our data center properties. Our data centers are highly specialized real estate assets containing
extensive electrical and mechanical systems that are uniquely designed to house and maintain our
customers equipment and, as such, have little, if any, traditional office space. As a result,
most of our data centers are not suited for use by customers as anything other than as data
centers and major renovations and expenditures would be required in order for us to re-lease data
center space for more traditional commercial or industrial uses, or for us to sell a property to
a buyer for use other than as a data center.
Environmental problems are possible and can be costly.
Environmental liabilities could arise and have a material adverse effect on our financial
condition and performance. Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous owner or operator of real estate
to investigate and remediate hazardous or toxic substances or petroleum product releases at or
from the property. In addition, we could incur costs to comply with such laws and regulations,
the violation of which could lead to substantial fines and penalties.
We may have to pay governmental entities or third parties for property damage and for
investigation and remediation costs that they incurred in connection with any contamination at
our current and former properties without regard to whether we knew of or caused the presence of
the contaminants. Even if more than one person may have been responsible for the contamination,
each person covered by these environmental laws may be held responsible for all of the clean-up
costs incurred.
Some of our properties contain or may contain asbestos-containing building materials.
Environmental laws may impose fines and penalties on building owners or operators who fail to
properly manage and maintain these materials, notify and train persons who may come into contact
with asbestos and undertake special precautions, and third parties could potentially seek
recovery from owners or operators for any personal injury associated with exposure to
asbestos-containing building materials.
Some of our properties may also contain or develop harmful mold or suffer from other air
quality issues. As a result, the presence of significant mold or other airborne contaminants at
any of our properties could require us to undertake a costly remediation program to contain or
remove the mold or other airborne contaminants from the affected property or increase indoor
ventilation. In addition, the presence of significant mold or other airborne contaminants could
expose us to liability from our
customers, employees of our customers and others if property damage or health concerns
arise.
We may incur significant costs complying with the Americans with Disabilities Act, or ADA, and
similar laws, which could materially adversely affect our financial condition and operating
results.
Under the ADA, all places of public accommodation must meet federal requirements related to
access and use by disabled persons. A number of additional federal, state and local laws may also
require modifications to our properties. We have not conducted an audit or investigation of all
of our properties to determine our compliance with the ADA. If one of our properties is not in
compliance with the ADA, we would be required to incur additional costs to bring the property
into compliance. Additional federal, state and local laws may require modifications to our
properties, or restrict our ability to renovate our properties. We cannot predict the ultimate
amount of the cost of compliance with the ADA or other legislation. If we incur substantial costs
to comply with the ADA and any other similar legislation, our financial condition and results of
operations could be materially adversely affected.
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We may be adversely affected by regulations related to climate change.
Climate change regulation is a rapidly developing area. Congress is currently considering
new laws relating to climate change, including potential cap-and-trade systems, carbon taxes and
other requirements relating to reduction of carbon footprints and/or greenhouse gas emissions.
Other countries have enacted climate change laws and regulations and the United States has been
involved in discussions regarding international climate change treaties. The U.S. Environmental
Protection Agency, or EPA, and some of the states and localities in which we operate, have also
enacted certain climate change laws and regulations and/or have begun regulating carbon
footprints and greenhouse gas emissions. Although these laws and regulations have not had an
adverse effect on our business to date, they could limit our ability to develop new facilities or
result in substantial compliance costs, retrofit costs and construction costs, including capital
expenditures for environmental control facilities and other new equipment. We could also face a
negative impact on our reputation with the public if we violate climate change laws or
regulations.
Risks Related to Our Organizational Structure
Our Board of Directors may change our major corporate, investment and financing policies without
stockholder approval and those changes may adversely affect our business.
Our Board of Directors will determine our major corporate policies, including our
acquisition, investment, financing, growth, operations and distribution policies and whether to
maintain our status as a REIT. In particular, we anticipate that our Board of Directors will
adopt a policy of limiting the amount of indebtedness we incur. However, our organizational
documents do not limit the amount or percentage of indebtedness, funded or otherwise, that we may
incur. Our Board of Directors may alter or eliminate our current corporate policies, including
our policy on borrowing at any time without stockholder approval. Accordingly, while our
stockholders have the power to elect or remove directors, our stockholders will have limited
direct control over changes in our policies and those changes could adversely affect our
business, financial condition, results of operations, the market price of our common stock and
our ability to make distributions to our stockholders.
While the Funds and their affiliates do not control our company, they own a majority of our
Operating Partnership and have the right initially to nominate two directors, and their interests
may differ from or conflict with the interests of our stockholders.
As of December 31, 2010 the Funds or their affiliates had an aggregate beneficial ownership
interest in our Operating Partnership of approximately 57.3% which, if exchanged for our common
stock, would represent an approximately 57.1% interest in our common stock. In addition, the
operating agreement for our Operating Partnership grants the Funds and their affiliates the right
to initially nominate two of the seven directors to our Board of Directors. As a result, the
Funds and their affiliates have the ability to exercise substantial influence over our company,
including with respect to decisions relating to our capital structure, issuing additional shares
of our common stock or other equity securities, paying dividends, incurring additional debt,
making acquisitions, selling properties or other assets, merging with other companies and
undertaking other extraordinary transactions. In any of these matters, the interests of the Funds
and their affiliates may differ from or conflict with the interests of our other stockholders. In
addition, the Funds and their affiliates are in the business of making investments in companies
and may, from time to time, acquire interests in businesses that directly or indirectly compete
with our business, as well as businesses that are significant existing or potential customers.
The Funds and their affiliates may acquire or seek to acquire assets that we seek to acquire and,
as a result, those acquisition opportunities may not be available to us or may be more expensive
for us to pursue.
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Our charter and bylaws contain provisions that may delay, defer or prevent an acquisition of our
common stock or a change in control, which may not be in the best interests of our stockholders.
Our charter and bylaws contain a number of provisions, the exercise or existence of which
could delay, defer or prevent a transaction or a change in control that might involve a premium
price for our stockholders or otherwise be in their best interests, including the following:
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Our Charter Contains Restrictions on the Ownership and Transfer of Our Stock
. In order
to assist us in complying with the limitations on the concentration of ownership of REIT
stock imposed by the Code on REITs, our charter generally prohibits any person or entity
(other than a person who or entity that has been granted an exception as described below)
from actually or constructively owning more than 9.8% (by value or by number of shares,
whichever is more restrictive) of our common stock or more than 9.8% (by value) of our
capital stock. The value and number of the outstanding shares of common stock and the value
of the outstanding shares of capital stock shall be determined by the Board of Directors in
good faith, which shall be conclusive for all purposes. We refer to these restrictions as the
ownership limits. Our charter permits our Board of Directors to make, and our Board of
Directors has made, certain exceptions to these ownership limits, where our Board of
Directors has determined that such exceptions would not cause us to fail to qualify as a
REIT. Our Board of Directors has granted exemptions from the ownership limits to the Funds
and their affiliates, as well as to one registered broker-dealer who hold shares of our
common stock for the benefit of multiple shareholders, none of whom individually holds more
than 9.8% of our capital stock. Any attempt to own or transfer shares of our capital stock in
excess of the ownership limits without the consent of our Board of Directors will result in
the automatic transfer of the shares (and all dividends thereon) to a charitable trust. These
ownership limitations may prevent a third party from acquiring control of us if our Board of
Directors does not grant an exemption from the ownership limitations, even if our
stockholders believe the change in control is in their best interests.
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Our Charter Grants Our Board of Directors the Right to Classify or Reclassify Any Unissued
Shares of Capital Stock, Increase or Decrease the Authorized Number of Shares and Establish
the Preference and Rights of Any Preferred Stock without Stockholder Approval
. Our charter
provides that the total number of shares of stock of all classes that we currently have
authority to issue is 120,000,000, initially consisting of 100,000,000 shares of common stock
and 20,000,000 shares of preferred stock. Our Board of Directors has the authority, without a
stockholders vote, to classify or reclassify any unissued shares of stock, including common
stock, into preferred stock or vice versa, to increase or decrease the authorized number of
shares of common stock and preferred stock and to establish the preferences and rights of any
preferred stock or other class or series of shares to be issued. Because the Board of
Directors has the power to establish the preferences and rights of additional classes or
series of stock without a stockholders vote, our Board of Directors may give the holders of
any class or series of stock preferences, powers and rights, including voting rights, senior
to the rights of holders of existing stock.
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Certain provisions of Maryland law may limit the ability of a third party to acquire control of us.
Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of
inhibiting a third party from making a proposal to acquire us or of impeding a change of control
under circumstances that otherwise could provide our common stockholders with the opportunity to
realize a premium over the then-prevailing market price of such shares, including:
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business combination
provisions that, subject to limitations, prohibit certain
business combinations between us and an interested stockholder (defined generally as any
person who beneficially owns 10% or more of the voting power of our outstanding shares of
voting stock or an affiliate or associate of the corporation who, at any time within the
two-year period immediately prior to the date in question, was the beneficial owner of 10% or
more of the voting power of the then outstanding stock of the corporation) or an affiliate of
any interested stockholder for five years after the most recent date on which the stockholder
becomes an interested stockholder and thereafter imposes two super-majority stockholder
voting requirements on these combinations; and
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control share
provisions that provide that control shares of our company (defined
as voting shares of stock which, when aggregated with all other shares controlled by the
stockholder, entitle the stockholder to exercise one of three increasing ranges of voting
power in electing directors) acquired in a control share acquisition (defined as the direct
or indirect acquisition of ownership or control of control shares) have no voting rights
except to the extent approved by our stockholders by the affirmative vote of at least
two-thirds of all of the votes entitled to be cast on the matter, excluding all interested
shares.
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We have opted out of these provisions of the MGCL, in the case of the business combination
provisions of the MGCL, by resolution of our Board of Directors and, in the case of the control
share provisions of the MGCL, by a provision in our bylaws. However, our Board of Directors may
elect to opt into these provisions, if approved by our stockholders by the affirmative vote of a
majority of votes cast and with the consent of the Funds or their affiliates, provided that the
consent of the Funds will not be
required unless, in the case of the control share provisions, such provisions would apply to
the Funds and their affiliates or in either case at such time they own less than 10% of our
outstanding common stock (assuming all operating partnership units are exchanged into common
stock).
Additionally, Title 3, Subtitle 8 of the MGCL permits our Board of Directors, without
stockholder approval and regardless of what is currently provided in our charter or bylaws, to
implement certain takeover defenses, such as a classified board, some of which we do not yet
have.
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Risks Related to Our Status as a REIT
Failure to qualify as a REIT would have material adverse consequences to us and the value of our
stock.
We intend to elect to be taxed and to operate in a manner that will allow us to qualify as a
REIT for federal income tax purposes under the Code. However, we cannot assure you that we will
qualify or will remain qualified as a REIT. If, in any taxable year, we lose our REIT status, we
will face serious tax consequences that would substantially reduce our cash available for
distribution to you for each of the years involved because:
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we would not be allowed a deduction for distributions to stockholders in computing our
taxable income and we would be subject to federal income tax, including any alternative
minimum tax, at regular corporate rates;
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we could be subject to possibly increased state and local taxes; and
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unless we are entitled to relief under applicable statutory provisions, we could not
elect to be taxed as a REIT for four taxable years following the year during which we were
disqualified.
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Our failure to qualify as a REIT could also impair our ability to expand our business and
raise capital, and would materially adversely affect the value of our common stock.
We have limited operating history as a REIT and a public company, which could hinder our ability to
successfully manage our business.
We have limited operating history as a REIT and a public company. Although certain of our
executive officers and directors have experience in the real estate industry, and Mr. Ray, our
President and Chief Executive Officer and Mr. Finnin, our Chief Financial Officer, have
considerable experience with publicly traded REITs, there is no assurance that our past
experience will be sufficient to operate a business in accordance with the Code requirements for
REIT qualification or in accordance with the requirements of the SEC and the NYSE for public
companies. We are required to develop and implement substantial control systems and procedures in
order to qualify and maintain our qualification as a REIT, satisfy our periodic and current
reporting requirements under applicable SEC regulations and comply with NYSE listing standards.
As a result, we will incur significant legal, accounting and other expenses that we did not incur
as a private company and our management and other personnel will need to devote a substantial
amount of time to comply with these rules and regulations and establish the corporate
infrastructure and controls demanded of a publicly-traded REIT. If our finance and accounting
organization is unable for any reason to respond adequately to the demands of being a publicly
held company, the quality and timeliness of our financial reporting may suffer and we could
experience significant deficiencies or material weaknesses in our disclosure controls and
procedures or in our internal control over financial reporting. An inability to establish and
maintain effective disclosure controls and procedures and internal control over financial
reporting could cause us to fail to meet our reporting obligations under the Exchange Act on a
timely basis or result in material misstatements or omissions in our Exchange Act reports.
Failure to qualify as a domestically-controlled REIT could subject our non-U.S. stockholders to
adverse federal income tax consequences.
We will be a domestically-controlled REIT if, at all times during a specified testing
period, less than 50% in value of our shares is held directly or indirectly by non-U.S.
stockholders. However, because our shares are publicly traded, we cannot guarantee that we will
in fact be a domestically-controlled REIT. If we fail to qualify as a domestically-controlled
REIT, our non-U.S. stockholders that otherwise would not be subject to federal income tax on the
gain attributable to a sale of our shares of common stock would be subject to taxation upon such
a sale if either (1) the shares of common stock were not considered to be regularly traded under
applicable Treasury Regulations on an established securities market, such as the NYSE, or (2) the
selling non-U.S. stockholder owned, actually or constructively, more than 5% in value of the
outstanding shares of common stock being sold during specified testing periods. If gain on the
sale or exchange of our shares of common stock was subject to taxation for these reasons, the
non-U.S. stockholder would be subject to regular U.S. income tax with respect to any gain on a
net basis in a manner similar to the taxation of a taxable U.S. stockholder, subject to any
applicable alternative minimum tax and special alternative minimum tax in the case of nonresident
alien individuals, and corporate non-U.S. stockholders may be subject to an additional branch
profits tax.
Our cash available for distribution to stockholders may not be sufficient to pay distributions at
expected levels or at all, and we may be required to borrow funds on a short-term basis during
unfavorable market conditions.
In order to maintain our qualification as a REIT, we are required under the Code to
distribute at least 90% of our net taxable income annually to our stockholders. In any period our
net taxable income may be greater than our cash flow from operations, requiring us to fund such
distributions from other sources, including borrowed funds, even if the market conditions are not
favorable for these borrowings. In addition, we may become party to debt agreements that include
cash management or similar provisions, pursuant to which revenues generated by properties subject
to such indebtedness are immediately, or upon the occurrence of certain events, swept into an
account for the benefit of the lenders under such debt agreements, which revenues would typically
only become available to us after the funding of reserve accounts for, among other things, debt
service, taxes, insurance and leasing commissions. In any event, if our properties do not
generate sufficient cash flow to satisfy our REIT distribution obligations, we may be required to
fund distributions from working capital, borrowings under our revolving credit facility, the sale
of assets or debt or equity financing, some or all of which may not be available or may not be
available on favorable market conditions. We may also elect to pay dividends to stockholders in
the form of taxable stock dividends in order to meet our distributions requirements or reduce
expected distributions. As a result, any failure to generate cash greater than our REIT
distribution obligation could have a material adverse effect on the price of our common stock.
26
Applicable REIT laws may restrict certain business activities.
As a REIT we are subject to various restrictions on our income, assets and activities. These
include restrictions on our ability to pursue certain strategic acquisitions or business
combinations and our ability to enter into other lines of business. Due to these restrictions, we
anticipate that we will conduct certain business activities, such as interconnection services, in
one or more taxable REIT subsidiaries. Our taxable REIT subsidiaries are taxable as regular C
corporations and are subject to federal, state, local and, if applicable, foreign taxation on
their taxable income at applicable corporate income tax rates. However, we may still be limited
in the business activities we can pursue.
Despite our REIT status, we remain subject to various taxes.
Notwithstanding our status as a REIT, we will be subject to certain federal, state and local
taxes on our income and property. For example, we will pay tax on certain types of income that we
do not distribute and we will incur a 100% excise tax on transactions with our TRS that are not
conducted on an arms length basis. Moreover, our TRS is taxable as a regular C corporation and
will pay federal, state and local income tax on its net income at the applicable corporate rates.
If the structural components of our properties were not treated as real property for purposes of
the REIT qualification requirements, we would fail to qualify as a REIT.
A significant portion of the value of our properties is attributable to structural
components related to the provision of electricity, heating, ventilation and air conditioning,
humidification regulation, security and fire protection, and telecommunication services. We have
received a private letter ruling from the Internal Revenue Service (the IRS), holding, among
other things, that our buildings, including the structural components, constitute real property
for purposes of the REIT qualification requirements. We are entitled to rely upon that private
letter ruling only to the extent that we did not misstate or omit a material fact in the ruling
request we submitted to the IRS and that we operate in the future in accordance with the material
facts described in that request. Moreover, the IRS, in its sole discretion, may revoke the
private letter ruling. If our structural components are subsequently determined not to constitute
real property for purposes of the REIT qualification requirements, including as a result of our
being unable to rely upon the private letter ruling or the IRS revoking that ruling, we would
fail to qualify as a REIT, which could have a material adverse effect on the value of our common
stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The information set forth under the caption Our Portfolio in Item 1 of this Annual Report
on Form 10-K is incorporated by reference herein.
