UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2019
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to .
Commission file number: 001-34877
CoreSite Realty Corporation
(Exact name of registrant as specified in its charter)
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Maryland |
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27-1925611 |
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(State or other jurisdiction
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(I.R.S. Employer
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1001 17th Street, Suite 500
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80202 |
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(Address of principal executive offices) |
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(Zip Code) |
(866) 777-2673
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
Trading Symbol |
Name of each exchange on which registered |
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Common Stock, $0.01 par value per share |
COR |
New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large Accelerated Filer ☒ |
|
Accelerated filer ☐ |
|
Non-accelerated filer ☐
|
|
Smaller reporting company ☐ Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock outstanding at October 30, 2019, was 37,687,013.
CORESITE REALTY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED September 30, 2019
TABLE OF CONTENTS
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six |
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PAGE |
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NO. |
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3 |
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3 |
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Condensed Consolidated Balance Sheets as of September 30, 2019, and December 31, 2018 (unaudited) |
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3 |
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4 |
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5 |
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6 |
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7 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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8 |
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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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27 |
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk |
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43 |
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43 |
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44 |
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44 |
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44 |
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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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44 |
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44 |
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44 |
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44 |
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45 |
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46 |
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Exhibit 10.1 |
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Exhibit 31.1 |
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Exhibit 31.2 |
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Exhibit 32.1 |
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Exhibit 32.2 |
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EX-101 INSTANCE DOCUMENT |
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EX-101 SCHEMA DOCUMENT |
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EX-101 CALCULATION LINKBASE DOCUMENT |
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EX-101 LABELS LINKBASE DOCUMENT |
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EX-101 PRESENTATION LINKBASE DOCUMENT |
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EX-101 DEFINITION LINKBASE DOCUMENT |
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2
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands except share and per share data)
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September 30, |
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December 31, |
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||
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2019 |
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2018 |
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ASSETS |
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Investments in real estate: |
|
|
|
|
|
|
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Land |
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$ |
90,300 |
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$ |
86,955 |
|
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Buildings and improvements |
|
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1,896,820 |
|
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1,730,329 |
|
|
|
|
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1,987,120 |
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1,817,284 |
|
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Less: Accumulated depreciation and amortization |
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(686,026) |
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(590,784) |
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Net investment in operating properties |
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1,301,094 |
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1,226,500 |
|
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Construction in progress |
|
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389,174 |
|
|
265,921 |
|
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Net investments in real estate |
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1,690,268 |
|
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1,492,421 |
|
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Operating lease right-of-use assets, net |
|
|
177,535 |
|
|
190,304 |
|
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Cash and cash equivalents |
|
|
4,703 |
|
|
2,599 |
|
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Accounts and other receivables, net of allowance for doubtful accounts of $214 and $417 as of September 30, 2019, and December 31, 2018, respectively |
|
|
26,330 |
|
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18,464 |
|
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Lease intangibles, net of accumulated amortization of $4,938 and $7,756 as of September 30, 2019, and December 31, 2018, respectively |
|
|
4,328 |
|
|
6,943 |
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Goodwill |
|
|
40,646 |
|
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40,646 |
|
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Other assets, net |
|
|
102,932 |
|
|
102,290 |
|
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Total assets |
|
$ |
2,046,742 |
|
$ |
1,853,667 |
|
|
|
|
|
|
|
|
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LIABILITIES AND EQUITY |
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Liabilities: |
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Debt, net of unamortized deferred financing costs of $6,709 and $5,677 as of September 30, 2019, and December 31, 2018, respectively |
|
$ |
1,380,541 |
|
$ |
1,130,823 |
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Operating lease liabilities |
|
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191,725 |
|
|
202,699 |
|
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Accounts payable and accrued expenses |
|
|
132,739 |
|
|
89,315 |
|
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Accrued dividends and distributions |
|
|
61,783 |
|
|
55,679 |
|
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Acquired below-market lease contracts, net of accumulated amortization of $1,460 and $3,840 as of September 30, 2019, and December 31, 2018, respectively |
|
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2,562 |
|
|
2,846 |
|
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Unearned revenue, prepaid rent and other liabilities |
|
|
34,066 |
|
|
37,672 |
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Total liabilities |
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1,803,416 |
|
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1,519,034 |
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Stockholders' equity: |
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|
|
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Common Stock, par value $0.01, 100,000,000 shares authorized and 37,688,382 and 36,708,691 shares issued and outstanding at September 30, 2019, and December 31, 2018, respectively |
|
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373 |
|
|
363 |
|
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Additional paid-in capital |
|
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508,209 |
|
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491,314 |
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Accumulated other comprehensive loss |
|
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(6,666) |
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(2,193) |
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Distributions in excess of net income |
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(321,720) |
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(246,929) |
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Total stockholders' equity |
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180,196 |
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242,555 |
|
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Noncontrolling interests |
|
|
63,130 |
|
|
92,078 |
|
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Total equity |
|
|
243,326 |
|
|
334,633 |
|
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Total liabilities and equity |
|
$ |
2,046,742 |
|
$ |
1,853,667 |
|
See accompanying notes to condensed consolidated financial statements.
3
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except share and per share data)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2019 |
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2018 |
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2019 |
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2018 |
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Operating revenues: |
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Data center revenue: |
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Rental, power, and related revenue |
|
$ |
122,598 |
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$ |
118,590 |
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$ |
361,534 |
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$ |
344,745 |
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Interconnection revenue |
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19,082 |
|
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17,701 |
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56,274 |
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51,683 |
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Office, light-industrial and other revenue |
|
|
3,211 |
|
|
2,889 |
|
|
8,884 |
|
|
8,818 |
|
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Total operating revenues |
|
|
144,891 |
|
|
139,180 |
|
|
426,692 |
|
|
405,246 |
|
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Operating expenses: |
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Property operating and maintenance |
|
|
41,251 |
|
|
41,161 |
|
|
117,428 |
|
|
112,870 |
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Real estate taxes and insurance |
|
|
4,973 |
|
|
4,699 |
|
|
17,157 |
|
|
14,329 |
|
|
Depreciation and amortization |
|
|
40,546 |
|
|
36,264 |
|
|
113,188 |
|
|
105,598 |
|
|
Sales and marketing |
|
|
5,476 |
|
|
5,180 |
|
|
16,912 |
|
|
15,629 |
|
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General and administrative |
|
|
10,671 |
|
|
10,074 |
|
|
33,123 |
|
|
29,556 |
|
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Rent |
|
|
8,331 |
|
|
7,329 |
|
|
23,752 |
|
|
20,276 |
|
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Transaction costs |
|
|
— |
|
|
— |
|
|
— |
|
|
75 |
|
|
Total operating expenses |
|
|
111,248 |
|
|
104,707 |
|
|
321,560 |
|
|
298,333 |
|
|
Operating income |
|
|
33,643 |
|
|
34,473 |
|
|
105,132 |
|
|
106,913 |
|
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Interest expense |
|
|
(10,986) |
|
|
(9,433) |
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|
(30,795) |
|
|
(26,078) |
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|
Income before income taxes |
|
|
22,657 |
|
|
25,040 |
|
|
74,337 |
|
|
80,835 |
|
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Income tax (expense) benefit |
|
|
(13) |
|
|
(20) |
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|
(45) |
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|
30 |
|
|
Net income |
|
$ |
22,644 |
|
$ |
25,020 |
|
$ |
74,292 |
|
$ |
80,865 |
|
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Net income attributable to noncontrolling interests |
|
|
5,194 |
|
|
6,420 |
|
|
17,646 |
|
|
22,574 |
|
|
Net income attributable to common shares |
|
$ |
17,450 |
|
$ |
18,600 |
|
$ |
56,646 |
|
$ |
58,291 |
|
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Net income per share attributable to common shares: |
|
|
|
|
|
|
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|
|
|
|
|
|
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Basic |
|
$ |
0.47 |
|
$ |
0.52 |
|
$ |
1.55 |
|
$ |
1.69 |
|
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Diluted |
|
$ |
0.47 |
|
$ |
0.52 |
|
$ |
1.54 |
|
$ |
1.68 |
|
|
Weighted average common shares outstanding |
|
|
|
|
|
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|
|
|
|
|
|
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Basic |
|
|
36,950,950 |
|
|
35,512,091 |
|
|
36,589,593 |
|
|
34,504,790 |
|
|
Diluted |
|
|
37,132,155 |
|
|
35,721,478 |
|
|
36,763,241 |
|
|
34,693,835 |
|
See accompanying notes to condensed consolidated financial statements.