27
ITEM 3. LEGAL PROCEEDINGS
From
time to time, we are party to a variety of legal proceedings rising
in the ordinary course of business. We believe that, with respect to
any such matters that we are currently a party to, the ultimate
disposition of any such matter will not result in a material adverse effect on us.
Prior to the completion of our IPO, Ari Brumer, the former general counsel of our affiliate CoreSite, LLC,
filed suit in federal court in Colorado against the Company, certain of our affiliates, our chief executive
officer and certain affiliates of the Funds and Carlyle. In his complaint, Mr. Brumer alleged that he was
fraudulently induced to accept employment with CoreSite, LLC, and that his employment was terminated in
retaliation for his assertions that the Company and certain of its officers and affiliates had been involved
in or committed certain illegal or improper acts. We investigated the assertions of illegal or improper acts made
by Mr. Brumer. Based on the results of that investigation, we concluded that those assertions were not based
on, or supported by, facts but were raised by Mr. Brumer in bad faith after his termination, which termination
was unrelated to his avowed concerns about the subject matter of the assertions.
On September 28, 2010, Mr. Brumer voluntarily dismissed the federal court action without prejudice and filed a
substantially identical complaint in Colorado state court in Denver. In the state action, Mr. Brumer claims
actual damages in an amount to be proven at trial as well as special damages of $1,019,000, principally attributable
to real estate losses that he allegedly incurred from relocating to Colorado.
On October 22, 2010, the Company and the other defendants filed a motion to dismiss the state court case on various
grounds. On January 11, 2011, the Court partially granted the motion, dismissing one claim as legally insufficient
and ordering the dismissal of all claims against our chief executive officer individually. On March 8, 2011, the
Company filed its answer to the amended complaint and asserted counterclaims against Mr. Brumer arising from his
efforts to disrupt the Companys initial public offering for personal advantage after his employment was terminated
by the Company.
Because the case is still in the preliminary stages, the cost of the litigation and its ultimate resolution are
not estimable at this time. We believe that we have valid defenses to Mr. Brumers remaining claims and that
there is significant merit to our counterclaims against Mr. Brumer and we intend to vigorously defend the case
and pursue our counterclaims against Mr. Brumer. Based on the claims and damages asserted and the probability
of an unfavorable outcome, we believe that this matter will not have a material adverse effect on our business,
financial position or liquidity.
ITEM 4. REMOVED AND RESERVED
28
PART II
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|
|
ITEM 5.
|
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
|
Market Information and Holders
Our common stock has been listed and is traded on the NYSE under the symbol COR since
September 23, 2010. As of December 31, 2010, we had 3 holders of record of our common stock. This
figure does not reflect the beneficial ownership of shares held in nominee name. The following
table sets forth, for the periods indicated, the high, and low sale prices in dollars on the NYSE
for our common stock and the distributions we declared with respect to the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price Range
|
|
|
Dividends
|
|
|
|
High
|
|
|
Low
|
|
|
Declared
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter
|
|
$
|
16.68
|
|
|
$
|
15.55
|
|
|
$
|
|
|
Fourth Quarter
|
|
$
|
16.56
|
|
|
$
|
12.25
|
|
|
$
|
0.13
|
|
Distributions and Dividends
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. Dividends declared in 2010 are noted in the chart above.
Performance Graph
The following line graph sets forth, for the period from September 23, 2010 through December
31, 2010, a comparison of the percentage change in the cumulative total stockholder return on our
common stock compared to the cumulative total return of the S&P 500 Market Index and the MSCI US
REIT Index (RMS). The graph assumes that $100 was invested on September 23, 2010 in shares of
our common stock and each of the aforementioned indices and that all dividends were reinvested
without the payment of any commissions. There can be no assurance that the performance of our
shares will continue in line with the same or similar trends depicted in the graph below.
29
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
None.
ITEM 6. SELECTED FINANCIAL DATA
On September 28, 2010, we closed our IPO and completed the acquisition of our Predecessor
and the CoreSite Acquired Properties. As such, the financial condition and results of operations
for the entities acquired by our Predecessor in connection with the IPO and related formation
transactions are only included in the condensed consolidated financial statements since the date
of the transactions. Prior to September 28, 2010, the date of these transactions, the condensed
consolidated financial statements include only the activities and capital structure of our
Predecessor.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
Historical Predecessor
|
|
|
|
For the period
|
|
|
|
|
|
|
September 28, 2010
|
|
|
For the period January
|
|
|
|
|
|
|
through December 31,
|
|
|
1, 2010 through
|
|
|
Year ended December 31,
|
|
(in thousands except per share data)
|
|
2010
|
|
|
September 27, 2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
(1)
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
38,352
|
|
|
$
|
35,557
|
|
|
$
|
28,831
|
|
|
$
|
15,581
|
|
|
$
|
10,349
|
|
|
$
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
|
12,107
|
|
|
|
14,272
|
|
|
|
13,954
|
|
|
|
11,258
|
|
|
|
4,451
|
|
|
|
|
|
Real estate taxes and insurance
|
|
|
1,642
|
|
|
|
1,262
|
|
|
|
1,787
|
|
|
|
2,125
|
|
|
|
1,015
|
|
|
|
|
|
Management fees to related party
|
|
|
|
|
|
|
3,582
|
|
|
|
2,244
|
|
|
|
1,523
|
|
|
|
363
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,146
|
|
|
|
11,848
|
|
|
|
11,193
|
|
|
|
7,966
|
|
|
|
3,528
|
|
|
|
|
|
Sales and marketing
|
|
|
1,341
|
|
|
|
125
|
|
|
|
135
|
|
|
|
170
|
|
|
|
60
|
|
|
|
|
|
General and administrative
|
|
|
4,987
|
|
|
|
2,258
|
|
|
|
1,401
|
|
|
|
1,325
|
|
|
|
267
|
|
|
|
|
|
Transaction costs
|
|
|
3,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
|
|
|
4,551
|
|
|
|
2,177
|
|
|
|
2,816
|
|
|
|
2,624
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
47,049
|
|
|
|
35,524
|
|
|
|
33,530
|
|
|
|
26,991
|
|
|
|
10,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(8,697
|
)
|
|
|
33
|
|
|
|
(4,699
|
)
|
|
|
(11,410
|
)
|
|
|
156
|
|
|
|
|
|
Interest income
|
|
|
77
|
|
|
|
2
|
|
|
|
3
|
|
|
|
17
|
|
|
|
38
|
|
|
|
|
|
Interest expense
|
|
|
(2,325
|
)
|
|
|
(1,590
|
)
|
|
|
(2,343
|
)
|
|
|
(2,495
|
)
|
|
|
(2,123
|
)
|
|
|
|
|
Gain on sale of real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(10,945
|
)
|
|
|
(1,555
|
)
|
|
|
(7,039
|
)
|
|
|
(13,888
|
)
|
|
|
2,571
|
|
|
|
|
|
Income taxes
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(10,722
|
)
|
|
|
(1,555
|
)
|
|
|
(7,039
|
)
|
|
|
(13,888
|
)
|
|
|
2,571
|
|
|
|
|
|
Net income (loss) attributable to noncontrolling interests
|
|
|
(7,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interests
|
|
$
|
(3,351
|
)
|
|
$
|
(1,555
|
)
|
|
$
|
(7,039
|
)
|
|
$
|
(13,888
|
)
|
|
$
|
2,571
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to controlling interests per common share
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
19,458,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
Historical Predecessor
|
|
|
|
|
|
|
December 31,
|
|
Balance Sheet Data
|
|
December 31, 2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net investments in real estate
|
|
$
|
589,679
|
|
|
$
|
218,055
|
|
|
$
|
197,493
|
|
|
$
|
151,044
|
|
|
$
|
28,432
|
|
Total Assets
|
|
|
833,026
|
|
|
|
239,420
|
|
|
|
213,846
|
|
|
|
164,762
|
|
|
|
28,461
|
|
Mortgages and notes payable
|
|
|
124,873
|
|
|
|
62,387
|
|
|
|
52,530
|
|
|
|
44,332
|
|
|
|
|
|
Noncontrolling interests in operating partnership
|
|
|
422,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity / members equity
|
|
|
232,239
|
|
|
|
162,338
|
|
|
|
149,103
|
|
|
|
107,228
|
|
|
|
28,414
|
|
|
|
|
(1)
|
|
The Predecessor acquired its first property in December 2006 and did not commence operations
until 2007. Accordingly, the selected financial data does not include statement of operations
data for the year ended December 31, 2006.
|
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, 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.
30
We offer this measure because we recognize that FFO will be used by investors as a basis to
compare our operating performance with that of other REITs. However, because FFO excludes
depreciation and amortization and captures neither the changes in the value of our properties
that result from use or market conditions, nor the level of capital expenditures and capitalized
leasing commissions necessary to maintain the operating performance of our properties, all of
which have real economic effect and could materially impact our financial condition and results
from operations, the utility of FFO as a measure of our performance is limited. FFO is a non-GAAP
measure and should not be considered a measure of liquidity, an alternative to net income, cash
provided by operating activities or any other performance measure determined in accordance with
GAAP, nor is it indicative of funds available to fund our cash needs, including our ability to
pay dividends or make distributions. In addition, our calculations of FFO are not necessarily
comparable to FFO as calculated by other REITs that do not use the same definition or
implementation guidelines or interpret the standards differently from us. Investors in our
securities should not rely on these measures as a substitute for any GAAP measure, including net
income.
The following table is a reconciliation of our net income (loss) to FFO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
Historical Predecessor
|
|
|
|
For the period
|
|
|
For the period
|
|
|
|
|
|
|
|
|
|
September 28, 2010 through
|
|
|
January 1, 2010 through
|
|
|
Year ended December 31,
|
|
(in thousands)
|
|
December 31, 2010
|
|
|
September 27, 2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net income (loss)
|
|
$
|
(10,722
|
)
|
|
$
|
(1,555
|
)
|
|
$
|
(7,039
|
)
|
|
$
|
(13,888
|
)
|
|
$
|
2,571
|
|
Real estate depreciation and amortization
|
|
|
18,936
|
|
|
|
11,748
|
|
|
|
11,193
|
|
|
|
7,966
|
|
|
|
3,528
|
|
Gain on sale of real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
8,214
|
|
|
$
|
10,193
|
|
|
$
|
4,154
|
|
|
$
|
(5,922
|
)
|
|
$
|
1,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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ITEM 7.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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You should read the following discussion and analysis of our results of operations,
financial condition and liquidity in conjunction with our consolidated financial statements and
the related notes included elsewhere in this report. Some of the information contained in this
discussion and analysis or set forth elsewhere in this report, including information with respect
to our plans and strategies for our business, statements regarding the industry outlook, our
expectations regarding the future performance of our business and the other non-historical
statements contained herein are forward-looking statements. See Forward-Looking Statements. You
should also review the Risk Factors section of this report for a discussion of important
factors that could cause actual results to differ materially from the results described herein or
implied by such forward-looking statements.
Overview
We are an owner, developer and operator 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 and New York City. Our high-quality data
centers feature ample and redundant power, advanced cooling and security systems and many are
points of dense network interconnection. We are able to satisfy the full spectrum of our
customers data center requirements by providing data center space ranging in size from an entire
building or large dedicated suite to a cage or cabinet. We lease our space to a broad and growing
customer base ranging from enterprise customers to less space-intensive, more network-centric
customers. Our operational flexibility allows us to selectively lease data center space to its
highest and best use depending on customer demand, regional economies and property
characteristics.
As of December 31, 2010, our property portfolio included 11 operating data center
facilities, one data center under construction and one development site, which collectively
comprise over 2.0 million NRSF, of which approximately 1.1 million NRSF is existing data center
space. These properties include 314,055 NRSF of space readily available for lease, of which
220,185 NRSF is available for lease as data center space. As of December 31, 2010, we had the
ability to expand our operating data center square footage by approximately 86.2%, or 973,590
NRSF through the development or redevelopment of (1) 102,686 NRSF space under construction, (2)
326,820 NRSF of vacant space, (3) 148,234 NRSF of currently operating space, and (4) 395,850 NRSF
of new data center space on land that we currently own at our Coronado-Stender properties of
which 50,600 NRSF of unconditioned core and shell space was under construction as of December 31,
2010. 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 positions us to significantly increase our cash flows.
We will pursue redevelopment and development projects and expansion
into new markets when we believe those opportunities support the additional supply in those markets.
Results of Operations
Prior to the closing of our IPO on September 28, 2010, we had no corporate activity other
than issuance of shares of common stock in connection with the initial capitalization of our
company. The results of operations for the years ended December 31, 2009 and 2008 reflect the
financial condition and operating results of our Predecessor, which was comprised of the real
estate activities and holdings of a Carlyle real estate fund that contributed properties into our
portfolio in connection with the IPO. The results of operations for the year ended December 31,
2010 reflect the financial condition and results of operations of our Predecessor, together with
the CoreSite Acquired Properties, from September 28, 2010, the date of acquisition. Our results
of operations may therefore not be indicative of our future results of operations.
31
Our Predecessor was comprised of the real estate activities and interconnection services of
four of our operating properties, 1656 McCarthy, 32 Avenue of the Americas, 12100 Sunrise Valley
and 70 Innerbelt, as well as the Coronado-Stender Business Park. The CoreSite Acquired Properties
include our continuing real estate operations at 55 S. Market, One Wilshire, 1275 K Street, 900
N. Alameda, 427 S. LaSalle and 2115 NW 22nd Street, as well as 1050 17th Street, a property we
lease for our corporate headquarters, which does not generate operating revenue.
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
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Total Company
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The Company
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The Predecessor
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and Predecessor
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The Predecessor
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For the period
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For the period
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Year ended
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|
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Year ended
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September 28, 2010 through
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January 1, 2010 through
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December 31,
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December 31,
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December 31, 2010
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September 27, 2010
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2010
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2009
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(in thousands)
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Operating Revenue
|
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$
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38,352
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|
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$
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35,557
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|
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$
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73,909
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|
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$
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28,831
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Operating Expense
|
|
$
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47,049
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|
|
$
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35,524
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|
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$
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82,573
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|
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$
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33,530
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Interest Expense
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|
$
|
(2,325
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)
|
|
$
|
(1,590
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)
|
|
$
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(3,915
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)
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$
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(2,343
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)
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Net loss
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$
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(10,722
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)
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|
$
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(1,555
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)
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$
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(12,277
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)
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|
$
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(7,039
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)
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Operating Revenue
. Operating revenue for the year ended December 31, 2010 was $73.9
million. This includes rental revenue of $48.8 million, power revenue of $17.9 million, tenant
reimbursements of $2.9 million and other revenue of $4.3 million, primarily from interconnection
services. This compares to revenue of $28.8 million for the year ended December 31, 2009. The
increase of $45.1 million, or 156.4%, was due primarily to $29.8 million of increased rental
revenue due to the acquisition of the CoreSite Acquired Properties, the placement into service
and subsequent leasing of 2901 Coronado during the second quarter of 2010, and $10.6 million of
increased power revenue related to the increased occupancy at 2901 Coronado and the CoreSite
Acquired Properties.
Operating Expenses
. Operating expenses for the year ended December 31, 2010 were
$82.6 million compared to $33.5 million for the year ended December 31, 2009. The increase of
$49.0 million, or 146.3%, was primarily due to increased property operating and maintenance
costs, depreciation and amortization expense and rent expense of $12.4 million, $19.8 million and
$3.9 million, respectively, mainly resulting from the acquisition of the CoreSite Acquired
Properties and the placement into service and subsequent leasing of 2901 Coronado during the
second quarter of 2010. In addition, the increase of $49.0 million was due to $3.3 million of
transaction costs incurred in connection with our acquisition of the CoreSite Acquired Properties
and $5.8 million of increased general and administrative expense mainly related to the
internalization of the management function through the Predecessors acquisition of CoreSite,
LLC, our management company, and $0.9 million related to the recognition of increased legal and
other fees incurred in connection with our IPO.
Interest Expense
. Interest expense, including amortization of deferred financing
costs, for the year ended December 31, 2010 was $3.9 million compared to interest expense of $2.3
million for the year ended December 31, 2009. The increase in interest expense was due to
increased debt balances.
Net Loss
. Net loss for the year ended December 31, 2010 was $12.3 million compared
to a net loss of $7.0 million for the year ended December 31, 2009. The increase of $5.2 million
was primarily due to transaction costs incurred in connection with our acquisition of the
CoreSite Acquired Properties and increased general and administrative expense resulting from
increased legal and other fees incurred in connection with our IPO. The increased property
operating and maintenance costs, depreciation and amortization expense and rent expense were
offset by increased operating revenue from the placement into service and subsequent leasing of
2901 Coronado during the second quarter of 2010 and the acquisition of the CoreSite Acquired
Properties.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
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The Predecessor
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Year ended December 31,
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2009
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2008
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(in thousands)
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Operating Revenue
|
|
$
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28,831
|
|
|
$
|
15,581
|
|
Operating Expense
|
|
$
|
33,530
|
|
|
$
|
26,991
|
|
Interest Expense
|
|
$
|
(2,343
|
)
|
|
$
|
(2,495
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)
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Net loss
|
|
$
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(7,039
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)
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$
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(13,888
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)
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32
Operating Revenue
. Operating revenue for the year ended December 31, 2009 was $28.8
million. This includes rental revenue of $19.0 million, power revenue of $7.4 million, tenant
reimbursements of $1.1 million and other revenue of $1.4 million, primarily from interconnection
services. This compares to revenue of $15.6 million for the year ended December 31, 2008. The
increase of $13.3 million, or 85.0%, was due primarily to $10.4 million of increased rental
revenue due to a full year of operations at 32 Avenue of the Americas and 12100 Sunrise Valley
which were placed into service during the third quarter of 2008, the continued lease up of 1656
McCarthy and 70 Innerbelt and $2.4 million of increased power revenue resulting from the
increased occupancy at these locations.
Operating Expenses
. Operating expenses for the year ended December 31, 2009 were
$33.5 million compared to $27.0 million for the year ended December 31, 2008. The increase of
$6.5 million, or 24.0%, was primarily due to increased depreciation and amortization expense of
$3.2 million resulting from a full of year of depreciation for 32 Avenue of the Americas and
12100 Sunrise Valley which were both placed into service during the third quarter of 2008 and
$2.7 million of increased property operating and maintenance expenses due to the continued lease
up of properties in 2009.
Interest Expense
. Interest expense, including amortization of deferred financing
costs, for the year ended December 31, 2009 was $2.3 million compared to interest expense of $2.5
million for the year ended December 31, 2008. The decrease in interest expense was due to lower
interest rates on floating rate debt partially offset by increased debt balances.
Net Loss
. Net loss for the year ended December 31, 2009 was $7.0 million compared to
a net loss of $13.9 million for the year ended December 31, 2008. The decrease of $6.9 million
was primarily due to increased operating revenue from the continued lease up activities partially
offset by increased property depreciation and amortization expense and property operating and
maintenance costs.
Factors that May Influence our Results of Operations
Rental Income.
Our ability to increase the net rental income generated by the properties in
our portfolio depends principally on our ability (i) to maintain the historical occupancy rates
of currently leased space and (ii) to lease currently available space and space that becomes
available from leases that expire or are terminated. As of December 31, 2010, our operating
facilities comprised approximately 75.0% of our total NRSF. Our ability to grow the rental income
generated by us also depends on our ability to maintain or increase rental rates at our
properties. Negative trends in one or more of these factors could adversely affect our rental
income in future periods. Future economic downturns or regional downturns affecting our markets
or downturns in the technology industry that impair our ability to renew or re-lease space and
the ability of our customers to fulfill their lease commitments, as in the case of customer
bankruptcies, could adversely affect our ability to maintain or increase rental rates at our
properties.
Leasing Arrangements
. Historically, many of our properties have been leased to customers on
a full service gross or a modified gross basis, both net of electricity expense, and to a limited
extent on a triple net lease basis. We expect to continue to do so in the future. Under a full
service gross lease, the customer pays a fixed annual rent on a monthly basis, and in return we
are required to pay all maintenance, repair, property taxes, insurance, and selling, general and
administrative expenses. Under a modified gross lease, the customer has a base-year expense stop,
whereby the customer pays a stated amount of certain expenses as part of the rent payment, while
future increases (above the base-year stop) in property operating expenses are billed to the
customer based on such customers proportionate square footage of the property and other factors.
The increased property operating expenses billed are reflected as customer reimbursements in the
statements of operations. Finally, in a triple net lease, the customer is responsible for all
operating expenses, property taxes and insurance. As such, the base rent payment does not include
any operating expense, but rather all such expenses are billed to the customer. The full amount
of the expenses for this lease type is reflected in customer reimbursements. Since a portion of
our revenue consists of those expenses reimbursed to us by our customers, in any given period our
revenue will be determined in part by the amount of expenses that are reimbursed by our
customers. The following table sets forth the NRSF of our portfolio leased under full service
gross, modified gross and triple net leases as well as the annualized rent attributable to such
leases as of December 31, 2010:
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Full Service Gross
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Modified Gross
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Triple Net
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Total
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Leased NRSF
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|
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665,131
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|
|
|
147,032
|
|
|
|
423,785
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|
|
|
1,235,948
|
|
% of Total
|
|
|
53.8
|
%
|
|
|
11.9
|
%
|
|
|
34.3
|
%
|
|
|
100.0
|
%
|
Annualized Rent
|
|
$
|
66,154
|
|
|
$
|
4,111
|
|
|
$
|
19,099
|
|
|
$
|
89,364
|
|
% of Total
|
|
|
74.0
|
%
|
|
|
4.6
|
%
|
|
|
21.4
|
%
|
|
|
100.0
|
%
|
Substantially all of our data center NRSF are subject to the breakered-amp or sub-metered
(branch circuit monitoring) pricing models. The allocation between the two models across our data
center customer base does not materially affect our ability to recover our electricity costs
because we separately recover all or substantially all of our electricity costs for all of our
leased data center space under either model. Under the sub-metered model, a customer pays us
monthly for the power attributable to its equipment in the data center as well as for its ratable
allocation of the power used to provide the cooling, lighting, security and other requirements
supporting the data center, in each case, at a rate substantially equivalent to our then current
cost of electricity. Under breakered-amp leases a customer pays a fixed monthly fee per committed
available ampere of connected power. The extent to which this fixed monthly fee correlates to the
monthly amount we pay to our utility provider for electricity at each data center facility varies
depending upon the amount of power each customer utilizes each month relative to the amount of
committed power purchased.
33
Under the breakered-amp model a customers base rent per NRSF is generally lower than in the
branch-circuit monitoring model reflecting the differing approach to electricity cost recovery
between the two models. Fluctuations in our customers monthly utilization of power and the
prices our utility providers charge us for power impact our operating revenue, expense and
earnings differently depending upon the applicable power pricing model. Under breakered-amp
leases, such fluctuations do not impact our operating revenue but do impact our operating expense
and, as such, our earnings because our breakered-amp customers pay for an amount of committed
power regardless of the amount of power they use and we recognize the difference between monthly
revenue from breakered-amp power commitments and our monthly electricity costs as income.
Accordingly, in any given period our breakered-amp revenue is fixed whereas our related expense
(which is dependent on utilization) can fluctuate. For leases under our sub-metered model,
fluctuations in our customers monthly utilization of power and the prices our utility providers
charge us for power impact our operating revenue and operating expense in a similar manner so
those fluctuations do not have a materially impact on our earnings. Additionally, under each
model, during the initial lease-up period, we generally do not fully recover our electricity
costs attributable to the power used to provide the cooling, lighting, security and other
requirements supporting the data center.
Scheduled Lease Expirations.
Our ability to re-lease expiring space materially affects our
results of operations. As of December 31, 2010, approximately 314,055 NRSF of our portfolio
represented currently available space, and leases representing approximately 21.0% and 24.7% of
the NRSF across our portfolio are scheduled to expire during the years ending December 31, 2011
and 2012, respectively. These leases also represented approximately 27.1% and 28.1%,
respectively, of our annualized rent as of December 31, 2010.
Acquisitions, Redevelopment and Development and Financing.
Our ability to grow rental income depends on
our ability to acquire, redevelop, develop and lease data center space at favorable rates. As of
December 31, 2010, we had approximately 379,106 NRSF of vacant redevelopment space or
approximately 18.7% of the total space in our portfolio. In addition, during the second quarter
of 2010, we completed development on a 50,000 NRSF data center at 2901 Coronado, Santa Clara,
California. During March 2010, we entered into a lease for 100% of this space with a leading
online social networking company. Our portfolio also contains a 50,400 NRSF data center under
construction and five buildings on a 9.1 acre development site in Santa Clara, California, which
can be developed into up to 446,250 NRSF of data center space.
We generally fund the cost of data center redevelopment and development from
additional capital, which, for future redevelopment and developments, we would
expect to obtain through unsecured and secured borrowings, construction financings
and the issuance of additional equity and debt securities, when market conditions permit. If we
cannot obtain capital when needed or on favorable terms, we may not be able to acquire
or develop properties when strategic opportunities arise.
Conditions in Significant Markets.
Our operating properties are located in Los Angeles, the
San Francisco Bay and Northern Virginia areas, Chicago, Boston, New York City and Miami. These
markets comprised 35.9%, 30.8%, 13.4%, 7.2%, 6.7%, 4.6% and 1.4%, respectively, of our annualized
rent as of December 31, 2010. Positive or negative changes in conditions in these markets will
impact our overall performance.
Liquidity and Capital Resources
Discussion of Cash Flows
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Net cash provided by operating activities was $15.9 million for the year ended December 31,
2010, compared to $1.4 million for the prior period. The increased cash provided by operating
activities of $14.5 million was primarily due to the increased number of operating properties
acquired in connection with our IPO.
Net cash used in investing activities increased by $18.0 million to $45.5 million for the
year ended December 31, 2010, compared to $27.5 million for the year ended December 31, 2009.
This increase was primarily due to an increase in cash paid for capital expenditures related to
redevelopment and development of data center space partially offset by cash balances acquired in
connection with our Predecessors acquisition of the CoreSite Acquired Properties.
Net cash provided by financing activities increased by $78.4 million to $108.4 million for
the year ended December 31, 2010 from $30.0 million for the year ended December 31, 2009
primarily due to the net proceeds received in connection with our IPO, an increase in capital
contributions received from the member of our Predecessor, partially offset by the redemption of
Operating Partnership units and the repayment of mortgages payable.
34
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Net cash provided by operating activities was $1.4 million for the year ended December 31,
2009, compared to cash used in operating activities of $9.6 million for the prior period. The
increased cash provided by operating activities of $11.1 million is primarily due to the
collection of accounts receivable, the increase in accounts payable and accrued expenses and
additional operating cash generated by the continued lease up of the properties.
Net cash used in investing activities decreased by $26.4 million to $27.5 million for the
year ended December 31, 2009, compared to $53.8 million for the year ended December 31, 2008.
This decrease was primarily due to a decrease in cash paid for
capital expenditures related to redevelopment and development of data center space.
Net cash provided by financing activities decreased by $33.2 million to $30.0 million for
the year ended December 31, 2009 from $63.2 million for the year ended December 31, 2008
primarily due to a decrease in capital contributions received from the member of the Predecessor.
Analysis of Liquidity and Capital Resources
As of December 31, 2010, we had $86.2 million of cash and equivalents, excluding $15.0
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.
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, the net proceeds from our IPO and to the extent necessary, 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, scheduled debt maturities and recurring and
non-recurring capital improvements. We expect to meet our 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 securities,
subject to prevailing market conditions, and/or through the issuance of operating partnership
units.
35
Indebtedness
A summary of outstanding indebtedness as of December 31, 2010 and 2009 is as follows (in
thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Interest Rate
|
|
Date
|
|
|
2010
|
|
|
2009
|
|
Senior secured credit facility
|
|
(1)
|
|
September 28, 2013
|
|
|
$
|
|
|
|
$
|
|
|
427 S. LaSalle
Senior mortgage loan
|
|
LIBOR plus 0.60% (0.86% at December 31, 2010)
|
|
March 9, 2012
|
(2)
|
|
|
25,000
|
(3)
|
|
|
|
|
427 S. LaSalle Subordinate
mortgage loan
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|
LIBOR plus 2.95% (3.21% at December 31, 2010)
|
|
March 9, 2012
|
(2)
|
|
|
5,000
|
(3)
|
|
|
|
|
427 S. LaSalle
Mezzanine loan
|
|
LIBOR plus 4.83% (5.09% at December 31, 2010)
|
|
March 9, 2012
|
(2)
|
|
|
10,000
|
(3)
|
|
|
|
|
55 S. Market
|
|
LIBOR plus 3.50% (3.76% at December 31, 2010)
(4)
|
|
October 9, 2012
|
(5)
|
|
|
60,000
|
|
|
|
|
|
12100 Sunrise Valley
|
|
LIBOR plus 2.75% (3.01% and 3.00% at December 31, 2010 and December 31, 2009)
(4)
|
|
June 1, 2013
|
|
|
|
25,560
|
|
|
|
17,362
|
|
70 Innerbelt
|
|
7.25%
|
|
|
N/A
|
(6)
|
|
|
|
|
|
|
14,486
|
|
Coronado Stender
Business Park
|
|
LIBOR plus 1.40% (1.65% at December 31, 2009)
|
|
|
N/A
|
(6)
|
|
|
|
|
|
|
30,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal outstanding
|
|
|
|
|
|
|
125,560
|
|
|
|
62,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized acquired below-market debt adjustment on 427 S. LaSalle mortgage loans
|
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness
|
|
|
|
|
|
|
|
$
|
124,873
|
|
|
$
|
62,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company can elect to have borrowings under the credit facility bear interest at a rate
per annum equal to (i) LIBOR plus 350 basis points to 400 basis points, depending on our
leverage ratio, or (ii) a base rate plus 250 basis points to 300 basis.
|
|
(2)
|
|
On March
8, 2011, the second extension option was exercised and the maturity was extended
to March 9, 2012.
|
|
(3)
|
|
Amounts represent the principal balance outstanding as of December 31, 2010 and excludes a
$0.7 million fair value of acquired debt adjustment resulting from CoreSite Predecessors
acquisition of the CoreSite Acquired Properties.
|
|
(4)
|
|
In October 2010, we entered into an interest rate swap agreement and an interest rate cap
agreement, each as a cash flow hedge for interest incurred by these LIBOR based loans.
|
|
(5)
|
|
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.
|
|
(6)
|
|
In connection with the closing of our initial public offering, the CoreSite Predecessor
repaid certain mortgage loans secured by the 70 Innerbelt and Coronado Stender Business Park
properties.
|
Senior Secured Credit Facility
In conjunction with our IPO, our Operating Partnership entered into a $110.0 million senior
secured revolving credit facility with a group of lenders for which KeyBank National Association
acts as the administrative agent. The revolving credit facility is unconditionally guaranteed on
an unsecured basis by CoreSite Realty Corporation. CoreSite, L.P. acts as the parent borrower,
and its subsidiaries that own the real estate properties, known as 1656 McCarthy, 70 Innerbelt,
2901 Coronado and 900 N. Alameda are co-borrowers under the facility, and such real estate
properties provide security for the facility. Each of the parent borrower and the subsidiary
borrowers are liable under the facility on a joint and several basis. The revolving credit
facility has an initial maturity date of September 28, 2013 with a one-time extension option,
which, if exercised, would extend the maturity date to March 28, 2014. The exercise of the
extension option is subject to the payment of an extension fee equal to 25 basis points of the
facility at initial maturity and certain other customary conditions. As of December 31, 2010, and
to date, we had not drawn any funds under the facility.
We may elect to have borrowings under the revolving credit facility bear interest at a rate
per annum equal to (i) LIBOR plus 350 basis points to 400 basis points, depending on our leverage
ratio, or (ii) a base rate plus 250 basis points to 300 basis points, depending on our leverage
ratio. The revolving credit facility also contains an accordion feature that allows us to
increase the total commitment by $90.0 million, to $200.0 million, under specified circumstances.
The total amount available for us to borrow under the facility will be subject to the lesser
of a percentage of the appraised value of our 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. Our ability to borrow under the facility is subject to ongoing
compliance with a number of customary restrictive covenants, including:
|
|
|
a maximum leverage ratio (defined as consolidated total indebtedness to total gross asset value) of 55%;
|
|
|
|
|
a minimum fixed charge coverage ratio (defined as consolidated
earnings before interest, taxes, depreciation and amortization to
consolidated fixed charges) of 1.75 times;
|
36
|
|
|
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.
|
Mortgages
427 S. LaSalle.
As of December 31, 2010, we had a senior mortgage loan, subordinate mortgage
loan and mezzanine loan payable of $25.0 million, $5.0 million and $10.0 million, respectively.
These loans are secured by deeds of trust on the property and bear interest as follows: LIBOR
plus 60 basis points for the senior mortgage loan (0.86% as of December 31, 2010), LIBOR plus 295
basis points for the subordinate mortgage loan (3.21% as of December 31, 2010) and LIBOR plus 483
basis points for the mezzanine loan payable (5.09% as of December 31, 2010). The loans payable
require payments of interest only until maturity. On March 8, 2011, the second and final
extension was exercised, and the maturities were extended to March 9, 2012.
55 S. Market.
Concurrently with the closing of our IPO on September 28, 2010, we refinanced
the existing $73.0 million of debt secured by the 55 S. Market property with a new $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 December 31, 2010, 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 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 December 31, 2010, 12100 Sunrise Valley had a mortgage loan
payable of $25.6 million, which bears interest at LIBOR plus 275 basis points (3.01% and 3.00% at
December 31, 2010 and 2009, respectively). We may make additional draws of up to $6.4 million to
fund specified construction under the loan agreement for a maximum total borrowing of $32.0
million. The mortgage loan payable is secured by 12100 Sunrise Valley and requires payments of
interest only until the amortization commencement date on June 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 December 31, 2010, we were in compliance with all 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%.