4
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)
|
|
|
|
|
|
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|
|
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Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
||||||||
|
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
|
Net income |
|
$ |
22,644 |
|
$ |
25,020 |
|
$ |
74,292 |
|
$ |
80,865 |
|
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on derivative contracts |
|
|
(463) |
|
|
523 |
|
|
(5,608) |
|
|
1,356 |
|
|
Reclassification of other comprehensive income (loss) to interest expense |
|
|
137 |
|
|
(69) |
|
|
(44) |
|
|
(145) |
|
|
Comprehensive income |
|
|
22,318 |
|
|
25,474 |
|
|
68,640 |
|
|
82,076 |
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
5,125 |
|
|
6,534 |
|
|
16,293 |
|
|
22,907 |
|
|
Comprehensive income attributable to common shares |
|
$ |
17,193 |
|
$ |
18,940 |
|
$ |
52,347 |
|
$ |
59,169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited and in thousands except share data)
|
|
|
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|
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|
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|
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|
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Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Additional |
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Other |
|
Distributions |
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Total |
|
|
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|
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|
|||||
|
|
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Common Shares |
|
Paid-in |
|
Comprehensive |
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in Excess of |
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Stockholders' |
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Noncontrolling |
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Total |
|
|||||||||
|
|
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Number |
|
Amount |
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Capital |
|
Income (Loss) |
|
Net Income |
|
Equity |
|
Interests |
|
Equity |
|
|||||||
|
Balance at January 1, 2019 |
|
36,708,691 |
|
$ |
363 |
|
$ |
491,314 |
|
$ |
(2,193) |
|
$ |
(246,929) |
|
$ |
242,555 |
|
$ |
92,078 |
|
$ |
334,633 |
|
|
Issuance of stock awards, net of forfeitures |
|
192,009 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Exercise of stock options |
|
1,129 |
|
|
— |
|
|
17 |
|
|
— |
|
|
— |
|
|
17 |
|
|
— |
|
|
17 |
|
|
Share-based compensation |
|
— |
|
|
1 |
|
|
3,592 |
|
|
— |
|
|
— |
|
|
3,593 |
|
|
— |
|
|
3,593 |
|
|
Dividends and distributions |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(40,581) |
|
|
(40,581) |
|
|
(12,733) |
|
|
(53,314) |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
19,661 |
|
|
19,661 |
|
|
6,244 |
|
|
25,905 |
|
|
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
(3,540) |
|
|
— |
|
|
(3,540) |
|
|
(1,124) |
|
|
(4,664) |
|
|
Balance at March 31, 2019 |
|
36,901,829 |
|
$ |
364 |
|
$ |
494,923 |
|
$ |
(5,733) |
|
$ |
(267,849) |
|
$ |
221,705 |
|
$ |
84,465 |
|
$ |
306,170 |
|
|
Redemption of noncontrolling interests |
|
2,770 |
|
|
— |
|
|
20 |
|
|
— |
|
|
— |
|
|
20 |
|
|
(20) |
|
|
— |
|
|
Issuance of stock awards, net of forfeitures |
|
(15,567) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Exercise of stock options |
|
1,339 |
|
|
— |
|
|
21 |
|
|
— |
|
|
— |
|
|
21 |
|
|
— |
|
|
21 |
|
|
Share-based compensation |
|
— |
|
|
— |
|
|
3,864 |
|
|
— |
|
|
— |
|
|
3,864 |
|
|
— |
|
|
3,864 |
|
|
Dividends and distributions |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(44,895) |
|
|
(44,895) |
|
|
(14,118) |
|
|
(59,013) |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
19,535 |
|
|
19,535 |
|
|
6,208 |
|
|
25,743 |
|
|
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
(502) |
|
|
— |
|
|
(502) |
|
|
(160) |
|
|
(662) |
|
|
Balance at June 30, 2019 |
|
36,890,371 |
|
$ |
364 |
|
$ |
498,828 |
|
$ |
(6,235) |
|
$ |
(293,209) |
|
$ |
199,748 |
|
$ |
76,375 |
|
$ |
276,123 |
|
|
Redemption of noncontrolling interests |
|
800,840 |
|
|
8 |
|
|
5,394 |
|
|
(174) |
|
|
— |
|
|
5,228 |
|
|
(5,228) |
|
|
— |
|
|
Issuance of stock awards, net of forfeitures |
|
(3,983) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Exercise of stock options |
|
1,154 |
|
|
— |
|
|
28 |
|
|
— |
|
|
— |
|
|
28 |
|
|
— |
|
|
28 |
|
|
Share-based compensation |
|
— |
|
|
1 |
|
|
3,959 |
|
|
— |
|
|
— |
|
|
3,960 |
|
|
— |
|
|
3,960 |
|
|
Dividends and distributions |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(45,961) |
|
|
(45,961) |
|
|
(13,142) |
|
|
(59,103) |
|
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
17,450 |
|
|
17,450 |
|
|
5,194 |
|
|
22,644 |
|
|
Other comprehensive loss |
|
— |
|
|
— |
|
|
— |
|
|
(257) |
|
|
— |
|
|
(257) |
|
|
(69) |
|
|
(326) |
|
|
Balance at September 30, 2019 |
|
37,688,382 |
|
$ |
373 |
|
$ |
508,209 |
|
$ |
(6,666) |
|
$ |
(321,720) |
|
$ |
180,196 |
|
$ |
63,130 |
|
$ |
243,326 |
|
See accompanying notes to condensed consolidated financial statements.
6
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
||||
|
|
|
2019 |
|
2018 |
|
||
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
Net income |
|
$ |
74,292 |
|
$ |
80,865 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
113,188 |
|
|
105,598 |
|
|
Amortization of above/below market leases |
|
|
(219) |
|
|
(494) |
|
|
Amortization of deferred financing costs and hedge amortization |
|
|
2,368 |
|
|
1,756 |
|
|
Share-based compensation |
|
|
10,781 |
|
|
8,864 |
|
|
Bad debt expense |
|
|
106 |
|
|
(300) |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(7,971) |
|
|
5,001 |
|
|
Deferred rent receivable |
|
|
4,218 |
|
|
(2,930) |
|
|
Deferred leasing costs |
|
|
(9,727) |
|
|
(9,140) |
|
|
Other assets |
|
|
(8,395) |
|
|
(5,342) |
|
|
Accounts payable and accrued expenses |
|
|
15,800 |
|
|
6,274 |
|
|
Unearned revenue, prepaid rent and other liabilities |
|
|
(8,765) |
|
|
(1,201) |
|
|
Operating leases |
|
|
2,035 |
|
|
(215) |
|
|
Net cash provided by operating activities |
|
|
187,711 |
|
|
188,736 |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Tenant improvements |
|
|
(3,167) |
|
|
(4,191) |
|
|
Real estate improvements |
|
|
(239,526) |
|
|
(160,269) |
|
|
Business combinations and asset acquisitions |
|
|
(26,060) |
|
|
(10,681) |
|
|
Net cash used in investing activities |
|
|
(268,753) |
|
|
(175,141) |
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
66 |
|
|
219 |
|
|
Proceeds from revolving credit facility |
|
|
286,250 |
|
|
184,036 |
|
|
Payments on revolving credit facility |
|
|
(435,500) |
|
|
(199,036) |
|
|
Proceeds from unsecured debt |
|
|
400,000 |
|
|
150,000 |
|
|
Payments of loan fees and costs |
|
|
(2,344) |
|
|
(4,986) |
|
|
Dividends and distributions |
|
|
(165,326) |
|
|
(143,769) |
|
|
Net cash provided by (used in) financing activities |
|
|
83,146 |
|
|
(13,536) |
|
|
Net change in cash and cash equivalents |
|
|
2,104 |
|
|
59 |
|
|
Cash and cash equivalents, beginning of period |
|
|
2,599 |
|
|
5,247 |
|
|
Cash and cash equivalents, end of period |
|
$ |
4,703 |
|
$ |
5,306 |
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized amounts |
|
$ |
21,686 |
|
$ |
21,209 |
|
|
Cash paid for operating lease liabilities |
|
$ |
18,581 |
|
$ |
18,116 |
|
|
NON-CASH INVESTING AND FINANCING ACTIVITY |
|
|
|
|
|
|
|
|
Construction costs payable capitalized to real estate |
|
$ |
65,964 |
|
$ |
37,816 |
|
|
Accrual of dividends and distributions |
|
$ |
61,783 |
|
$ |
51,840 |
|
|
NON-CASH OPERATING ACTIVITY |
|
|
|
|
|
|
|
|
Lease liabilities arising from obtaining right-of-use assets |
|
$ |
1,035 |
|
$ |
114,989 |
|
See accompanying notes to condensed consolidated financial statements.
7
CORESITE REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(unaudited)
1. Organization and Description of Business
CoreSite Realty Corporation (the “Company,” “we,” “us,” or “our”) was organized in the State of Maryland on February 17, 2010, and is a fully-integrated, self-administered, and self-managed real estate investment trust (“REIT”). Through our controlling interest in CoreSite, L.P. (our “Operating Partnership”), we are engaged in the business of owning, acquiring, constructing and operating data centers. As of September 30, 2019, the Company owned a 77.6% common interest in our Operating Partnership, and affiliates of The Carlyle Group and others owned a 22.4% interest in our Operating Partnership. See additional discussion in Note 10, Noncontrolling Interests — Operating Partnership.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by our management in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended September 30, 2019, are not necessarily indicative of the expected results for the year ending December 31, 2019, or any other future period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Our Operating Partnership meets the definition and criteria of a variable interest entity (“VIE”) and we are the primary beneficiary of the VIE. Our sole significant asset is the investment in our Operating Partnership, and consequently, substantially all of our assets and liabilities represent those assets and liabilities of our Operating Partnership. Our debt is an obligation of our Operating Partnership where the creditors also have recourse against the credit of the Company. Intercompany balances and transactions have been eliminated upon consolidation.
Recent Accounting Pronouncements Not Yet Adopted
Fair Value Measurement
In August 2018, the Financial Accounting Standards Board (“FASB”) issued guidance codified in Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 improves the overall usefulness of disclosures to financial statement users and reduces unnecessary costs in preparing fair value measurement disclosures. The standard will be effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We will adopt the standard effective January 1, 2020. We do not expect the provisions of ASU 2018-13 to have a material impact on our condensed consolidated financial statements.
Intangibles – Goodwill and Other – Internal-Use Software
In August 2018, the FASB issued guidance codified in ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies that implementation costs incurred by customers in cloud computing arrangements are deferred if they would be capitalized by customers in software licensing arrangements under the internal-use software guidance. Additionally, ASU 2018-15 clarifies that all capitalized costs must be presented in the same financial statement line item as the cloud computing arrangement. The standard will be effective, on either a prospective or retrospective basis, for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted. We will adopt the standard effective January 1, 2020, prospectively.
8
We do not expect the provisions of ASU 2018-15 to have a material impact on our condensed consolidated financial statements.
We determined that all other recently issued accounting pronouncements will not have a material impact on our consolidated financial statements or do not apply to our operations.
Use of Estimates
The preparation of these unaudited condensed consolidated financial statements, in conformity with GAAP, requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates, including those related to assessing our standalone selling prices, performance-based equity compensation plans and the carrying values of our real estate properties, goodwill, and accrued liabilities. We base our estimates on historical experience, current market conditions, and various other assumptions that we believe to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could vary under different assumptions or conditions.
Investments in Real Estate
Real estate investments are carried at cost less accumulated depreciation and amortization. The cost of real estate includes the purchase price of property and leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized. During land development and construction periods, we capitalize construction costs, legal fees, financing costs, real estate taxes and insurance, rent expense and internal costs of personnel performing development, if such costs are incremental and identifiable to a specific development project. Capitalization of costs begins upon commencement of development efforts and ceases when the project is ready for its intended use and held available for occupancy. Interest is capitalized during the period of development based upon applying the weighted-average borrowing rate to the actual development costs expended. Capitalized interest costs were $3.7 million and $1.3 million for the three months ended September 30, 2019, and 2018, respectively. Capitalized interest costs were $10.0 million and $3.5 million for the nine months ended September 30, 2019, and 2018, respectively.
Depreciation and amortization are calculated using the straight-line method over the following useful lives of the assets:
|
|
|
|
|
Buildings |
|
27 to 40 years |
|
Building improvements |
|
1 to 10 years |
|
Leasehold improvements |
|
The shorter of the lease term or useful life of the asset |
Depreciation expense was $35.1 million and $31.4 million for the three months ended September 30, 2019, and 2018, respectively. Depreciation expense was $100.1 million and $91.3 million for the nine months ended September 30, 2019, and 2018, respectively.
Acquisition of Investment in Real Estate
When accounting for business combinations and asset acquisitions, the fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and building improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and the value of customer relationships. The primary difference between business combinations and asset acquisitions is that asset acquisitions require cost accumulation and allocation at a relative fair value. Acquisition costs are capitalized for asset acquisitions and are expensed for business combinations.