Commitments and Contingencies
The following table summarizes our contractual obligations as of December 31, 2010,
including the maturities and scheduled principal repayments of indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligation
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
16,615
|
|
|
$
|
17,044
|
|
|
$
|
17,458
|
|
|
$
|
17,742
|
|
|
$
|
17,620
|
|
|
$
|
44,254
|
|
|
$
|
130,733
|
|
Credit Facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgages payable
(1)
|
|
|
|
|
|
|
100,000
|
|
|
|
25,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,560
|
|
Construction
Contracts
|
|
|
38,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,886
|
|
Other
(2)
|
|
|
2,897
|
|
|
|
2,181
|
|
|
|
279
|
|
|
|
151
|
|
|
|
104
|
|
|
|
190
|
|
|
|
5,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,398
|
|
|
$
|
119,225
|
|
|
$
|
43,297
|
|
|
$
|
17,893
|
|
|
$
|
17,724
|
|
|
$
|
44,444
|
|
|
$
|
300,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
On March
8, 2011, the second extension options were exercised on the 427 S. LaSalle loans
and the maturities were extended to March 9, 2012.
|
|
(2)
|
|
Obligations for tenant improvement work at 55 S. Market Street, power contracts and
telecommunications leases.
|
37
Off-Balance Sheet Arrangements
As of December 31, 2010, our company did not have any off-balance sheet arrangements.
Related Party Transactions
We lease 1,515 net rentable square feet of space at our 12100 Sunrise Valley property to an
affiliate of Carlyle. The lease commenced on July 1, 2008 and expires on June 30, 2013. Rental
revenue was $0.2 million, $0.2 million and less than $0.1 million for the years ended December
31, 2010, 2009 and 2008, respectively.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP). The preparation of these financial statements
in conformity with GAAP requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amount
of revenues and expenses during the reporting period. Our actual results may differ from these
estimates. We have provided a summary of our significant accounting policies in Note 2 to our
consolidated financial statements included elsewhere in this report. We describe below those
accounting policies that require material subjective or complex judgments and that have the most
significant impact on our financial condition and results of operations. Our management evaluates
these estimates on an ongoing basis, based upon information currently available and on various
assumptions management believes are reasonable as of the date of this prospectus.
Acquisition of Real Estate.
We apply purchase accounting to the assets and liabilities
related to all of our real estate investments acquired. Accordingly, we are required to make
subjective assessments to allocate the purchase price paid 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 and lease
origination costs. These allocation assessments involve significant judgment and complex
calculations and have a direct impact on our results of operations.
Capitalization of Costs.
We capitalize direct and indirect costs related to leasing,
construction, redevelopment and development, including property taxes, insurance and financing
costs relating to properties under development. We cease cost capitalization on redevelopment and
development space once the space is ready for its intended use and held available for occupancy.
All renovations and betterments that extend the economic useful lives of assets are capitalized.
Useful Lives of Assets.
We are required to make subjective assessments as to the useful
lives of our properties for purposes of determining the amount of depreciation to record on an
annual basis with respect to our investments in real estate. These assessments have a direct
impact on our net income. Buildings are depreciated on a straight-line basis over 27 to 40 years.
Additionally we depreciate building improvements over ten years for owned properties and the
remaining term of the original lease for leased properties. Leasehold improvements are
depreciated over the shorter of the lease term or useful life of the asset.
Impairment of Long-Lived Assets.
We review the carrying value of our properties 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) from an asset are less than the carrying amount of
the asset. The estimation of expected future net cash flows is inherently uncertain and relies to
a considerable extent on assumptions regarding current and future economic and market conditions
and the availability of capital. If, in future periods, there are changes in the estimates or
assumptions incorporated into an impairment review analysis, these changes could result in an
adjustment to the carrying amount of our assets. To the extent that an impairment has occurred,
the excess of the carrying amount of the property over its estimated fair value would be charged
to income. No such impairment losses have been recognized to date.
Goodwill.
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. The Companys 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.
Revenue Recognition.
Rental income is recognized on a straight-line basis over the
non-cancellable term of customer leases. The excess of rents recognized over amounts
contractually due pursuant to the underlying leases are recorded as deferred rent receivable on
our balance sheets. Many of our leases contain provisions under which our customers reimburse us
for a portion of direct operating expenses, including power, as well as real estate taxes and
insurance. Such reimbursements are recognized in the period that the expenses are recognized. We
recognize the amortization of the acquired above-market and below-market leases as decreases and
increases, respectively, to rental revenue over the remaining non-cancellable term of the
underlying leases. If the value of below-market leases includes renewal option periods, we
include such renewal periods in the amortization period utilized.
Interconnection and utility services are considered separate earnings processes that are
typically provided and completed on a month-to-month basis and revenue is recognized in the
period that the services are performed. Set-up charges and utility installation fees are
initially deferred and recognized over the term of the arrangement or the expected period of
performance unless management determines a separate earnings process exists related to an
installation charge.
38
We must make subjective estimates as to when our revenue is earned and the collectability of
our accounts receivable related to rent, deferred rent, expense reimbursements and other income.
We analyze individual accounts receivable and historical bad debts, customer concentrations,
customer creditworthiness and current economic trends when evaluating the adequacy of the
allowance for bad debts. These estimates have a direct impact on our net income because a higher
bad debt allowance would result in lower net income and recognizing rental revenue as earned in
one period versus another would result in higher or lower net income for a particular period.
Share-Based Awards.
We generally recognize compensation expense related to share-based
awards on a straight-line basis over the vesting period of the award. The calculation of the fair
value of share-based awards is subjective and requires several assumptions over such items as
expected stock volatility, dividend payments and interest rates. These assumptions have a direct
impact on our net income because a higher share-based awards amount would result in lower net
income for a particular period.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2010-28, IntangiblesGoodwill and Other. This ASU amends ASC Topic
350 and clarifies the requirement to test for impairment of goodwill. ASC Topic 350 has required
that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its
fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative
an entity is required to assess,
considering qualitative factors such as those used to determine whether a triggering event
would require an interim goodwill impairment test, whether it is more likely than not that a
goodwill impairment exists and perform step 2 of the goodwill impairment test if so concluded.
The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for
fiscal years beginning after December 15, 2010 and interim periods within those years. Early
adoption is not permitted. The adoption of this standard is not expected to have a material
impact on our consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. The
new standard changes the requirements for establishing separate units of accounting in a
multiple-element arrangement and requires the allocation of arrangement consideration to each
deliverable based on the relative selling price. ASU 2009-13 is effective for revenue
arrangements entered into in fiscal years beginning on or after June 15, 2010. The adoption of
this standard is not expected to have a material impact on our consolidated financial statements.
39
ITEM 7A. 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 December 31, 2010, we had $125.6 million of consolidated indebtedness (excluding a
$0.7 million fair value of acquired debt adjustment resulting from our Predecessors acquisition
of the CoreSite Acquired Properties) that bore interest at variable rates. $40.0 million and
$25.0 million of our consolidated indebtedness is hedged against LIBOR interest rate increases
above 6.24% and 2.0%, respectively. 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. Interest risk amounts were determined by
considering the impact of hypothetical interest rates on our financial instruments.
These analyses do not consider the effect of any change in overall economic activity that
could occur in that environment. 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.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements of CoreSite Realty Corporation
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Page No.
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42
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43
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44
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45
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46
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47
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65
|
|
41
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
CoreSite Realty Corporation:
We have audited the accompanying consolidated balance sheets of CoreSite Realty Corporation and
subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated
statements of operations and cash flows for the period from September 28, 2010 through December 31,
2010, the period from January 1, 2010 through September 27, 2010, and the years ended December 31,
2009 and 2008, and stockholders equity and comprehensive income for each of the years in the
three-year period ended December 31, 2010. In connection with our audits of the consolidated
financial statements, we also have audited the related financial statement schedule,
Schedule III Real Estate and Accumulated Depreciation. These consolidated financial statements and the
financial statement schedule are the responsibility of the Companys management. Our responsibility is
to express an opinion on these consolidated financial statements and the financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CoreSite Realty Corporation and
subsidiaries as of December 31, 2010 and 2009, and the consolidated results of their operations and
their cash flows for the period from September 28, 2010 through December 31, 2010, the period from
January 1, 2010 through September 27, 2010, and the years ended December 31, 2009 and 2008 in
conformity with U.S. generally accepted accounting principles. Also in our opinion, the related
financial statement schedule, Schedule III Real Estate and Accumulated Depreciation, when
considered in relation to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Denver, Colorado
March 11, 2011
42
CORESITE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
The Predecessor
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments in real estate:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
84,738
|
|
|
$
|
43,186
|
|
Building & building improvements
|
|
|
450,097
|
|
|
|
137,158
|
|
Leasehold improvements
|
|
|
75,800
|
|
|
|
30,782
|
|
|
|
|
|
|
|
|
|
|
|
610,635
|
|
|
|
211,126
|
|
Less: Accumulated depreciation and amortization
|
|
|
(32,943
|
)
|
|
|
(16,207
|
)
|
|
|
|
|
|
|
|
Net investment in operating properties
|
|
|
577,692
|
|
|
|
194,919
|
|
Construction in progress
|
|
|
11,987
|
|
|
|
23,136
|
|
|
|
|
|
|
|
|
Net investments in real estate
|
|
|
589,679
|
|
|
|
218,055
|
|
Cash and cash equivalents
|
|
|
86,246
|
|
|
|
7,466
|
|
Restricted cash
|
|
|
14,968
|
|
|
|
1,057
|
|
Accounts and other receivables, net of allowance for
doubtful accounts of $305 and $271 as of December 31,
2010 and 2009, respectively
|
|
|
5,332
|
|
|
|
1,566
|
|
Lease intangibles, net of accumulated amortization of
$17,105 and $4,829 as of December 31, 2010 and 2009,
respectively
|
|
|
71,704
|
|
|
|
2,140
|
|
Goodwill
|
|
|
41,191
|
|
|
|
|
|
Other assets
|
|
|
23,906
|
|
|
|
9,136
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
833,026
|
|
|
$
|
239,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY AND
MEMBERS EQUITY
|
|
|
|
|
|
|
|
|
Mortgage loans payable
|
|
$
|
124,873
|
|
|
$
|
62,387
|
|
Accounts payable and accrued expenses
|
|
|
26,393
|
|
|
|
6,449
|
|
Due to related parties
|
|
|
|
|
|
|
6
|
|
Deferred rent payable
|
|
|
2,277
|
|
|
|
1,733
|
|
Acquired below-market lease contracts, net of accumulated
amortization of $4,989 and $3,260 as of December 31, 2010
and 2009, respectively
|
|
|
16,415
|
|
|
|
2,459
|
|
Prepaid rent and other liabilities
|
|
|
8,603
|
|
|
|
4,048
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
178,561
|
|
|
|
77,082
|
|
Stockholders equity and members equity:
|
|
|
|
|
|
|
|
|
Members equity
|
|
|
|
|
|
|
162,338
|
|
Common stock, par value $0.01, 100,000,000 shares
authorized and 19,644,044 shares issued and outstanding
at December 31, 2010
|
|
|
194
|
|
|
|
|
|
Additional paid-in capital
|
|
|
239,453
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
52
|
|
|
|
|
|
Accumulated deficit
|
|
|
(7,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
232,239
|
|
|
|
|
|
Noncontrolling interests
|
|
|
422,226
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
654,465
|
|
|
|
162,338
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
833,026
|
|
|
$
|
239,420
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
43
CORESITE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
The Predecessor
|
|
|
|
For the period
|
|
|
|
|
|
|
|
|
|
September 28, 2010
|
|
|
For the period January 1,
|
|
|
|
|
|
|
through December 31,
|
|
|
2010 through
|
|
|
Year ended December 31,
|
|
|
|
2010
|
|
|
September 27, 2010
|
|
|
2009
|
|
|
2008
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental revenue
|
|
$
|
24,428
|
|
|
$
|
24,377
|
|
|
$
|
18,974
|
|
|
$
|
8,592
|
|
Power revenue
|
|
|
9,403
|
|
|
|
8,520
|
|
|
|
7,372
|
|
|
|
4,971
|
|
Tenant reimbursement
|
|
|
1,501
|
|
|
|
1,406
|
|
|
|
1,061
|
|
|
|
1,223
|
|
Other revenue
|
|
|
3,020
|
|
|
|
1,254
|
|
|
|
1,424
|
|
|
|
795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
38,352
|
|
|
|
35,557
|
|
|
|
28,831
|
|
|
|
15,581
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
|
12,107
|
|
|
|
14,272
|
|
|
|
13,954
|
|
|
|
11,258
|
|
Real estate taxes and insurance
|
|
|
1,642
|
|
|
|
1,262
|
|
|
|
1,787
|
|
|
|
2,125
|
|
Management fees to related party
|
|
|
|
|
|
|
3,582
|
|
|
|
2,244
|
|
|
|
1,523
|
|
Depreciation and amortization
|
|
|
19,146
|
|
|
|
11,848
|
|
|
|
11,193
|
|
|
|
7,966
|
|
Sales and marketing
|
|
|
1,341
|
|
|
|
125
|
|
|
|
135
|
|
|
|
170
|
|
General and administrative
|
|
|
4,987
|
|
|
|
2,258
|
|
|
|
1,401
|
|
|
|
1,325
|
|
Transaction costs
|
|
|
3,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
|
|
|
4,551
|
|
|
|
2,177
|
|
|
|
2,816
|
|
|
|
2,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
47,049
|
|
|
|
35,524
|
|
|
|
33,530
|
|
|
|
26,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(8,697
|
)
|
|
|
33
|
|
|
|
(4,699
|
)
|
|
|
(11,410
|
)
|
Interest income
|
|
|
77
|
|
|
|
2
|
|
|
|
3
|
|
|
|
17
|
|
Interest expense
|
|
|
(2,325
|
)
|
|
|
(1,590
|
)
|
|
|
(2,343
|
)
|
|
|
(2,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(10,945
|
)
|
|
|
(1,555
|
)
|
|
|
(7,039
|
)
|
|
|
(13,888
|
)
|
Income taxes
|
|
|
223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,722
|
)
|
|
$
|
(1,555
|
)
|
|
$
|
(7,039
|
)
|
|
$
|
(13,888
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
(7,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shares
|
|
$
|
(3,351
|
)
|
|
$
|
(1,555
|
)
|
|
$
|
(7,039
|
)
|
|
$
|
(13,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common shares
|
|
$
|
(0.17
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
19,458,605
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
44
CORESITE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
(in thousands except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
|
Common Shares
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Members
|
|
|
Stockholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
Noncontrolling
|
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income
|
|
|
Equity
|
|
|
Equity
|
|
|
Interests
|
|
|
Equity
|
|
|
Interests
|
|
Balance at January 1, 2008
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
107,228
|
|
|
$
|
107,228
|
|
|
$
|
|
|
|
$
|
107,228
|
|
|
$
|
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,763
|
|
|
|
55,763
|
|
|
|
|
|
|
|
55,763
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,888
|
)
|
|
|
(13,888
|
)
|
|
|
|
|
|
|
(13,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,103
|
|
|
|
149,103
|
|
|
|
|
|
|
|
149,103
|
|
|
|
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,274
|
|
|
|
20,274
|
|
|
|
|
|
|
|
20,274
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,039
|
)
|
|
|
(7,039
|
)
|
|
|
|
|
|
|
(7,039
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162,338
|
|
|
|
162,338
|
|
|
|
|
|
|
|
162,338
|
|
|
|
|
|
Contributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,399
|
|
|
|
33,399
|
|
|
|
|
|
|
|
33,399
|
|
|
|
|
|
Distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
Initial capitalization of CoreSite Realty Corporation
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
19,435,000
|
|
|
|
194
|
|
|
|
310,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310,960
|
|
|
|
|
|
|
|
310,960
|
|
|
|
|
|
Issuance of Operating Partnership units in exchange for 100% of the interests in our predecessor
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(236,764
|
)
|
|
|
(236,764
|
)
|
|
|
|
|
|
|
(236,764
|
)
|
|
|
236,764
|
|
Issuance of Operating Partnership units in exchange for 100% of the interests in the CoreSite Acquired Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316,836
|
|
Redemption of Operating Partnership units for cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,513
|
)
|
Offering costs
|
|
|
|
|
|
|
|
|
|
|
(25,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,306
|
)
|
|
|
|
|
|
|
(25,306
|
)
|
|
|
|
|
Reclassify members equity to additional paid in capital
|
|
|
|
|
|
|
|
|
|
|
(43,027
|
)
|
|
|
|
|
|
|
|
|
|
|
43,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock awards
|
|
|
208,044
|
|
|
|
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
361
|
|
|
|
|
|
|
|
361
|
|
|
|
|
|
Issuance of equity incentive Operating Partnership units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
538
|
|
|
|
|
|
|
|
538
|
|
|
|
|
|
Dividends and distributions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,554
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,554
|
)
|
|
|
(3,413
|
)
|
|
|
(5,967
|
)
|
|
|
|
|
Adjustment to reflect redeemable noncontrolling interest at redemption value
|
|
|
|
|
|
|
|
|
|
|
(3,879
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,879
|
)
|
|
|
|
|
|
|
(3,879
|
)
|
|
|
3,879
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,906
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,906
|
)
|
|
|
(4,275
|
)
|
|
|
(9,181
|
)
|
|
|
(3,096
|
)
|
Unrealized gain on derivative contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
52
|
|
|
|
69
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,854