The fair value of the land and building of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” fair value is then allocated to land and building based on management's determination of the fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.
9
The fair value of intangibles related to in-place leases includes the value of lease intangibles for above-market and below-market leases, lease origination costs, and customer relationships, determined on a lease-by-lease basis. Above-market and below-market leases are valued based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management's estimate of market lease rates for the corresponding in-place leases, measured over a period equal to the remaining noncancelable term of the lease and, for below-market leases, over a time period equal to the initial term plus any below-market fixed rate renewal periods. Lease origination costs include estimates of costs avoided associated with leasing the property, including tenant allowances and improvements and leasing commissions. Customer relationship intangibles relate to the additional revenue opportunities expected to be generated through interconnection services and utility services to be provided to the in-place lease tenants.
The capitalized values for above and below-market lease intangibles, lease origination costs, and customer relationships are amortized over the term of the underlying leases or the expected customer relationship. Amortization related to above-market and below-market leases where the Company is the lessor is recorded as either a reduction of or an increase to rental revenue, amortization related to above-market and below-market leases where the Company is the lessee is recorded as either a reduction of or an increase to rent expense. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off.
The carrying value of intangible assets is reviewed for impairment in connection with its respective asset group whenever events or changes in circumstances indicate that the asset group may not be recoverable. An impairment loss is recognized if the carrying amount of the asset group is not recoverable and its carrying amount exceeds its estimated fair value. No impairment loss related to these intangible assets was recognized for the three or nine months ended September 30, 2019, or 2018.
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, 2019, and December 31, 2018, we had $40.6 million of goodwill at each date. The Company’s goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. No impairment loss was recognized for the three or nine months ended September 30, 2019, or 2018.
Cash and Cash Equivalents
Cash and cash equivalents include all non-restricted cash held in financial institutions and other non-restricted highly liquid short-term investments with original maturities at acquisition of three months or less.
Initial Direct Costs
Initial direct costs include commissions paid to third parties, including brokers, leasing and referral agents, and internal sales commissions paid to employees for successful execution of lease agreements. Initial direct costs are incremental costs that would not have been incurred if the lease agreement had not been executed. These initial direct costs are capitalized and generally amortized over the term of the related leases using the straight-line method. If a customer lease terminates prior to the expiration of its initial term, any unamortized initial direct costs related to the lease are written off to amortization expense. Amortization of initial direct costs was $4.0 million for both the three months ended September 30, 2019, and 2018. Amortization of initial direct costs was $10.8 million and $11.8 million for the nine months ended September 30, 2019, and 2018, respectively. Initial direct costs are included within other assets in the condensed consolidated balance sheets and consisted of the following, net of amortization, as of September 30, 2019, and December 31, 2018 (in thousands):
10
Deferred Financing Costs
Deferred financing costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are capitalized and amortized on a straight-line basis, which approximates the effective-interest method, over the term of the indebtedness and the amortization is included as a component of interest expense. Depending on the type of debt instrument, deferred financing costs are reported either in other assets or as a direct deduction from the carrying amount of the related debt liabilities in our condensed consolidated balance sheets.
Recoverability of Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the assets. The estimation of expected future net cash flows is inherently uncertain and relies, to a considerable extent, on assumptions regarding current and future economics and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the long-lived assets. To the extent that impairment has occurred, the excess of the carrying amount of long-lived assets over its estimated fair value would be recognized as an impairment loss charged to net income. For the three and nine months ended September 30, 2019, and 2018, no impairment of long-lived assets was recognized in the condensed consolidated financial statements.
Derivative Instruments and Hedging Activities
We reflect all derivative instruments at fair value as either assets or liabilities on the condensed consolidated balance sheets. For those derivative instruments that are designated and qualify as hedging instruments, we record the gain or loss on the hedging instruments as a component of accumulated other comprehensive income or loss. For derivatives that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized within net income. See additional discussion in Note 8, Derivatives and Hedging Activities.
Internal-Use Software
We recognize internal-use software development costs based on the development stage of the project and nature of the cost. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Internal and external costs incurred to develop internal-use software during the application development stage are capitalized. Internal and external training costs and maintenance costs during the post-implementation-operation stage are expensed as incurred. Completed projects are placed into service and amortized over the estimated useful life of the software. No impairment of internal-use software was recognized in the condensed consolidated financial statements for the three and nine months ended September 30, 2019, and 2018.
Revenue Recognition
Rental, Power, and Related Revenue
We derive our revenues from leases with customers for data center and office and light-industrial space. Our leases include rental revenue lease components and nonlease revenue components, such as power and tenant reimbursements. We have elected to combine all of our nonlease revenue components that have the same pattern of transfer as the related operating lease component into a single combined lease component.
Our leases with customers are classified as operating leases and rental revenue is recognized on a straight-line basis over the customer lease term. Occasionally, our customer leases include options to extend or terminate the lease agreements. We do not include any of these extension or termination options in a customer’s lease term for lease classification purposes or for recognizing rental revenue unless we are reasonably certain the customer will exercise these extension or termination options. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent receivable within other assets on our condensed consolidated balance sheets.
In general, we provide two power products for our data center leased space, consisting of a fixed (breakered-amperage) and a variable (sub-metered) model. Customer power arrangements are coterminous with the customer’s underlying
11
lease and have the same pattern of transfer over the lease term and are therefore combined with lease revenue within our condensed consolidated statements of operations. For fixed power arrangements, a customer pays us a fixed monthly fee for a committed available amount of power. We recognize the fixed power revenue each month over the term of the lease. For variable power arrangements, a customer pays us variable monthly fees for the specific amount of power utilized at the current utility rates. We recognize variable power revenue each month as the uncertainty related to the consideration is resolved, as power is provided to our customers, and as our customers utilize the power.
Some of our leases contain provisions under which our customers reimburse us for common area maintenance and other executory costs. These customer reimbursements are variable and are recognized in the period that the expenses are recognized. These services have the same pattern of transfer over the lease term and are also combined with lease revenue within our condensed consolidated statements of operations.
Interconnection Revenue
We also derive revenue from interconnection services, which are generally contracted on a month-to-month basis cancellable by us or the customer at any time. Interconnection services are accounted for as separate contracts and are not combined with lease and power arrangements. We recognize interconnection revenue each month as these services are delivered to, and utilized by, our customers.
Allowance for Doubtful Accounts
A provision for uncollectible accounts is recorded if a receivable balance relating to contractual rent, rental revenue recorded on a straight-line basis, tenant reimbursements or other billed amounts is considered by management to be uncollectible. At September 30, 2019, and December 31, 2018, the allowance for doubtful accounts totaled $0.2 million and $0.4 million, respectively, on the condensed consolidated balance sheets.
Lessee Accounting
We determine if an arrangement is a lease at inception. Our operating lease agreements are primarily for real estate space and are included within operating lease right-of-use (“ROU”) assets and operating lease liabilities on the condensed consolidated balance sheets. We elected the practical expedient to combine our lease and related nonlease components for our lessee building leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Our variable lease payments consist of nonlease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. ROU assets also include any lease payments made and exclude lease incentives. Many of our lessee agreements include options to extend the lease, which we do not include in our minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Share-Based Compensation
We account for share-based compensation using the fair value method of accounting. The estimated fair value of the stock options granted by us is calculated based on the Black-Scholes option-pricing model. The fair value of restricted share-based and Operating Partnership unit compensation is based on the fair value of our common stock on the date of the grant. The fair value of performance share awards, which have a market condition, is based on a Monte Carlo simulation. The fair value for all share-based compensation is amortized on a straight-line basis over the vesting period. We have elected to account for forfeitures as they occur.
Asset Retirement and Environmental Remediation Obligations
We record accruals for estimated asset retirement and environmental remediation obligations. The obligations relate primarily to the removal of asbestos during development of properties as well as the estimated equipment removal costs upon termination of a certain lease where we are the lessee. At September 30, 2019, and December 31, 2018, the amount
12
included in unearned revenue, prepaid rent and other liabilities on the condensed consolidated balance sheets was approximately $1.7 million and $1.6 million, respectively.
Income Taxes
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ended December 31, 2010. To qualify as a REIT, we are required to distribute at least 90% of our taxable income to our stockholders and meet various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we generally are not subject to corporate level federal income tax on the earnings distributed currently to our stockholders. If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates.
To maintain REIT status, we must distribute a minimum of 90% of our taxable income. However, it is our policy and intent, subject to change, to distribute 100% of our taxable income and therefore, no provision is required in the accompanying condensed consolidated financial statements for federal income taxes with regard to our activities and our subsidiary pass-through entities. The allocable share of taxable income is included in the income tax returns of its stockholders. We are subject to the statutory requirements of the locations in which we conduct business. State and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat certain subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as services for our tenants that could be considered otherwise impermissible for us to perform and holding assets that we cannot hold directly. A TRS is subject to corporate level federal and state income taxes.
Deferred income taxes are recognized in certain taxable entities. Deferred income tax generally is a function of the period’s temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior years that previously had been recognized as deferred income tax assets and the reversal of any previously recorded deferred income tax liabilities. A valuation allowance for deferred income tax assets is provided if we believe all or some portion of the deferred income tax asset may more likely than not be realized. Any increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in the estimated realizability of the related deferred income tax asset is included in deferred tax expense. As of September 30, 2019, and December 31, 2018, the gross deferred income taxes were not material.
We currently have no liabilities for uncertain income tax positions. The earliest tax year for which we are subject to examination is 2016.
Concentration of Credit Risks
Our cash and cash equivalents are maintained in various financial institutions, which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts, and management believes that the Company is not exposed to any significant credit risk in this area. We have no off-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts, or foreign currency hedging arrangements.
Segment Information
We manage our business as one reportable segment consisting of investments in data centers located in the United States. Although we provide services in several markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics amongst all markets, including the nature of the services provided and the type of customers purchasing these services.
13
3. Investment in Real Estate
The following is a summary of the properties owned or leased by market at September 30, 2019 (in thousands):
| (1) | On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our Santa Clara campus for a purchase price of $26 million. We expect to develop an approximately 200,000 NRSF turn-key data center building on the acquired land parcel, which we refer to as SV9, as the existing office tenants vacate upon expiration of their leases and upon the receipt of necessary entitlements. |
The following is a summary of the properties owned or leased by market at December 31, 2018 (in thousands):
4. Other Assets
Other assets consisted of the following, net of amortization and depreciation, if applicable for each line item, as of September 30, 2019, and December 31, 2018 (in thousands):
14
5. Leases
As the lessee, we currently lease real estate space under noncancelable operating lease agreements for our turn-key data centers at NY1, LA1, LA4, DC1, DC2, DE1, and DE2, and our corporate headquarters located in Denver, Colorado. Our leases have remaining lease terms ranging from less than 1 year to 10 years, some of the leases include options to extend the leases for up to an additional 20 years. We do not include any of our renewal options in our lease terms for calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not reasonably certain we will exercise these renewal options at this time. The weighted-average remaining non-cancelable lease term for our operating leases was nine years and ten years at September 30, 2019, and December 31, 2018, respectively. The weighted-average discount rate was 4.9% at each date.
During the three months ended September 30, 2019, we extended the term of approximately 5,300 NRSF at our existing DE1 space from October 2019 to October 2024. As a result of this extension, we remeasured the lease liability and adjusted the ROU asset by approximately $1.0 million.
The components of lease expense were as follows (in thousands):
6. Lease Revenue
The components of data center, office, light-industrial, and other lease revenue were as follows (in thousands):
15
7. Debt
A summary of outstanding indebtedness as of September 30, 2019, and December 31, 2018, is as follows (in thousands):
| (1) | Our Operating Partnership has in place a swap agreement with respect to the 2020 Term Loan (as defined below), effective through May 5, 2020, to swap the variable interest rate associated with $75 million, or 50% of the principal amount, of the 2020 Term Loan to a fixed rate of approximately 2.83% per annum at our current leverage ratio as of September 30, 2019. The interest rate on the remaining $75 million of the 2020 Term Loan is based on the London Interbank Offered Rate (“LIBOR”) plus the applicable spread. The effective interest rate as of September 30, 2019, is 3.12%. See Note 8 – Derivatives and Hedging Activities. |
| (2) | Our Operating Partnership has in place a swap agreement with respect to the 2023 Term Loan (as defined below), effective through April 5, 2023, to swap the variable interest rate associated with $75 million, or 50% of the principal amount of the 2023 Term Loan, to a fixed rate of approximately 4.12% per annum at our current leverage ratio as of September 30, 2019. The interest rate on the remaining $75 million of the 2023 Term Loan is based on LIBOR plus the applicable spread. The effective interest rate as of September 30, 2019, is 3.77%. See Note 8 – Derivatives and Hedging Activities. |
| (3) | Our Operating Partnership had in place a $175 million forward-starting seven-year interest rate swap agreement to protect against adverse fluctuations in interest rates in anticipation of the issuance of the 2026 Notes (as defined below). On April 3, 2019, we settled the $175 million swap and after giving effect to cancellation costs incurred in connection with the termination of the swap, the 2026 Notes bear an effective interest rate of 4.52% per annum. See Note 8 – Derivatives and Hedging Activities. |
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Revolving Credit Facility
On April 19, 2018, our Operating Partnership and certain subsidiary co-borrowers entered into the Fourth Amended and Restated Credit Agreement (as amended and restated, the “Amended and Restated Credit Agreement”), which amended and restated our previous credit agreement to provide additional liquidity of $250 million, which was used to pay down a portion of the then-existing revolving credit facility, fund continued development across our portfolio, and for general corporate purposes. The Amended and Restated Credit Agreement, among other things, increased the revolving credit facility from $350 million to $450 million, decreased the interest rates on borrowings under the revolving credit facility and certain term loans, and extended the maturity date from June 24, 2019, to April 19, 2022, with a one-time extension option, which, if exercised, would extend the maturity date to April 19, 2023. The exercise of the extension option is subject to the payment of an extension fee equal to 10 basis points of the total commitments under the Amended and Restated Credit Agreement at initial maturity and certain other customary conditions. The Amended and Restated Credit Agreement increased our total commitment from $600 million to $850 million, consisting of a $450 million revolving credit facility, a $150 million senior unsecured term loan scheduled to mature on June 24, 2020, a $100 million senior unsecured term loan scheduled to mature on February 2, 2021, and a new $150 million senior unsecured term loan scheduled to mature on April 19, 2023. See “2020 Senior Unsecured Term Loan,” “2021 Senior Unsecured Term Loan,” and “2023 Senior Unsecured Term Loan” below for a discussion of the $150 million, $100 million, and $150 million senior unsecured term loans, respectively. The Amended and Restated Credit Agreement also increased our accordion feature by $150 million to $350 million, which allows our Operating Partnership to increase the total commitments from $850 million to $1.2 billion, under specified circumstances, including securing capital from new or existing lenders.