|
)
|
|
|
(4,206
|
)
|
|
|
(9,060
|
)
|
|
|
(3,096
|
)
|
Reclassify redeemable noncontrolling interests to permanent equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429,845
|
|
|
|
429,845
|
|
|
|
(429,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
|
19,644,044
|
|
|
$
|
194
|
|
|
$
|
239,453
|
|
|
$
|
(7,460
|
)
|
|
$
|
52
|
|
|
$
|
|
|
|
$
|
232,239
|
|
|
$
|
422,226
|
|
|
$
|
654,465
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
CORESITE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
The Predecessor
|
|
|
|
For the period
|
|
|
|
|
|
|
September 28, 2010
|
|
|
For the period January 1,
|
|
|
|
|
|
|
through December 31,
|
|
|
2010 through
|
|
|
Year ended December 31,
|
|
|
|
2010
|
|
|
September 27, 2010
|
|
|
2009
|
|
|
2008
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,722
|
)
|
|
$
|
(1,555
|
)
|
|
$
|
(7,039
|
)
|
|
$
|
(13,888
|
)
|
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
19,146
|
|
|
|
11,848
|
|
|
|
10,368
|
|
|
|
6,820
|
|
Amortization of above/below market leases
|
|
|
(390
|
)
|
|
|
(171
|
)
|
|
|
(206
|
)
|
|
|
223
|
|
Amortization of deferred financing costs
|
|
|
427
|
|
|
|
323
|
|
|
|
490
|
|
|
|
276
|
|
Amortization of share-based compensation
|
|
|
538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of discount to fair market value of acquired loan
|
|
|
916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
25
|
|
|
|
(82
|
)
|
|
|
310
|
|
|
|
324
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
3,670
|
|
|
|
(250
|
)
|
|
|
(323
|
)
|
|
|
49
|
|
Accounts receivable
|
|
|
(1,790
|
)
|
|
|
583
|
|
|
|
470
|
|
|
|
(1,040
|
)
|
Due to and due from related parties
|
|
|
|
|
|
|
875
|
|
|
|
(783
|
)
|
|
|
703
|
|
Deferred rent receivable
|
|
|
(995
|
)
|
|
|
(1,656
|
)
|
|
|
(2,312
|
)
|
|
|
(944
|
)
|
Deferred leasing costs
|
|
|
(503
|
)
|
|
|
(4,449
|
)
|
|
|
(2,182
|
)
|
|
|
(3,715
|
)
|
Other assets
|
|
|
(987
|
)
|
|
|
(253
|
)
|
|
|
60
|
|
|
|
79
|
|
Accounts payable and accrued expenses
|
|
|
(176
|
)
|
|
|
(317
|
)
|
|
|
1,065
|
|
|
|
(658
|
)
|
Prepaid rent and other liabilities
|
|
|
1,528
|
|
|
|
(222
|
)
|
|
|
1,279
|
|
|
|
1,158
|
|
Deferred rent payable
|
|
|
400
|
|
|
|
143
|
|
|
|
239
|
|
|
|
981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
11,087
|
|
|
|
4,817
|
|
|
|
1,436
|
|
|
|
(9,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate improvements
|
|
|
(11,348
|
)
|
|
|
(44,691
|
)
|
|
|
(28,043
|
)
|
|
|
(54,377
|
)
|
Assumption of cash balances in connection with the contribution of the CoreSite Acquired Properties
|
|
|
10,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in reserves for capital improvements
|
|
|
50
|
|
|
|
239
|
|
|
|
591
|
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,029
|
)
|
|
|
(44,452
|
)
|
|
|
(27,452
|
)
|
|
|
(53,845
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
310,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering costs
|
|
|
(25,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of operating partnership units
|
|
|
(125,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from mortgages payable
|
|
|
60,000
|
|
|
|
10,302
|
|
|
|
9,857
|
|
|
|
8,199
|
|
Repayments of mortgages payable
|
|
|
(152,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments of loan fees and costs
|
|
|
(3,440
|
)
|
|
|
(272
|
)
|
|
|
(144
|
)
|
|
|
(777
|
)
|
Reduction in contribution receivables
|
|
|
2,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
|
|
|
|
33,399
|
|
|
|
20,274
|
|
|
|
55,763
|
|
Distributions
|
|
|
|
|
|
|
(2,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
66,928
|
|
|
|
41,429
|
|
|
|
29,987
|
|
|
|
63,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
76,986
|
|
|
|
1,794
|
|
|
|
3,971
|
|
|
|
(292
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
9,260
|
|
|
|
7,466
|
|
|
|
3,495
|
|
|
|
3,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
86,246
|
|
|
$
|
9,260
|
|
|
$
|
7,466
|
|
|
$
|
3,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,278
|
|
|
$
|
1,193
|
|
|
$
|
1,919
|
|
|
$
|
2,597
|
|
NON-CASH INVESTING AND FINANCING ACTIVITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction costs payable capitalized to real estate
|
|
$
|
2,890
|
|
|
$
|
1,516
|
|
|
$
|
1,721
|
|
|
$
|
2,113
|
|
Contribution of the CoreSite Acquired Properties for Operating Partnership units
|
|
$
|
316,836
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accrual of dividends and distributions
|
|
$
|
5,967
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Accrued offering costs
|
|
$
|
124
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
See accompanying notes to consolidated financial statements.
46
CORESITE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010
1. Organization
CoreSite Realty Corporation, (the Company, we, or our), was organized in the state of
Maryland on February 17, 2010 and is a fully integrated, self-administered, and self-managed real
estate investment trust (REIT). We intend to qualify as a REIT for federal income tax purposes
commencing with our taxable year ending December 31, 2010. Through our controlling interest in
CoreSite, LP, (our Operating Partnership) we are engaged in the business of ownership,
acquisition, construction and management of technology-related real estate. On September 28,
2010, we closed on our initial public offering of common stock (the IPO) and completed the
following transactions (which are also discussed in further detail in Note 11):
|
|
|
Issued 19,435,000 shares of our common stock in exchange for proceeds of $289.2 million net of
underwriter discounts and commissions of $21.8 million,
|
|
|
|
In our formation transactions, our Operating Partnership acquired 100% of the ownership interests
in the entities that owned our Predecessor, as defined below, from certain real estate funds (the
Funds) affiliated with The Carlyle Group in exchange for 14,797,755 Operating Partnership units,
or $236.8 million in value based on our initial public offering price of $16.00 per share of the
Companys common stock,
|
|
|
|
In our formation transactions, our Operating Partnership acquired 100% of the ownership interests
in the entities that owned the CoreSite Acquired Properties, as defined below, from the Funds and
their affiliates in exchange for 19,802,245 Operating Partnership units, or $316.8 million in value
based on our initial public offering price of $16.00 per share of the Companys common stock,
|
|
|
|
Concurrently with the closing of the IPO, we used a portion of the cash proceeds to purchase from
the Funds and their affiliates 8,435,000 Operating Partnership units for an aggregate purchase
price of $125.5 million,
|
|
|
|
We purchased an additional 11,000,000 newly-issued Operating Partnership units from our Operating
Partnership for a purchase price of $163.7 million, and
|
|
|
|
We entered into a $110.0 million secured credit facility that contains an accordion feature that
allows us to increase the total commitment by $90.0 million, to $200.0 million, under specified
terms.
|
The financial condition and results of operations for the entities acquired by our
predecessor in connection with the IPO and related formation transactions are only included in
the consolidated financial statements since the date of the transactions. Prior to the date of
the transactions of September 28, 2010, the consolidated financial statements include only the
activities and capital structure of our Predecessor. More specifically, our results of operations
for the year ended December 31, 2010 reflect the operations of the consolidated Predecessor
entities as defined in the table below, together with the CoreSite Acquired Properties from the
date of their acquisition, September 28, 2010. Changes in our capital structure that occurred on
September 28, 2010, including the acquisition of our Predecessor by our Operating Partnership,
are reflected since that date in the financial statements including the allocation of net loss
attributable to noncontrolling interest holders and calculations of loss per share. Our financial
condition as of December 31, 2009 and results of operations for the years ended December 31, 2009
and 2008 reflect the financial condition and operating results for the Predecessor entities. The
accompanying consolidated financial statements include the following entities and properties:
|
|
|
Predecessor
|
|
Coresite Acquired Properties
|
CRP Fund V Holdings, LLC
|
|
One Wilshire
|
1656 McCarthy
|
|
900 N. Alameda
|
2901 Coronado
|
|
55 S. Market
|
Coronado-Stender Properties
|
|
427 S. LaSalle
|
70 Innerbelt
|
|
1275 K Street
|
32 Avenue of the Americas
|
|
2115 NW 22nd Street
|
12100 Sunrise Valley
|
|
CoreSite, LLC
|
Our Predecessor includes the limited liability companies which were all wholly owned,
directly or indirectly, by CRP Fund V Holdings, LLC. We have determined that CRP Fund V Holdings,
LLC, is the acquirer for accounting purposes and therefore, interests contributed by CRP Fund V
Holdings, LLC in the formation transactions (the Predecessor entities and properties) were
recorded at historical cost. The contribution or acquisition of interests in the CoreSite
Acquired Properties has been accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated
fair value of acquired assets and assumed liabilities on the date of the contribution.
47
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements have been prepared by management in
accordance with U.S. generally accepted accounting principles (GAAP). Intercompany balances and
transactions have been eliminated in these consolidated financial statements. The Company
reviewed subsequent events through the issuance date for inclusion in these consolidated
financial statements.
Use of Estimates
The preparation of 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 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. We base our estimates
on 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 less than $0.1 million and $0.5 million for the
period from September 28, 2010 to December 31, 2010 and the period from January 1, 2010 to
September 27, 2010, respectively and were not significant for the years ended December 31, 2009
and 2008.
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 $7.4 million, $9.6 million, $9.2 million and $5.8 million for the
period from September 28, 2010 to December 31, 2010, the period from January 1, 2010 to September
27, 2010 and the years ended December 31, 2009 and 2008, respectively.
Acquisition of Investment in Real Estate
Purchase accounting is applied to the assets and liabilities related to all real estate
investments acquired. The fair value of the real estate acquired is allocated to the acquired
tangible assets, consisting primarily of land, building and improvements, and identified
intangible assets and liabilities, consisting of the value of above-market and below-market
leases, value of in-place leases and the value of customer relationships.
The fair value of the land and building of an acquired property is determined by valuing the
property as if it were vacant, and the as-if-vacant value is then allocated to land and
building based on managements 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.
48
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) managements 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 September 30, 2010, we had approximately $40.2 million of goodwill. As of
December 31, 2010, we had approximately $41.2 million of goodwill. The change in goodwill is due
to the finalization and true-up of the purchase price allocation for our Predecessors
acquisition of the CoreSite Acquired Properties. The Companys 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 and obligations related to tax assessments and
insurance premiums. 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 years ended December 31, 2010,
2009 and 2008 no impairment was recognized.
Derivative Instruments and Hedging Activities
We reflect all derivative instruments at fair value as either assets or liabilities on the
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 loss. Any ineffective portion of a
derivatives 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.
49
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 revenue associated with
separate elements are allocated based on their relative fair values. The revenue associated with
each element is then recognized as earned. Interconnection, utility and power services are
considered as separate earnings processes that are provided and completed on a month-to-month
basis and revenue is recognized in the period that 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 that the expenses are incurred.
A provision for uncollectible accounts is recorded if a receivable balance relating to
contractual rent, rent recorded on a straight-line basis, and tenant reimbursements is considered
by management to be uncollectible. At December 31, 2010 and 2009 the allowance for doubtful
accounts totaled $0.3 million, and $0.3 million, respectively. Additions to the allowance for
doubtful accounts were less than $0.1 million, $0.2 million, $0.3 million, and $0.3 million, for
the period from September 28, 2010 to December 31, 2010, the period from January 1, 2010 to
September 27, 2010 and the years ended December 31, 2009 and 2008, respectively. Write-offs
(recoveries) charged against the allowance were $0.1 million, $0.1 million, $0.4 million, and $0,
for the period from September 28, 2010 to December 31, 2010, the period from January 1, 2010 to
September 27, 2010 and the years ended December 31, 2009 and 2008, 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 expected service period.
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and marketing expense.
Advertising costs were not significant for the year ended December 31, 2010, and for the years
ended December 31, 2009 and 2008 were $0.1 million, and $0.2 million, respectively.
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 where the Company is the lessee. At December 31, 2010 and 2009, the amount
included in other liabilities on the consolidated balance sheets was approximately $2.1 million
and $1.5 million, respectively.
Income Taxes
We intend to elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended
(the Code), commencing with our initial 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 Companys taxable income.
However, it is our policy and intent, subject to change, to distribute 100% of the Companys
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
Companys 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.
50
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 periods 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 had been previously 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
December 31, 2010, the deferred income taxes were not material.
We currently have no liabilities for uncertain tax positions. The earliest tax year 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 subject to examination of our subsidiaries is 2006.
Concentration of Credit Risks
The Companys 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.
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 such services.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2010-28, IntangiblesGoodwill and Other. This ASU amends ASC Topic
350 and clarifies the requirement to test for impairment of goodwill. ASC Topic 350 has required
that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its
fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative
an entity is required to assess, considering qualitative factors such as those used to determine
whether a triggering event would require an interim goodwill impairment test, whether it is more
likely than not that a goodwill impairment exists and perform step 2 of the goodwill impairment
test if so concluded. The modifications to ASC Topic 350 resulting from the issuance of ASU
2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods
within those years. Early adoption is not permitted. The adoption of this standard is not
expected to have a material impact on our consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. The
new standard changes the requirements for establishing separate units of accounting in a
multiple-element arrangement and requires the allocation of arrangement consideration to each
deliverable based on the relative selling price. ASU 2009-13 is effective for revenue
arrangements entered into in fiscal years beginning on or after June 15, 2010. The adoption of
this standard is not expected to have a material impact on our consolidated financial statements.
Reclassifications
Certain amounts in the prior years financial statements have been reclassified to conform
to the current years presentation.
3. Acquisitions
As described in Note 1, the Company acquired the CoreSite Acquired Properties as part of the
Companys IPO for $316.8 million. In connection with the acquisition of the CoreSite Acquired
Properties, the Company incurred $3.3 million of transaction costs. The results of operations for
each of the acquired entities are included in our consolidated statements of operations only from
the date of acquisition. The following table reflects the allocation of the purchase price for
the entities we acquired on September 28, 2010 (in thousands):
|
|
|
|
|
Consideration paid
|
|
|
|
|
Issuance of operating partnership units
|
|
$
|
316,836
|
|
Allocation of consideration paid to acquire Coresite Acquired Properties
|
|
|
|
|
Net investments in real estate
|
|
$
|
334,839
|
|
Lease intangibles
|
|
|
82,124
|
|
Goodwill
|
|
|
41,191
|
|
Mortgage loans payable
|
|
|
(143,863
|
)
|
Below market leases
|
|
|
(15,686
|
)
|
Other assets and liabilities acquired, net
|
|
|
18,231
|
|
|
|
|
|
Total allocation of consideration paid
|
|
$
|
316,836
|
|
|
|
|
|
51
Operating revenues of $21.0 million and an operating loss of $(11.6) million attributed
to CoreSite Acquired Properties since the date of acquisition are included in the consolidated
statement of operations for the year ended December 31, 2010. If the acquisition of the CoreSite
Acquired Properties had occurred on January 1, 2010 and 2009 the consolidated results of
operations for the years ended December 31, 2010 and 2009 on a pro forma basis would have been as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
(1)
|
|
|
2009
(1)
|
|
|
|
(unaudited)
|
|
Revenue
|
|
$
|
144,161
|
|
|
$
|
115,227
|
|
Expenses
|
|
|
165,657
|
|
|
|
144,599
|
|
Operating
loss
|
|
|
(21,496
|
)
|
|
|
(29,372
|
)
|
Net loss
|
|
|
(28,481
|
)
|
|
|
(35,995
|
)
|
|
|
|
(1)
|
|
These unaudited pro forma results do not purport to be indicative of what operating
results would have been had the acquisition occurred on January 1, 2010 or January 1, 2009, and may
not be indicative of future operating results.
|
4. Acquired Intangible Assets and Liabilities
Upon acquisition of real estate, the Company records the intangible assets and liabilities
acquired at their estimated fair value separate and apart from goodwill. The Company amortizes
identified intangible assets and liabilities that are determined to have finite lives based on
the period over which the assets and liabilities are expected to affect, directly or indirectly,
the future cash flows of the real estate property acquired (generally the life of the lease).
During the year ended December 31, 2010, the Company added approximately $82.1 million of new
intangible assets (excluding amount attributed to goodwill) and $15.7 million of new intangible
liabilities. The weighted average life of the intangible assets and intangible liabilities
acquired during the year ended December 31, 2010 is 3.2 years and 10.8 years, respectively.
Amortization of intangibles, for which we are the lessor, related to above or below-market leases
is recorded in rental revenue in the consolidated statements of operations. Amortization of other
intangibles is recorded in depreciation and amortization in the consolidated statements of
operations. Intangible assets subject to amortization are reviewed for impairment whenever events
or changes in circumstances indicate that their carrying amount may not be recoverable. An
impairment loss is recognized if the carrying amount of an intangible asset is not recoverable
and its carrying amount exceeds its estimated fair value. No impairment loss was recognized for
the years ended December 31, 2010, 2009, or 2008.