Borrowings under the revolving credit facility were amended to bear interest at a variable rate per annum equal to either (i) LIBOR plus 145 basis points to 205 basis points, or (ii) a base rate plus 45 basis points to 105 basis points, each depending on our Operating Partnership’s leverage ratio. At September 30, 2019, our Operating Partnership’s leverage ratio was 29.3% and the interest rate was LIBOR plus 145 basis points.
The total amount available for borrowing under the revolving credit facility, is equal to the lesser of $450.0 million or the availability calculated based on our unencumbered asset pool. As of September 30, 2019, the borrowing capacity was $450.0 million. As of September 30, 2019, $62.3 million was borrowed and outstanding, $4.9 million was outstanding under letters of credit, and therefore $382.8 million remained available for us to borrow under the revolving credit facility.
Our ability to borrow under the Amended and Restated Credit Agreement is subject to ongoing compliance with a number of financial covenants and other customary restrictive covenants, including, among others:
| ● | a maximum leverage ratio (defined as total consolidated indebtedness to total gross asset value) of 60%, which, as of September 30, 2019, was 29.3% |
| ● | a maximum secured debt ratio (defined as total consolidated secured debt to total gross asset value) of 40%, which, as of September 30, 2019, was 0.0% |
| ● | a minimum fixed charge coverage ratio (defined as adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.5 to 1.0, which, as of September 30, 2019, was 5.9 to 1.0. |
The Amended and Restated Credit Agreement ranks pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, 2024 Notes, the 2026 Notes, and the 2029 Notes (each as defined herein) and contains the same financial covenants and other customary restrictive covenants as those debt instruments. As of September 30, 2019, we were in compliance with all of the financial covenants under the Amended and Restated Credit Agreement.
2020 Senior Unsecured Term Loan
Pursuant to the terms of the Amended and Restated Credit Agreement, our Operating Partnership and certain subsidiaries are party to a $150 million senior unsecured term loan (the “2020 Term Loan”), which was originally entered into on June 24, 2015. The 2020 Term Loan has a five-year term maturing on June 24, 2020. The 2020 Term Loan ranks pari passu with the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes, the 2026 Notes, the 2029 Notes and the Amended and Restated Credit Agreement and contains the same financial covenants and
17
other customary restrictive covenants as those debt instruments. As of September 30, 2019, we were in compliance with all of the financial covenants under the 2020 Term Loan.
Borrowings under the 2020 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 140 basis points to 200 basis points, or (ii) a base rate plus 40 basis points to 100 basis points, each depending on our Operating Partnership’s leverage ratio. At September 30, 2019, the Operating Partnership’s leverage ratio was 29.3% and the interest rate was LIBOR plus 140 basis points.
2021 Senior Unsecured Term Loan
On February 2, 2016, our Operating Partnership and certain subsidiaries partially exercised the accordion feature on our term loans under the Amended and Restated Credit Agreement and entered into a $100 million senior unsecured term loan (the “2021 Term Loan”). The 2021 Term Loan is governed by the terms of the Amended and Restated Credit Agreement. The 2021 Term Loan has a five-year term maturing on February 2, 2021. The 2021 Term Loan ranks pari passu with the 2020 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes, the 2026 Notes, the 2029 Notes and the Amended and Restated Credit Agreement and contains the same financial covenants and other customary restrictive covenants as those debt instruments. As of September 30, 2019, we were in compliance with all of the financial covenants under the 2021 Term Loan.
Borrowings under the 2021 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 140 basis points to 200 basis points, or (ii) a base rate plus 40 basis points to 100 basis points, each depending on our Operating Partnership’s leverage ratio. At September 30, 2019, our Operating Partnership’s leverage ratio was 29.3% and the interest rate was LIBOR plus 140 basis points.
2022 Senior Unsecured Term Loan
On April 19, 2017, our Operating Partnership and certain subsidiaries entered into an Amended and Restated Term Loan Agreement (as amended and restated, the “Term Loan Agreement”), which amended and restated the $100 million senior unsecured term loan, originally entered into on January 31, 2014 (the “2022 Term Loan”). The Term Loan Agreement was amended and restated to, among other things, (i) exercise the accordion feature to increase the total commitments to $200 million, (ii) extend the maturity of the term loan from January 31, 2019, to April 19, 2022, (iii) amend the accordion feature to allow an increase in total commitments from $200 million to $300 million, under specified circumstances, including securing capital from new or existing lenders, and (iv) explicitly permit the issuance of the 2024 Notes defined below (the “2024 Notes”).
The 2022 Term Loan ranks pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes, the 2026 Notes, the 2029 Notes and the Amended and Restated Credit Agreement and contains the same financial covenants and other customary restrictive covenants as those debt instruments. As of September 30, 2019, we were in compliance with all of the financial covenants under the 2022 Term Loan.
Borrowings under the 2022 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 140 basis points to 200 basis points, or (ii) a base rate plus 40 basis points to 100 basis points, each depending on our Operating Partnership’s leverage ratio. At September 30, 2019, our Operating Partnership’s leverage ratio was 29.3% and the interest rate was LIBOR plus 140 basis points.
2023 Senior Unsecured Term Loan
On April 19, 2018, pursuant to the terms of, the Amended and Restated Credit Agreement, our Operating Partnership and certain subsidiaries entered into a $150 million senior unsecured term loan (the “2023 Term Loan”). The 2023 Term Loan has a five-year term maturing on April 19, 2023. The 2023 Term Loan ranks pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Notes, the 2024 Notes, the 2026 Notes, the 2029 Notes and the Amended and Restated Credit Agreement and contains the same financial covenants and other customary restrictive covenants as those debt instruments. As of September 30, 2019, we were in compliance with all of the financial covenants under the 2023 Term Loan.
Borrowings under the 2023 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 140 basis points to 200 basis points, or (ii) a base rate plus 40 basis points to 100 basis points, each depending on our
18
Operating Partnership’s leverage ratio. At September 30, 2019, our Operating Partnership’s leverage ratio was 29.3% and the interest rate was LIBOR plus 140 basis points.
2023 Senior Unsecured Notes
On June 15, 2016, our Operating Partnership issued an aggregate principal amount of $150 million, 4.19% senior unsecured notes due June 15, 2023 (the “2023 Notes”), in a private placement to certain accredited investors. The terms of the 2023 Notes are governed by a note purchase agreement, dated June 15, 2016 (the “2023 Note Purchase Agreement”), by and among our Operating Partnership, the Company and the purchasers of the 2023 Notes.
Interest is payable semiannually, on the 15th day of June and December of each year, commencing on December 15, 2016. The 2023 Notes are senior unsecured obligations of our Operating Partnership and are jointly and severally guaranteed by the Company and each of our Operating Partnership’s subsidiaries that guarantees indebtedness under our Amended and Restated Credit Agreement (the “Subsidiary Guarantors”).
Our Operating Partnership may prepay all or a portion of the 2023 Notes upon notice to the holders for 100% of the principal amount plus a make-whole premium as set forth in the 2023 Note Purchase Agreement. Upon the occurrence of certain change of control events, holders of the 2023 Notes have the right to require our Operating Partnership to purchase 100% of such holder’s 2023 Notes in cash at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The 2023 Notes rank pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2024 Notes, the 2026 Notes, the 2029 Notes and the Amended and Restated Credit Agreement. On June 12, 2018, the 2023 Note Purchase Agreement was amended to, among other things, conform to the same financial covenants as the Amended and Restated Credit Agreement, as described above. In addition, certain additional financial covenants in the Amended and Restated Credit Agreement were automatically incorporated into the 2023 Note Purchase Agreement, and, subject to certain conditions, these additional financial covenants will be deleted, removed, amended or otherwise modified to be more or less restrictive if the analogous covenant in the Credit Agreement is so deleted, removed, amended or otherwise modified. These covenants are subject to a number of exceptions and qualifications set forth in the 2023 Note Purchase Agreement. As of September 30, 2019, we were in compliance with all of the financial covenants under the 2023 Note Purchase Agreement.
2024 Senior Unsecured Notes
On April 20, 2017, our Operating Partnership issued an aggregate principal amount of $175 million, 3.91% senior unsecured notes due April 20, 2024 (the “2024 Notes”), in a private placement to certain accredited investors. The terms of the 2024 Notes are governed by a note purchase agreement, dated April 20, 2017 (the “2024 Note Purchase Agreement”), by and among our Operating Partnership, the Company and the purchasers of the 2024 Notes.
Interest is payable semiannually, on the 15th day of June and December of each year, commencing on December 15, 2017. The 2024 Notes are senior unsecured obligations of our Operating Partnership and are jointly and severally guaranteed by the Company and each of the Subsidiary Guarantors.
Our Operating Partnership may prepay all or a portion of the 2024 Notes upon notice to the holders for 100% of the principal amount plus a make-whole premium as set forth in the 2024 Note Purchase Agreement. Upon the occurrence of certain change of control events, holders of the 2024 Notes would have the right to require our Operating Partnership to purchase 100% of such holders’ 2024 Notes in cash at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The 2024 Notes rank pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2026 Notes, the 2029 Notes and the Amended and Restated Credit Agreement. On June 12, 2018, the 2024 Note Purchase Agreement was amended to, among other things, conform to the same financial covenants as the Amended and Restated Credit Agreement, as described above. In addition, certain additional financial covenants in the Amended and Restated Credit Agreement were automatically incorporated into the 2024 Note Purchase Agreement, and, subject to certain conditions, these additional financial covenants will be deleted, removed, amended or otherwise modified to be more or less restrictive if the analogous covenant in the Amended and Restated Credit Agreement is so deleted, removed, amended or otherwise modified. These covenants are subject to a number of
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exceptions and qualifications set forth in the 2024 Note Purchase Agreement. As of September 30, 2019, we were in compliance with all of the financial covenants under the 2024 Note Purchase Agreement.
2026 Senior Unsecured Notes
On April 17, 2019, our Operating Partnership issued an aggregate principal amount of $200 million, 4.11% Series A senior unsecured notes due April 17, 2026 (the “2026 Notes”), in a private placement to certain accredited investors. After giving effect to cancellation costs incurred in connection with the termination of an interest rate swap agreement entered into in anticipation of the issuance of the Notes, the 2026 Notes bear an effective interest rate of 4.52% per annum. The terms of the 2026 Notes are governed by a note purchase agreement, dated April 17, 2019 (the “2026 Note Purchase Agreement”), by and among our Operating Partnership, the Company and the purchasers of the 2026 Notes.
Interest is payable semiannually, on the 15th day of August and February of each year, commencing on February 15, 2020. The 2026 Notes are senior unsecured obligations of our Operating Partnership and are jointly and severally guaranteed by the Company and each of the Subsidiary Guarantors.
Our Operating Partnership may prepay all or a portion of the 2026 Notes upon notice to the holders for 100% of the principal amount plus a make-whole premium as set forth in the 2026 Note Purchase Agreement. Upon the occurrence of certain change of control events, holders of the 2026 Notes would have the right to require our Operating Partnership to purchase 100% of such holders’ 2026 Notes in cash at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The 2026 Notes rank pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes, the 2029 Notes and the Amended and Restated Credit Agreement. The 2026 Note Purchase Agreement conforms to the same financial covenants as the Amended and Restated Credit Agreement, as described above. In addition, on the date of the 2026 Note Purchase Agreement and from time to time, certain additional financial covenants in the Amended and Restated Credit Agreement will be automatically incorporated into the 2026 Note Purchase Agreement and, subject to certain conditions, will be deleted, removed, amended or otherwise modified to be more or less restrictive if the analogous covenant in the Amended and Restated Credit Agreement is so deleted, removed, amended or otherwise modified. These covenants are subject to a number of exceptions and qualifications set forth in the 2026 Note Purchase Agreement. As of September 30, 2019, we were in compliance with all of the financial covenants under the 2026 Note Purchase Agreement.
2029 Senior Unsecured Notes
As mentioned above, on April 17, 2019, our Operating Partnership entered into the 2026 Note Purchase Agreement to issue the 2026 Notes and an additional aggregate principal amount of $200 million, 4.31% Series B senior unsecured notes due April 17, 2029 (the “2029 Notes”), in a private placement to certain accredited investors. An aggregate principal amount of $125 million of the 2029 Notes was issued on April 17, 2019. The remaining $75 million of the 2029 Notes was issued on July 17, 2019. The terms of the 2029 Notes are governed by the 2026 Note Purchase Agreement, by and among our Operating Partnership, the Company and the purchasers of the 2029 Notes.
Interest is payable semiannually, on the 15th day of August and February of each year, commencing on February 15, 2020. The 2029 Notes are senior unsecured obligations of our Operating Partnership and are jointly and severally guaranteed by the Company and each of the Subsidiary Guarantors.
Our Operating Partnership may prepay all or a portion of the 2029 Notes upon notice to the holders for 100% of the principal amount plus a make-whole premium as set forth in the 2026 Note Purchase Agreement. Upon the occurrence of certain change of control events, holders of the 2029 Notes would have the right to require our Operating Partnership to purchase 100% of such holders’ 2029 Notes in cash at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The 2029 Notes rank pari passu with the 2020 Term Loan, the 2021 Term Loan, the 2022 Term Loan, the 2023 Term Loan, the 2023 Notes, the 2024 Notes, the 2026 Notes and the Amended and Restated Credit Agreement. As of September 30, 2019, we were in compliance with all of the financial covenants under the 2026 Note Purchase Agreement.