Above-market and below-market lease intangibles balances at December 31, 2010 and 2009 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Lease contracts above-market value
|
|
$
|
8,668
|
|
|
$
|
680
|
|
Accumulated amortization
|
|
|
(1,360
|
)
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
Lease contracts above-market value, net
|
|
$
|
7,308
|
|
|
$
|
75
|
|
|
|
|
|
|
|
|
Weighted average remaining life
|
|
3.5 years
|
|
|
9.5 years
|
|
|
|
|
|
|
|
|
|
|
Lease contracts below-market value
|
|
$
|
21,404
|
|
|
$
|
5,719
|
|
Accumulated amortization
|
|
|
(4,989
|
)
|
|
|
(3,260
|
)
|
|
|
|
|
|
|
|
Lease contracts below-market value, net
|
|
$
|
16,415
|
|
|
$
|
2,459
|
|
|
|
|
|
|
|
|
Weighted average remaining life
|
|
10.8 years
|
|
|
4.7 years
|
|
52
The net effect of amortization of acquired above-market and below-market leases resulted in
an increase to rental income of $0.4 million, $0.6 million, $1.0 million and $0.9 million, for
the period from September 28, 2010 to December 31, 2010, the period from January 1, 2010 to
September 27, 2010 and the years ended December 31, 2009 and 2008, respectively. The estimated
amortization of acquired below-market leases, net of acquired above-market leases for each of the
five succeeding fiscal years, which will be a net increase to rental revenue, is as follows (in
thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2011
|
|
$
|
1,563
|
|
2012
|
|
|
1,275
|
|
2013
|
|
|
790
|
|
2014
|
|
|
508
|
|
2015
|
|
|
559
|
|
Thereafter
|
|
|
4,412
|
|
|
|
|
|
Total
|
|
$
|
9,107
|
|
|
|
|
|
Amortization of
all other identified intangible assets was $11.1 million,
$0.7 million, $0.8
million and $1.1 million, for the period from September 28, 2010 to
December 31, 2010, the period
from January 1, 2010 to September 27, 2010 and the years ended
December 31, 2009 and 2008,
respectively. As of December 31, 2010 and 2009, the weighted average remaining useful
life was
3.2 years and 5.4 years, respectively. The estimated amortization of all other
identified
intangible assets for each of the five succeeding fiscal years is as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
2011
|
|
$
|
31,616
|
|
2012
|
|
|
16,936
|
|
2013
|
|
|
7,120
|
|
2014
|
|
|
3,013
|
|
2015
|
|
|
1,919
|
|
Thereafter
|
|
|
3,792
|
|
|
|
|
|
Total
|
|
$
|
64,396
|
|
|
|
|
|
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. The Companys 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. The increase in goodwill of $41.2 million is a result
of the acquisition of the CoreSite Acquired Properties of which we expect none to be deductible
for tax purposes.
5. Investment in Real Estate
The following is a summary of the properties owned and leased at December 31, 2010 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
|
|
|
|
Buildings and
|
|
|
Leasehold
|
|
|
Construction in
|
|
|
|
|
Property Name
|
|
Location
|
|
|
Date
|
|
|
Land
|
|
|
Improvements
|
|
|
Improvements
|
|
|
Progress
|
|
|
Total Cost
|
|
1656 McCarthy
|
|
Milpitas, CA
|
|
|
12/6/2006
|
|
|
$
|
5,086
|
|
|
$
|
21,432
|
|
|
$
|
|
|
|
$
|
1
|
|
|
$
|
26,519
|
|
2901 Coronado
|
|
Santa Clara, CA
|
|
|
2/2/2007
|
|
|
|
3,972
|
|
|
|
45,068
|
|
|
|
|
|
|
|
|
|
|
|
49,040
|
|
Coronado-Stender Properties
|
|
Santa Clara, CA
|
|
|
2/2/2007
|
|
|
|
15,928
|
|
|
|
15,811
|
|
|
|
|
|
|
|
5,201
|
|
|
|
36,940
|
|
70 Innerbelt
|
|
Somerville, MA
|
|
|
4/11/2007
|
|
|
|
6,100
|
|
|
|
60,591
|
|
|
|
|
|
|
|
22
|
|
|
|
66,713
|
|
32 Avenue of the Americas
|
|
New York, NY
|
|
|
6/30/2007
|
|
|
|
|
|
|
|
|
|
|
|
30,823
|
|
|
|
2
|
|
|
|
30,825
|
|
12100 Sunrise Valley
|
|
Reston, VA
|
|
|
12/28/2007
|
|
|
|
12,100
|
|
|
|
61,002
|
|
|
|
|
|
|
|
1,455
|
|
|
|
74,557
|
|
One Wilshire
|
|
Los Angeles, CA
|
|
|
9/28/2010
|
|
|
|
|
|
|
|
|
|
|
|
40,262
|
|
|
|
1,263
|
|
|
|
41,525
|
|
900 N. Alameda
|
|
Los Angeles, CA
|
|
|
9/28/2010
|
|
|
|
28,467
|
|
|
|
95,707
|
|
|
|
|
|
|
|
887
|
|
|
|
125,061
|
|
55 S. Market
|
|
San Jose, CA
|
|
|
9/28/2010
|
|
|
|
6,863
|
|
|
|
91,590
|
|
|
|
|
|
|
|
795
|
|
|
|
99,248
|
|
427 S. LaSalle
|
|
Chicago, IL
|
|
|
9/28/2010
|
|
|
|
5,493
|
|
|
|
49,551
|
|
|
|
|
|
|
|
1,930
|
|
|
|
56,974
|
|
1275 K Street
|
|
Washington, DC
|
|
|
9/28/2010
|
|
|
|
|
|
|
|
|
|
|
|
4,715
|
|
|
|
417
|
|
|
|
5,132
|
|
2115 NW 22nd Street
|
|
Miami, FL
|
|
|
9/28/2010
|
|
|
|
729
|
|
|
|
9,345
|
|
|
|
|
|
|
|
14
|
|
|
|
10,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
84,738
|
|
|
$
|
450,097
|
|
|
$
|
75,800
|
|
|
$
|
11,987
|
|
|
$
|
622,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
6.
Other Assets
Our other assets consisted of the following, net of amortization and depreciation, if
applicable, as of December 31 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Deferred leasing costs
|
|
$
|
7,954
|
|
|
$
|
5,055
|
|
Deferred rent receivable
|
|
|
6,065
|
|
|
|
3,413
|
|
Deferred financing costs
|
|
|
3,426
|
|
|
|
448
|
|
Leasehold interests in corporate headquarters
|
|
|
2,959
|
|
|
|
|
|
Other
|
|
|
3,502
|
|
|
|
220
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
23,906
|
|
|
$
|
9,136
|
|
|
|
|
|
|
|
|
Deferred leasing costs are amortized as amortization expense on a straight-line basis over
the remaining life of the underlying leases. The estimated amortization of deferred leasing costs
for each of the five succeeding fiscal years is as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2011
|
|
$
|
1,989
|
|
2012
|
|
|
1,523
|
|
2013
|
|
|
1,079
|
|
2014
|
|
|
898
|
|
2015
|
|
|
777
|
|
Thereafter
|
|
|
1,688
|
|
|
|
|
|
Total
|
|
$
|
7,954
|
|
|
|
|
|
7. Leases
The future minimum lease payments to be received under noncancelable leases in effect at
December 31, 2010 are as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2011
|
|
$
|
84,097
|
|
2012
|
|
|
62,494
|
|
2013
|
|
|
43,336
|
|
2014
|
|
|
30,614
|
|
2015
|
|
|
26,015
|
|
Thereafter
|
|
|
55,473
|
|
|
|
|
|
Total
|
|
$
|
302,029
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008, total operating revenues recognized
from one customer accounted for 16.4%, 8.5%, and 0.0%, respectively. For the years ended December
31, 2010, 2009 and 2008, total operating revenues recognized from another customer accounted for
7.0%, 19.2%, and 44.9%, respectively. The Company obtains security deposits from most of its
tenants.
54
8. Debt
A summary of outstanding indebtedness as of December 31, 2010 and 2009 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Interest Rate
|
|
Date
|
|
|
2010
|
|
|
2009
|
|
Senior secured credit facility
|
|
|
(1)
|
|
|
September 28, 2013
|
|
|
$
|
|
|
|
$
|
|
|
427 S. LaSalle
Senior mortgage loan
|
|
LIBOR plus 0.60% (0.86% at December 31, 2010)
|
|
March 9, 2012
|
(2)
|
|
|
25,000
|
(3)
|
|
|
|
|
427 S. LaSalle Subordinate mortgage loan
|
|
LIBOR plus 2.95% (3.21% at December 31, 2010 )
|
|
March 9, 2012
|
(2)
|
|
|
5,000
|
(3)
|
|
|
|
|
427 S. LaSalle
Mezzanine loan
|
|
LIBOR plus 4.83% (5.09% at December 31, 2010)
|
|
March 9, 2012
|
(2)
|
|
|
10,000
|
(3)
|
|
|
|
|
55 S. Market
|
|
LIBOR plus 3.50% (3.76% at December 31, 2010)
(4)
|
|
October 9, 2012
|
(5)
|
|
|
60,000
|
|
|
|
|
|
12100 Sunrise Valley
|
|
LIBOR plus 2.75% (3.01% and 3.00% at December 31, 2010 and December 31, 2009)
(4)
|
|
June 1, 2013
|
|
|
|
25,560
|
|
|
|
17,362
|
|
70 Innerbelt
|
|
|
7.25%
|
|
|
|
N/A
|
(6)
|
|
|
|
|
|
|
14,486
|
|
Coronado Stender
Business Park
|
|
LIBOR plus 1.40% (1.65% at December 31, 2009)
|
|
|
N/A
|
(6)
|
|
|
|
|
|
|
30,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal outstanding
|
|
|
|
|
|
|
|
|
125,560
|
|
|
|
62,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized acquired below-market debt
adjustment on 427 S. LaSalle mortgage loans
|
|
|
(687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness
|
|
|
|
|
|
|
|
|
|
$
|
124,873
|
|
|
$
|
62,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company can elect to have borrowings under the credit facility bear interest at a rate
per annum equal to (i) LIBOR plus 350 basis points to 400 basis points, depending on our leverage
ratio, or (ii) a base rate plus 250 basis points to 300 basis
|
|
(2)
|
|
On March 8, 2011, the second extension option was exercised and the maturity was extended to
March 9, 2012.
|
|
(3)
|
|
Amounts represent the principal balance outstanding as of December 31, 2010 and excludes a $0.7
million fair value of acquired debt adjustment resulting from CoreSite Predecessors acquisition of
the CoreSite Acquired Properties.
|
|
(4)
|
|
In October 2010, we entered into an interest rate swap agreement and an interest rate cap
agreement, each as a cash flow hedge for interest incurred by these LIBOR based loans.
|
|
(5)
|
|
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.
|
|
(6)
|
|
In connection with the closing of our initial public offering, the CoreSite Predecessor repaid
certain mortgage loans secured by the 70 Innerbelt and Coronado Stender Business Park properties.
|
Senior Secured Credit Facility
In conjunction with our IPO and formation transactions, our Operating Partnership entered
into a $110.0 million senior secured revolving credit facility with a group of lenders for which
KeyBank National Association acts as the administrative agent. The revolving credit facility is
unconditionally guaranteed on an unsecured basis by CoreSite Realty Corporation. CoreSite, L.P.
acts as the parent borrower, and its subsidiaries that own the real estate properties, known as
1656 McCarthy, 70 Innerbelt, 2901 Coronado and 900 N. Alameda are co-borrowers under the
facility, and such real estate properties provide security for the facility. Each of the parent
borrower and the subsidiary borrowers are liable under the facility on a joint and several basis.
The facility has an initial maturity date of September 28, 2013 with a one-time extension option,
which if exercised, would extend the maturity date to March 28, 2014. The exercise of the
extension option is subject to the payment of an extension fee equal to 25 basis points of the
facility at initial maturity and certain other customary conditions. As of December 31, 2010, the
Company has not drawn any funds under the facility.
The Company can elect to have borrowings under the credit facility bear interest at a rate
per annum equal to (i) LIBOR plus 350 basis points to 400 basis points, depending on our leverage
ratio, or (ii) a base rate plus 250 basis points to 300 basis points, depending on our leverage
ratio. The secured revolving credit facility contains an accordion feature that allows us to
increase the total commitment by $90.0 million, to $200.0 million, under specified circumstances.
55
The total amount available for us to borrow under the facility will be subject to the lesser
of a percentage of the appraised value of our 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 December 31, 2010, $100.8 million was available for us to borrow
under the facility. Our ability to borrow under the facility is subject to ongoing compliance
with a number of customary restrictive covenants, including:
|
|
|
a maximum leverage ratio (defined as consolidated total indebtedness to total gross asset value)
of 55%;
|
|
|
|
a minimum fixed charge coverage ratio (defined as 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.
|
Financing costs of $2.3 million, which were incurred in connection with the execution of the
credit facility, have been capitalized and are included in deferred financing costs. Amortization
of these deferred financing costs for year ended December 31, 2010 totaled $0.2 million and has
been included in interest expense.
427 S. LaSalle
As of December 31, 2010, the Company had a senior mortgage loan, subordinate mortgage loan
and mezzanine loan payable of $25.0 million, $5.0 million and $10.0 million, respectively. These
loans are secured by deeds of trust on the property and bear interest as follows: LIBOR plus 60
basis points for the senior mortgage loan (0.86% as of December 31, 2010), LIBOR plus 295 basis
points for the subordinate mortgage loan (3.21% as of December 31, 2010) and LIBOR plus 483 basis
points for the mezzanine loan payable (5.09% as of December 31, 2010). The loans payable require
payments of interest only until maturity. On March 8, 2011, the second and final extension was
exercised, and the maturities were extended to March 9, 2012.
55 S. Market
Concurrently with the closing of our IPO on September 28, 2010, the Company refinanced the
maturing $73.0 million of debt secured by the 55 S. Market property with a new $60.0 million mortgage loan, which matures
on October 9, 2012. The mortgage payable contains one two-year extension option provided the
Company meets 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 December 31, 2010, the Company was in compliance with the covenants.
12100 Sunrise Valley
As of December 31, 2010, 12100 Sunrise Valley had a mortgage loan payable of $25.6 million,
which bears interest at LIBOR plus 275 basis points (3.01% and 3.00% at December 31, 2010 and
2009, respectively). We may make additional draws of up to $6.4 million to fund specified
construction under the loan agreement for a maximum total borrowing of $32.0 million. The
mortgage loan payable is secured by 12100 Sunrise Valley and requires payments of interest only
until the amortization commencement date on June 1, 2011. The loan matures on June 1, 2013 and
we may exercise the one remaining one-year extension option provided the Company meets 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 December 31, 2010, the Company was in compliance with all covenants.
Debt Maturities
The following table summarizes our debt maturities and principal payments as of December 31,
2010 (in thousands):
|
|
|
|
|
Year
|
|
|
|
|
2011
|
|
$
|
|
|
2012
|
|
|
100,000
|
(1)
|
2013
|
|
|
25,560
|
|
|
|
|
|
Total
|
|
$
|
125,560
|
|
|
|
|
|
|
|
|
(1)
|
|
On March 8, 2011, the second extension option on the 427 S. LaSalle mortgage loans were
exercised and the maturities were extended to March 9, 2012.
|
56
Repayment of Mortgages and Notes Payable
Concurrently with the closing of the IPO, the Company used proceeds from the offering to
repay certain outstanding mortgages and notes payable of our Predecessor and the CoreSite
Acquired Properties as follows:
Predecessor indebtedness repaid
:
|
|
|
$14.5 million on a mortgage loan secured by our 70 Innerbelt property with an interest rate of
7.25% as of September 28, 2010 that was scheduled to mature on March 1, 2011;
|
|
|
|
$28.0 million on a senior mortgage loan secured by the Coronado Stender Business Park with an
interest rate of LIBOR plus 1.40% that was scheduled to mature on March 9, 2011; and
|
|
|
|
$4.6 million on a junior mortgage loan secured by the Coronado Stender Business Park with an
interest rate of LIBOR plus 1.40% that was scheduled to mature on March 9, 2011.
|
CoreSite Acquired Properties indebtedness repaid
:
|
|
|
$32.0 million on a senior mortgage loan secured by our 900 N. Alameda property with an interest
rate of 9.0% as of September 28, 2010 that was scheduled to mature on November 1, 2010;
|
|
|
|
$0.5 million on a subordinate mortgage loan secured by our 900 N. Alameda property with an
interest rate of 9.0% as of September 28, 2010 that was scheduled to mature on November 1, 2010;
|
|
|
|
$13.0 million of outstanding indebtedness secured by our 55 S. Market property. As noted above,
the Company refinanced $73.0 million of previously existing debt with a new $60.0 million mortgage
loan.
|
As a result of the repayment of the mortgages and notes payable described above, the Company
wrote off unamortized deferred financing costs which resulted in a charge to interest expense of $0.2 million.
9. 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
Companys derivative financial instruments are used to manage differences in the amount, timing,
and duration of the Companys known or expected cash receipts and its known or expected cash
payments principally related to the Companys investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Companys 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 2010, 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 years ended December 31, 2010,
2009 and 2008 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 Companys variable-rate
debt. During 2011, the Company estimates that an additional $0.1 million will be reclassified as
an increase to interest expense.
57
As of December 31, 2010, 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
|
|
|
Notional
|
|
|
|
Instruments
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
Derivative Type
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
|
1
|
|
|
$
|
60,000
|
|
Interest Rate Caps
|
|
|
1
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
Total
|
|
|
2
|
|
|
$
|
85,000
|
|
|
|
|
|
|
|
|
Non-designated Hedges
Additionally, the Company does not use derivatives for trading or speculative purposes.
Derivatives not designated as hedges are not speculative and are used to manage the Companys
exposure to interest rate movements but due to immateriality, are not designated for hedge
accounting purposes. The Companys derivatives detailed in the table below that are not
designated as hedging instruments for accounting purposes and do not have material economic value
as of December 31, 2010. Changes in the fair value of derivatives not designated in hedging
relationships are recorded directly in earnings. As of December 31, 2010, the Company had the
following outstanding derivatives that were not designated as hedges in qualifying hedging
relationships:
|
|
|
|
|
|
|
|
|
Cash Flow Hedge Derivative Summary
|
|
|
|
Number of
|
|
|
Notional
|
|
|
|
Instruments
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
Derivative Type
|
|
|
|
|
|
|
|
|
Interest Rate Caps
|
|
|
4
|
|
|
$
|
107,800
|
|
|
|
|
|
|
|
|
Total
|
|
|
4
|
|
|
$
|
107,800
|
|
|
|
|
|
|
|
|
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Companys derivative financial instruments as
well as their classification on the balance sheet as of December 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Values of Derivative Instruments
|
|
|
|
Derivatives Asset
|
|
|
Derivative Liabilities
|
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Other Assets
|
|
|
Other Assets
|
|
|
Other Liabilities
|
|
|
Other Liabilities
|
|
Interest Rate Caps
|
|
$
|
31
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Interest Rate Swaps
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
148
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
Other Assets
|
|
Other Assets
|
|
Other Liabilities
|
|
Other Liabilities
|
Interest Rate Caps
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
The tables below present the effect of the Companys derivative financial instruments on the
statement of operations as of December 31, 2010, 2009 and 2008 (in thousands).
58
Income Statement Impact of Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Gain or (Loss)
|
|
|
Amount of Gain or (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
|
|
|
Recognized in Income on
|
|
|
Recognized in Income on
|
|
|
|
Amount of Gain or (Loss)
|
|
|
Location of Gain or (Loss)
|
|
|
Reclassified from
|
|
|
Derivative (Ineffective
|
|
|
Derivative (Ineffective
|
|
|
|
Recognized in OCI on Derivative
|
|
|
Reclassified from
|
|
|
Accumulated OCI into
|
|
|
Portion and Amount
|
|
|
Portion and Amount Excluded
|
|
|
|
(Effective Portion)
|
|
|
Accumulated OCI into
|
|
|
Income (Effective Portion)
|
|
|
Excluded from
|
|
|
from Effectiveness Testing)
|
|
|
|
2010
|
|
|
2009
|
|
|
Income (Effective Portion)
|
|
|
2010
|
|
|
2009
|
|
|
Effectiveness Testing)
|
|
|
2010
|
|
|
2009
|
|
Interest rate derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Caps
|
|
$
|
4
|
|
|
$
|
|
|
|
Interest income / (expense)
|
|
$
|
|
|
|
$
|
|
|
|
Other income / (expense)
|
|
$
|
|
|
|
$
|
|
|
Interest Rate Swaps
|
|
$
|
95
|
|
|
$
|
|
|
|
Interest income / (expense)
|
|
$
|
22
|
|
|
$
|
|
|
|
Other income / (expense)
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
99
|
|
|
$
|
|
|
|
|
|
|
|
$
|
22
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-risk-related Contingent Features
The company has agreements with each of its derivative counterparties that contain a
provision where if the Company defaults on any of its indebtedness, including default where
repayment of the indebtedness has not been accelerated by the lender, then the company could also
be declared in default on its derivative obligations which may require the Company to settle any
outstanding derivatives at their then current fair value. However, as of December 31, 2010, the
Company did not have any derivatives with fair values in a net liability position. As such, had
the Company breached this provision at December 31, 2010, it would not have been required to make
any payments to its counterparties in order to settle it outstanding derivative agreements. The
Company has not posted any cash collateral related to these agreements.
10. Noncontrolling Interests Operating Partnership
Noncontrolling interests represent the limited partnership interests in the Operating
Partnership, held by individuals and entities other than CoreSite. Commencing on the first
anniversary of the IPO, the Operating Partnership units will be eligible to be redeemed for cash
or, at our option, exchangeable into our common stock on a one-for-one basis. If ownership
percentages of any individual shareholders exceed the limitations of our governing documents, we
could be required to redeem some operating partnership units for cash rather than exchanged for
our common stock. Because of the uncertainty about the amount of operating partnership units
outstanding that we would potentially be required to redeem for cash, we previously classified
the operating partnership units as redeemable noncontrolling interests, which are not included in
equity, and adjusted the noncontrolling interests to redemption value for the nine months ended
September 30, 2010. Subsequent to September 30, 2010, the Company obtained the necessary
information to evaluate 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 December 31, 2010.
As a result, we have reclassified the noncontrolling interests totaling approximately $429.8
million from the mezzanine section to the equity section of our consolidated balance sheet.
The following table shows the ownership interest in the Operating Partnership as of December
31, 2010:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
Number of Units
|
|
|
Percentage of Total
|
|
The Company
|
|
|
19,458,605
|
|
|
|
42.6
|
%
|
Noncontrolling interests consist of:
|
|
|
|
|
|
|
|
|
Common units held by third parties
|
|
|
26,165,000
|
|
|
|
57.3
|
%
|
Incentive units held by employees
|
|
|
61,065
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
Total
|
|
|
45,684,670
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
The redemption value of the noncontrolling interests at December 31, 2010 was $357.7 million
based on the closing price of the Companys stock of $13.64 on that date.
11. Stockholders Equity
On September 28, 2010 we completed our IPO which resulted in the sale of 19,435,000 shares
of our common stock, including 2,535,000 shares as a result of the underwriters exercising their
over-allotment option, at a price per share of $16.00, generating gross proceeds to the Company
of $311.0 million. The proceeds to the Company, net of underwriters discounts, commissions and
other offering costs were $285.6 million. Underwriters discounts, commissions and other offering
costs of $25.3 million are reflected as a reduction to additional paid-in capital in the
consolidated balance sheet of the Company.
In connection with the IPO, we issued 6,758 fully vested shares of common stock to certain
employees which resulted in a charge to compensation expense of $0.1 million. Additionally, we
issued 108,787 shares of restricted stock and 577,555 stock options to certain employees that
vest evenly over four years commencing on the first anniversary of the IPO. We issued an
additional 59,820 restricted shares to employees that vest evenly over a three year period
commencing on the first anniversary of the IPO.
59
In compensation for their services as members of the Board of Directors, the independent
directors were issued 10,000 restricted stock units and a one-time grant of 10,000 stock options.
Upon closing of the IPO, the Company retired the former profits interest incentive program,
under which employees were provided equity-based awards in order to align their interests with
those of our equity holders and for retention purposes. In retirement of this plan, the Company
issued 15,847 fully vested shares of common stock, 10,201 shares of restricted stock which vest
evenly over three years commencing on the first anniversary of the IPO, and 6,627 shares of
restricted stock which vest in April of 2011. In addition, certain employees were issued 61,065
fully vested Operating Partnership units and 25,883 unvested Operating Partnership units which
vest evenly over three years commencing on the first anniversary of the IPO.
On December 20, 2010, the Company declared a dividend on our common stock and an equivalent
distribution on units in our Operating Partnership for the year ended December 31, 2010. The
following table summarizes the taxability of our common share dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nontaxable
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
|
|
|
Return of Capital
|
|
|
|
|
|
|
|
|
|
|
|
Taxable Dividend
|
|
|
Distributions
|
|
Record Date
|
|
Payment Date
|
|
|
Cash Dividend
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
12/31/2010
|
|
|
1/14/2011
|
|
|
$
|
0.13
|
|
|
$
|
0.0415
|
|
|
$
|
|
|
Note that of the $0.1300 quarterly dividend paid in January 2011, $0.0415 is included as 2010
taxable common dividends and $0.0885 will be included in the 2011 taxable year.
12. Equity Incentive Plan
In connection with our IPO, we adopted our 2010 Equity Incentive Plan, which we refer to as
the 2010 Plan. The 2010 Plan will be 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 that 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.
Stock Options
Stock option awards are granted with an exercise price equal to the closing market price of
the Companys 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 year ended December 31, 2010, 587,555 stock options were granted. The fair values are being
expensed on a straight-line basis over the vesting period.
The following table sets forth the 2010 Plans stock option activity for the year ended
December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
|
Subject to Option
|
|
|
Exercise Price
|
|
Options outstanding, December 31, 2009
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
587,555
|
|
|
|
16.00
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2010
|
|
|
587,555
|
|
|
$
|
16.00
|
|
|
|
|
|
|
|
|
The following table sets forth the number of shares subject to option that are unvested
as of December 31, 2010 and the fair value of these options at the grant date:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Shares
|
|
|
Fair Value at
|
|
|
|
Subject to Option
|
|
|
Grant Date
|
|
Unvested balance, December 31, 2009
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
587,555
|
|
|
|
4.95
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance, December 31, 2010
|
|
|
587,555
|
|
|
$
|
4.95
|
|
|
|
|
|
|
|
|
60
The fair value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model. As the Company has been a publicly traded company only
since September 28, 2010, expected volatilities used in the Black-Scholes model are based on the
historical volatility of a group of comparable REITs. We utilize the simplified method of
estimating the term for options granted due to the lack of historical exercise data necessary to
provide a reasonable basis upon which to estimate the term. The risk-free rate for periods within
the contractual life of the option is based on the U.S. Treasury yield curve in effect at the
time of grant. The following table summarizes the assumptions used to value the stock options
granted during the year ended December 31, 2010:
|
|
|
|
|
|
|
Assumption
|
|
Number of options granted
|
|
|
587,555
|
|
Exercise price
|
|
$
|
16.00
|
|
Expected term (in years)
|
|
|
6.25
|
|
Expected volatility
|
|
|
43.59
|
%
|
Expected annual dividend
|
|
|
3.25
|
%
|
Risk-free rate
|
|
|
1.33
|
%
|
As of December 31, 2010, total unearned compensation on options was approximately $2.7
million, and the weighted average vesting period was 4.0 years.
Restricted Awards
During the year ended December 31, 2010, the Company issued 185,435 shares of restricted
stock which had a value of $3.0 million on the grant date. Additionally, the Company issued
10,000 restricted stock units, RSUs, which had a value of $0.2 million on the grant date. The
principal difference between these instruments is that RSUs are not shares of CoreSite Realty
Corporation common stock and do not have any of the rights or privileges thereof, including
voting rights. On the applicable vesting date, the holder of an RSU becomes entitled to a share
of common stock. The restricted awards will be 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average Fair
|
|
|
|
Restricted
|
|
|
Value at Grant
|
|
|
|
Awards
|
|
|
Date
|
|
Unvested balance, December 31, 2009
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
195,435
|
|
|
|
15.98
|
|
Forfeited
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance, September 30, 2010
|
|
|
195,435
|
|
|
$
|
15.98
|
|
|
|
|
|
|
|
|
As of December 31, 2010, total unearned compensation on restricted awards was approximately
$2.8 million, and the weighted average vesting period was 3.4 years.
Operating
Partnership Units
During
the year ended December 31, 2010, the Company issued 25,883 Operating
Partnership units which were fair valued at $15.98 per unit or $0.4
million in total. The Operating Partnership units will be amortized
on a straight-line basis to expense over the vesting period. As of
December 31, 2010, total unearned compensation on Operating
Partnership units was approximately $0.4 million, and the weighted
average vesting period was 3.0 years.
13. Earnings Per Share
Basic loss per share is calculated by dividing the net loss attributable to controlling
interests by the weighted average number of common shares outstanding during the period. As our
IPO occurred on September 28, 2010, the weighted average number of common shares outstanding
includes the days for which the issued shares were outstanding. Diluted loss per share adjusts
basic loss per share for the effects of potentially dilutive common shares, if the effect is not antidilutive. Potentially dilutive common shares consist
of shares issuable under our equity-based compensation plan and Operating Partnership units. For
the year ended December 31, 2010, 587,555 stock options and 195,435 restricted shares have been
excluded from the calculation of diluted earnings per share as their effect would have been
antidilutive.
61
14. Employee Benefit Plan
CoreSite, LLC has a tax qualified retirement 401(k) plan that provides employees with an
opportunity to save for retirement on a tax advantaged basis. Employees may participate after six
months of employment. Additionally at that time, the Company provides a safe harbor contribution
equal to 3% of the participants annual salary. The employee and employer contributions are
limited to the maximum amount allowed by the Internal Revenue Service. Both employee and employer
contributions vest immediately. Company contributions were less than $0.1 million for the year
ended December 31, 2010.
15. 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, 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 $125.6 million (excluding a $0.7
million fair value of acquired debt adjustment) and $62.4 million as of December 31, 2010 and
2009, respectively, with a fair value of $123.8 million and $62.0 million, respectively, based on
Level 3 inputs from the fair value hierarchy. The fair values of mortgage notes payable are based
on the Companys assumptions of interest rates and terms available.
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 managements best
estimate of current costs.
Derivative financial instruments
Currently, the Company uses interest rate swaps to manage interest rate risk. The fair value
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 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 enhancements 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 itself and its counterparties. However, as of
December 31, 2010, 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.
62
The table below presents the Companys assets and liabilities measured at fair value on a
recurring basis as of December 31, 2010 and 2009, 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
|
|
|
Significant
|
|
|
Significant
|
|
|
|
|
|
|
Assets and Liabilities
|
|
|
Other Observable Inputs
|
|
|
Unobservable Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total Fair Value at
|
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
As of December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(In thousands)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Financial
Instruments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
148
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
148
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
Financial
Instruments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Related Party Transactions
Prior to the closing of the IPO on September 28, 2010, CoreSite, LLC was engaged to act as
the Companys agent for the purpose of coordinating the activities of the property manager, for
leasing and servicing the properties, and for overseeing property build-out activities.
Subsequent to our Predecessors acquisition of CoreSite, LLC as part of the IPO on September 28,
2010, all related party revenue and expenses incurred in connection with CoreSite, LLCs
activities, have been eliminated in consolidation. For the years ended December 31, 2010, 2009
and 2008, CoreSite, LLC earned management fees from the Predecessor of $3.6 million, $2.2 million
and $1.5 million, respectively. For the years ended December 31, 2010, 2009 and 2008, CoreSite,
LLC earned lease commissions from our Predecessor of $2.8 million, $1.8 million and $2.4 million,
respectively. These commissions are included in deferred leasing costs. For the years ended
December 31, 2010, 2009 and 2008, CoreSite, LLC earned construction management fees from our
Predecessor of $1.2 million, $0.6 million and $1.1 million, respectively. The construction
management fees are included in building improvements and construction in progress. For the years
ended December 31, 2010, 2009 and 2008, CoreSite, LLC was reimbursed for payroll related expenses
from our Predecessor of $1.2 million, $1.0 million and $0.7 million, respectively. At December
31, 2010 and 2009 $0 and less than $0.1 million of such fees were payable to CoreSite, LLC.
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 $0.2 million, $0.2 million and less than $0.1 million for the years ended
December 31, 2010, 2009 and 2008, respectively.
17. Commitments and Contingencies
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 future minimum payments to be made under noncancelable leases, telecommunications
capacity commitments and power usage commitments as of December 31, 2010 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
Thereafter
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
16,615
|
|
|
$
|
17,044
|
|
|
$
|
17,458
|
|
|
$
|
17,742
|
|
|
$
|
17,620
|
|
|
$
|
44,254
|
|
|
$
|
130,733
|
|
Other
(1)
|
|
|
2,897
|
|
|
|
2,181
|
|
|
|
279
|
|
|
|
151
|
|
|
|
104
|
|
|
|
190
|
|
|
|
5,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,512
|
|
|
$
|
19,225
|
|
|
$
|
17,737
|
|
|
$
|
17,893
|
|
|
$
|
17,724
|
|
|
$
|
44,444
|
|
|
$
|
136,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Obligations for tenant improvement work at 55 S. Market Street, power contracts and
telecommunications leases.
|
Rent expense was $4.5 million, $2.2 million, $2.8 million and $2.6 million, for the
period from September 28, 2010 to December 31, 2010, the period from January 1, 2010 to September
27, 2010 and the years ended December 31, 2009 and 2008, 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 December 31, 2010, we had open commitments related to construction contracts of
approximately $38.9 million.
63
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.
Prior to the completion of our IPO, Ari Brumer, the former general counsel of our affiliate CoreSite, LLC,
filed suit in federal court in Colorado against the Company, certain of our affiliates, our chief executive
officer and certain affiliates of the Funds and Carlyle. In his complaint, Mr. Brumer alleged that he was
fraudulently induced to accept employment with CoreSite, LLC, and that his employment was terminated in
retaliation for his assertions that the Company and certain of its officers and affiliates had been involved
in or committed certain illegal or improper acts. We investigated the assertions of illegal or improper acts made
by Mr. Brumer. Based on the results of that investigation, we concluded that those assertions were not based
on, or supported by, facts but were raised by Mr. Brumer in bad faith after his termination, which termination
was unrelated to his avowed concerns about the subject matter of the assertions.
On September 28, 2010, Mr. Brumer voluntarily dismissed the federal court action without prejudice and filed a
substantially identical complaint in Colorado state court in Denver. In the state action, Mr. Brumer claims
actual damages in an amount to be proven at trial as well as special damages of $1,019,000, principally attributable
to real estate losses that he allegedly incurred from relocating to Colorado.
On October 22, 2010, the Company and the other defendants filed a motion to dismiss the state court case on various
grounds. On January 11, 2011, the Court partially granted the motion, dismissing one claim as legally insufficient
and ordering the dismissal of all claims against our chief executive officer individually. On March 8, 2011, the
Company filed its answer to the amended complaint and asserted counterclaims against Mr. Brumer arising from his
efforts to disrupt the Companys initial public offering for personal advantage after his employment was terminated
by the Company.
Because the case is still in the preliminary stages, the cost of the litigation and its ultimate resolution are
not estimable at this time. We believe that we have valid defenses to Mr. Brumers remaining claims and that
there is significant merit to our counterclaims against Mr. Brumer and we intend to vigorously defend the case
and pursue our counterclaims against Mr. Brumer. Based on the claims and damages asserted and the probability
of an unfavorable outcome, we believe that this matter will not have a material adverse effect on our business,
financial position or liquidity.
18. Quarterly Financial Information
(unaudited)
The table below reflects the selected quarterly information for the years ended December 31,
2010 and 2009 (in thousands except share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company
|
|
|
The Predecessor
|
|
|
|
For the period
|
|
|
|
|
|
|
|
|
|
September
|
|
|
For the period July
|
|
|
|
|
|
|
28, 2010 through
|
|
|
1, 2010 through
|
|
|
Three Months Ended
|
|
|
|
December 31, 2010
|
|
|
September 27, 2010
|
|
|
June 30, 2010
|
|
|
March 31, 2010
|
|
Revenue
|
|
$
|
38,352
|
|
|
$
|
14,139
|
|
|
$
|
12,387
|
|
|
$
|
9,031
|
|
Operating income (loss)
|
|
|
(8,697
|
)
|
|
|
(913
|
)
|
|
|
1,344
|
|
|
|
(398
|
)
|
Net income (loss)
|
|
|
(10,722
|
)
|
|
|
(1,591
|
)
|
|
|
945
|
|
|
|
(909
|
)
|
Net loss attributable to common shares
|
|
|
(3,351
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Basic and diluted net loss per share attributable to common shares
|
|
$
|
(0.17
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Predecessor
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
Revenue
|
|
$
|
8,996
|
|
|
$
|
7,473
|
|
|
$
|
6,347
|
|
|
$
|
6,015
|
|
Operating income (loss)
|
|
|
439
|
|
|
|
(1,684
|
)
|
|
|
(2,048
|
)
|
|
|
(1,406
|
)
|
Net loss
|
|
|
(127
|
)
|
|
|
(2,282
|
)
|
|
|
(2,630
|
)
|
|
|
(2,000
|
)
|
Net loss attributable to common shares
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Basic and diluted net loss per share
attributable to common shares
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
CoreSite Realty Corporation
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs Capitalized
|
|
|
Gross Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to
|
|
|
Carried at
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
Initial Cost
|
|
|
Acquisition
|
|
|
December 31, 2010
|
|
|
Depreciation at
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
Building and
|
|
|
|
|
|
|
Building and
|
|
|
|
|
|
|
Building and
|
|
|
|
|
|
|
December 31,
|
|
|
Acquired
|
|
Property
(1)
|
|
Encumbrances
|
|
|
Land
|
|
|
Improvements
|
|
|
Land
|
|
|
Improvements
|
|
|
Land
|
|
|
Improvements
|
|
|
Total
|
|
|
2010
|
|
|
or Leased
|
|
|
|
(In thousands)
|
|
1656 McCarthy
|
|
$
|
|
|
|
$
|
5,086
|
|
|
$
|
5,046
|
|
|
$
|
|
|
|
$
|
16,387
|
|
|
$
|
5,086
|
|
|
$
|
21,433
|
|
|
$
|
26,519
|
|
|
$
|
4,429
|
|
|
|
2006
|
|
2901 Coronado
|
|
|
|
|
|
|
3,972
|
|
|
|
3,482
|
|
|
|
|
|
|
|
41,586
|
|
|
|
3,972
|
|
|
|
45,068
|
|
|
|
49,040
|
|
|
|
2,709
|
|
|
|
2007
|
|
Coronado-Stender
Properties
|
|
|
|
|
|
|
15,928
|
|
|
|
12,956
|
|
|
|
|
|
|
|
8,056
|
|
|
|
15,928
|
|
|
|
21,012
|
|
|
|
36,940
|
|
|
|
1,649
|
|
|
|
2007
|
|
70 Innerbelt
|
|
|
|
|
|
|
6,100
|
|
|
|
26,748
|
|
|
|
|
|
|
|
33,865
|
|
|
|
6,100
|
|
|
|
60,613
|
|
|
|
66,713
|
|
|
|
9,602
|
|
|
|
2007
|
|
32 Avenue of the
Americas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,825
|
|
|
|
|
|
|
|
30,825
|
|
|
|
30,825
|
|
|
|
5,118
|
|
|
|
2007
|
|
12100 Sunrise Valley
|
|
|
25,560
|
|
|
|
12,100
|
|
|
|
32,939
|
|
|
|
|
|
|
|
29,518
|
|
|
|
12,100
|
|
|
|
62,457
|
|
|
|
74,557
|
|
|
|
6,307
|
|
|
|
2007
|
|
One Wilshire
|
|
|
|
|
|
|
|
|
|
|
41,099
|
|
|
|
|
|
|
|
426
|
|
|
|
|
|
|
|
41,525
|
|
|
|
41,525
|
|
|
|
782
|
|
|
|
2010
|
|
900 N. Alameda
|
|
|
|
|
|
|
28,467
|
|
|
|
94,114
|
|
|
|
|
|
|
|
2,480
|
|
|
|
28,467
|
|
|
|
96,594
|
|
|
|
125,061
|
|
|
|
920
|
|
|
|
2010
|
|
55 S. Market
|
|
|
60,000
|
|
|
|
6,863
|
|
|
|
91,719
|
|
|
|
|
|
|
|
666
|
|
|
|
6,863
|
|
|
|
92,385
|
|
|
|
99,248
|
|
|
|
737
|
|
|
|
2010
|
|
427 S. LaSalle
|
|
|
40,000
|
|
|
|
5,493
|
|
|
|
49,522
|
|
|
|
|
|
|
|
1,959
|
|
|
|
5,493
|
|
|
|
51,481
|
|
|
|
56,974
|
|
|
|
491
|
|
|
|
2010
|
|
1275 K Street
|
|
|
|
|
|
|
|
|
|
|
4,797
|
|
|
|
|
|
|
|
335
|
|
|
|
|
|
|
|
5,132
|
|
|
|
5,132
|
|
|
|
85
|
|
|
|
2010
|
|
2115 NW 22nd Street
|
|
|
|
|
|
|
729
|
|
|
|
9,325
|
|
|
|
|
|
|
|
34
|
|
|
|
729
|
|
|
|
9,359
|
|
|
|
10,088
|
|
|
|
114
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
125,560
|
|
|
$
|
84,738
|
|
|
$
|
371,747
|
|
|
$
|
|
|
|
$
|
166,137
|
|
|
$
|
84,738
|
|
|
$
|
537,884
|
|
|
$
|
622,622
|
|
|
$
|
32,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate cost of the total properties for federal income tax purposes was
approximately $637.4 million (unaudited) at December 31, 2010.
See accompanying report of independent registered public accounting firm.
65
CoreSite Realty Corporation
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2010
The following table reconciles the historical cost and accumulated depreciation of
the CoreSite Realty Corporation properties for the years ended December 31, 2010, 2009
and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
234,262
|
|
|
$
|
204,505
|
|
|
$
|
152,242
|
|
Additions property acquisitions
|
|
|
332,128
|
|
|
|
|
|
|
|
|
|
Additions improvements
|
|
|
56,232
|
|
|
|
29,757
|
|
|
|
52,263
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
622,622
|
|
|
$
|
234,262
|
|
|
$
|
204,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period
|
|
$
|
16,207
|
|
|
$
|
7,012
|
|
|
$
|
1,199
|
|
Additions depreciation and
amortization
|
|
|
16,736
|
|
|
|
9,195
|
|
|
|
5,813
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
32,943
|
|
|
$
|
16,207
|
|
|
$
|
7,012
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying report of independent registered public accounting firm.
66
|
|
|
ITEM 9.
|
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
Not applicable.
|
|
|
ITEM 9A.
|
|
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 SECs 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 December 31, 2010, the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of management, including our Chief
Executive Officer and our then-Chief Financial Officer, regarding the effectiveness of our
disclosure controls and procedures at the end of the period covered by this report. Based on the
foregoing, our Chief Executive Officer and our then-Chief Financial Officer concluded, as of that
time, that our disclosure controls and procedures were effective in ensuring that information
required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is
processed, recorded, summarized and reported within the time periods specified in the SECs rules
and forms and (ii) is accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, as appropriate to allow for timely decisions
regarding required disclosure.
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 our last
fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
This Annual Report on Form 10-K does not include a report of managements assessment
regarding internal control over financial reporting or an attestation report of our registered
independent public accounting firm due to a transition period established by the rules of the SEC
for newly public companies.
|
|
|
ITEM 9B.
|
|
OTHER INFORMATION
|
Not applicable.
PART III
|
|
|
ITEM 10.
|
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information concerning our directors and executive officers required by Item 10
will be included in the Proxy Statement to be filed relating to our 2011 Annual Meeting of
Stockholders, to be filed no later than April 30, 2011, and is incorporated herein by reference.
Because our common stock is listed on the New York Stock Exchange (NYSE), our Chief
Executive Officer is required to make, and will make, an annual certification to the NYSE stating
that he was not aware of any violation by us of the corporate governance listing standards of the
NYSE. Our Chief Executive Officer will make his annual certification to that effect to the NYSE
within the 30-day period following the 2011 Annual Meeting of Stockholders.
|
|
|
ITEM 11.
|
|
EXECUTIVE COMPENSATION
|
The information concerning our directors and executive officers required by Item 11
will be included in the Proxy Statement to be filed relating to our 2011 Annual Meeting of
Stockholders, to be filed no later than April 30, 2011, and is incorporated herein by reference.
67
|
|
|
ITEM 12.
|
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
|
The information concerning our directors and executive officers required by Item 12
will be included in the Proxy Statement to be filed relating to our 2011 Annual Meeting of
Stockholders, to be filed no later than April 30, 2011, and is incorporated herein by reference.
|
|
|
ITEM 13.
|
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
|
The information concerning our directors and executive officers required by Item 13
will be included in the Proxy Statement to be filed relating to our 2010 Annual Meeting of
Stockholders, to be filed no later than April 30, 2011, and is incorporated herein by reference.
|
|
|
ITEM 14.
|
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information concerning our directors and executive officers required by Item 14
will be included in the Proxy Statement to be filed relating to our 2011 Annual Meeting of
Stockholders, to be filed no later than April 30, 2011, and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this annual report on Form 10-K or incorporated by reference:
|
(1)
|
|
Our consolidated financial statements are provided under Item 8 of this
annual report on Form 10-K.
|
|
|
(2)
|
|
Schedule IIIReal Estate and Accumulated Depreciation is included
herein at page 65. All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have been
omitted.
|
(b)
|
|
The following exhibits are filed with this annual report on Form 10-K or incorporated by
reference, as indicated:
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
3.1
|
|
Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)
|
3.2
|
|
Amended and Restated Bylaws of CoreSite Realty.(1)
|
4.1
|
|
Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(2)
|
10.1
|
|
Limited Partnership Agreement of CoreSite, L.P.(3)
|
10.2
|
|
Form of 2010 Equity Incentive Plan.(1)*
|
10.3
|
|
Form of 2010 Equity Incentive Plan Restricted Stock Unit Award Agreement.(1)*
|
10.4
|
|
Form of 2010 Equity Incentive Plan Stock Option Agreement.(1)*
|
10.5
|
|
Form of 2010 Equity Incentive Plan Restricted Stock Agreement.(1)*
|
10.6
|
|
Form of 2010 Equity Incentive Plan Restricted Stock Agreement for Non-Employee Directors.(1)*
|
10.7
|
|
Employment Agreement between CoreSite Realty Corporation and Thomas M. Ray.(1)*
|
10.8
|
|
Employment Agreement between CoreSite Realty Corporation and Deedee Beckman.(1)*
|
10.9
|
|
Form of Indemnification Agreement for directors and officers of CoreSite Realty Corporation.(1)*
|
10.10
|
|
Registration Rights Agreement.(3)
|
10.11
|
|
Tax Protection Agreement.(3)
|
10.12
|
|
Contribution Agreement.(3)
|
10.13
|
|
Lease Agreement between Hines REIT One Wilshire Services, Inc. and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)
|
10.14
|
|
Lease Agreement between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)
|
10.15
|
|
First Amendment to Lease between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of May 1, 2008.(1)
|
10.16
|
|
Form of Restricted Stock Agreement.(1)*
|
10.17
|
|
Form of Restricted Unit Agreement.(1)*
|
68
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
10.18
|
|
Form of Management Rights Agreement.(1)*
|
10.19
|
|
CoreSite Realty Corporation and CoreSite, L.P. Senior Management Severance and Change in Control Program.(1)*
|
10.20
|
|
CoreSite Realty Corporation Non-Employee Director Compensation Policy.(1)*
|
10.21
|
|
Credit Agreement among CoreSite, L.P., as parent borrower, CoreSite Real Estate 70 Innerbelt,
L.L.C., CoreSite Real Estate 900 N. Alameda, L.L.C., CoreSite Real Estate 2901 Coronado, L.L.C.
and CoreSite Real Estate 1656 McCarthy, L.L.C., as subsidiary borrowers, Keybank National
Association, the other lenders party thereto and other lenders that may become parties thereto,
Keybank National Association, as agent, and Keybanc Capital Markets and RBC Capital Markets
Corporation, as joint lead arrangers and joint book managers, dated as of September 28, 2010.(3)
|
10.22
|
|
Form of Restricted Stock Agreement.(3)*
|
10.23
|
|
Employment Agreement between CoreSite Realty Corporation and Jeffrey S. Finnin.(4)*
|
10.24
|
|
Employment Agreement between CoreSite Realty Corporation and Derek McCandless.(5)*
|
21.1
|
|
Subsidiaries of CoreSite Realty Corporation.
|
23.1
|
|
Consent of KPMG LLP.
|
31.1
|
|
Certification of Principal Executive Officer Pursuant To Section 302 Of The SarbanesOxley Act
Of 2002.
|
31.2
|
|
Certification of Principal Financial Officer Pursuant To Section 302 Of The SarbanesOxley 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.
|
*
|
|
Represents management contract or compensatory plan or agreement.
|
|
(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 the companys 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 October 1, 2010.
|
|
(4)
|
|
Incorporated by reference to our Current Report on Form 8-K filed January 6, 2011.
|
|
(5)
|
|
Incorporated by reference to our Current Report on Form 8-K filed February 11, 2011.
|
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
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Dated: March 11, 2011
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CORESITE REALTY CORPORATION
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Registrant
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By:
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/s/
Thomas M. Ray
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Thomas M. Ray
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President and Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been
signed by the following persons on behalf of the Registrant, in the capacities and on the dates
indicated.
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Signature
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Title
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Date
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/s/
Thomas M. Ray
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President and Chief Executive Officer
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(Principal Executive Officer) and
Director
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March 11, 2011
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/s/
Jeffrey S. Finnin
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Chief Financial Officer (Principal Financial and
Accounting Officer)
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March 11, 2011
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/s/
Robert G. Stuckey
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Chairman
of the Board of Directors
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March 11, 2011
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/s/
James A. Attwood, Jr.
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Director
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March 11, 2011
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/s/
Michael Koehler
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Director
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March 11, 2011
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/s/
Paul E. Szurek
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Director
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March 11, 2011
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/s/
J. David Thompson
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Director
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March 11, 2011
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/s/
David A. Wilson
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Director
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March 11, 2011
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70
INDEX TO EXHIBITS
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Exhibit
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No.
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21.1
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Subsidiaries of CoreSite Realty Corporation.
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23.1
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Consent of KPMG LLP.
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31.1
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Certification of Principal Executive Officer Pursuant To
Section 302 Of The SarbanesOxley Act Of 2002.
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31.2
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Certification of Principal Financial Officer Pursuant To
Section 302 Of The SarbanesOxley Act Of 2002.
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32.1
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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.
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32.2
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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.
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