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Debt Maturities
The following table summarizes when our debt currently becomes due (in thousands):
|
|
|
|
|
|
|
Year Ending December 31, |
|
|
|
|
|
2019 |
|
$ |
— |
|
|
2020 |
|
|
150,000 |
|
|
2021 |
|
|
100,000 |
|
|
2022 |
|
|
262,250 |
|
|
2023 |
|
|
300,000 |
|
|
Thereafter |
|
|
575,000 |
|
|
Total principal outstanding |
|
|
1,387,250 |
|
|
Unamortized deferred financing costs |
|
|
(6,709) |
|
|
Total debt, net |
|
$ |
1,380,541 |
|
8. Derivatives and Hedging Activities
The following table summarizes our derivative positions as of September 30, 2019, and December 31, 2018 (in thousands):
| (1) | Derivative assets are recorded at fair value in our condensed consolidated balance sheets in other assets and derivative liabilities are recorded at fair value in our condensed consolidated balance sheets in unearned revenue, prepaid rent and other liabilities. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. |
| (2) | On January 31, 2019, the remaining $50 million of a five-year interest rate swap agreement, which reduced our variability in cash flows relating to interest payments based on one-month LIBOR variable rate debt, expired. |
| (3) | On December 6, 2018, we entered into forward-starting seven-year interest rate swap agreement to protect against adverse fluctuations in interest rates. The swap effectively fixed the interest rate at approximately 2.91% per annum plus the applicable spread. On April 3, 2019, we settled the $175 million forward-starting seven-year interest rate swap, in connection with the anticipated subsequent debt issuance of $200 million of the 2026 Notes, at a loss of $5.7 million. The loss is included in accumulated other comprehensive income and will be amortized to interest expense over the term of the 2026 Notes. |
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known or uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and our known or expected cash payments principally related to our investments and borrowings.
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Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to reduce variability in interest expense and to manage our exposure to adverse interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The changes in the fair value of derivatives designated and that qualify as effective cash flow hedges is recorded in accumulated other comprehensive income or loss on the condensed consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the subsequent twelve months, beginning October 1, 2019, we estimate that $1.5 million will be reclassified as an increase to interest expense.
9. Stockholders’ Equity
We announced the following dividends per share on our common stock during the nine months ended September 30, 2019:
10. Noncontrolling Interests — Operating Partnership
Noncontrolling interests represent the limited partnership interests in our Operating Partnership held by individuals and entities other than CoreSite Realty Corporation. The current holders of common Operating Partnership units are eligible to have the common Operating Partnership units redeemed for cash or common stock on a one-for-one basis, at our option.
The following table shows the common ownership interests in our Operating Partnership as of September 30, 2019, and December 31, 2018:
For each share of common stock issued by us, our Operating Partnership issues to us an equivalent common Operating Partnership unit. During the nine months ended September 30, 2019, we issued 170,364 shares of common stock related to employee compensation arrangements and therefore an equivalent number of common Operating Partnership units were issued to us by our Operating Partnership.
Holders of common Operating Partnership units received aggregate distributions of $3.54 per unit during the nine months ended September 30, 2019, payable in correlation with declared dividends on shares of our common stock.
During the nine months ended September 30, 2019, 803,610 common Operating Partnership units held by affiliates of The Carlyle Group and other third parties were redeemed for shares of our common stock in connection with the sale of 803,610 shares of our common stock. This redemption was recorded as a $5.2 million reduction to noncontrolling interests in our Operating Partnership and an increase to total stockholder’s equity in the condensed consolidated balance sheets.
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The redemption value of the noncontrolling interests at September 30, 2019, was $1.3 billion based on the closing price of the Company’s common stock of $121.85 per share on the last trading day prior to that date.
11. Equity Incentive Plan
Our Board of Directors adopted and, with the approval of our stockholders, amended the 2010 Equity Incentive Plan (as amended, the “2010 Plan”) in 2013. The 2010 Plan is administered by the Compensation Committee of our Board of Directors. Awards issuable under the 2010 Plan include common stock, stock options, restricted stock, stock appreciation rights, dividend equivalents, Operating Partnership units and other incentive awards. We have reserved a total of 6,000,000 shares of our common stock for issuance pursuant to the 2010 Plan, which may be adjusted for changes in our capitalization and certain corporate transactions. To the extent that an award expires, terminates or lapses, or an award is settled in cash without the delivery of shares of common stock to the participant, then any unvested 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 awarded under the 2010 Plan. The payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the 2010 Plan.
As of September 30, 2019, 2,674,453 shares of our common stock were available for issuance pursuant to the 2010 Plan.
Stock Options
Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. The fair value of each option granted under the 2010 Plan is estimated on the date of grant using the Black-Scholes option-pricing model. The fair values are amortized on a straight-line basis over the vesting periods. Stock options have not been granted since the year ended December 31, 2013. As of September 30, 2019, all stock option awards are fully vested. The following table sets forth stock option activity under the 2010 Plan for the nine months ended September 30, 2019:
Restricted Stock Awards and Units
Restricted stock awards and restricted stock units, or RSUs, are granted with a fair value equal to the closing market price of the Company’s common stock on the date of grant. The principal difference between restricted stock awards and RSUs is that RSUs are not shares of our common stock and do not have any of the rights or privileges thereof, including voting rights. On the applicable vesting date, the holder of an RSU becomes entitled to a share of common stock. The restricted stock awards and RSUs are amortized on a straight-line basis to expense over the vesting period. The following table sets forth the number of unvested restricted stock awards and RSUs and the weighted-average fair value of these awards at the date of grant:
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As of September 30, 2019, total unearned compensation on restricted stock awards and RSUs was approximately $22.1 million, and the weighted-average vesting period was 2.5 years.
Performance Stock Awards
We grant long-term incentives to members of management in the form of performance-based restricted stock awards (“PSAs”) under the 2010 Plan. The number of PSAs earned is based on our achievement of relative total shareholder return (“TSR”) measured versus the MSCI US REIT Index over a three-year performance period and ranges between 25% and 175% of the target number of shares for PSAs granted in 2017, 2018, and 2019. The PSAs are granted at the maximum percentage of target and are retired annually to the extent we do not meet the maximum relative TSR performance threshold versus the MSCI US REIT Index. The PSAs are earned upon TSR achievement measured both annually and over the full three-year performance period. The PSAs have a service condition and will be released at the end of the three-year performance period, to the extent earned, provided that the holder continues to be employed or otherwise in service of the Company at the end of the three-year performance period. The PSAs are amortized on a straight-line basis to expense over the vesting period. Holders of the PSAs are entitled to dividends on the PSAs, which are accrued and paid in cash at the end of the three-year performance period.
The following table sets forth the number of unvested PSAs and the weighted-average fair value of these awards at the date of grant:
| (1) | Includes the annual adjustment for the number of PSAs earned based on our achievement of relative TSR measured versus the MSCI US REIT Index for the applicable performance periods. |
As of September 30, 2019, total unearned compensation on PSAs was approximately $6.5 million, and the weighted-average vesting period was 2.1 years. The fair value of each PSA award is estimated on the date of grant using a Monte Carlo simulation. The simulation requires assumptions for expected volatility, risk-free rate of return, and dividend yield. The following table summarizes the assumptions used to value the PSAs granted during the nine months ended September 30, 2019, and 2018:
| (1) | The fair value of the PSAs assumes reinvestment of dividends. |
12. Earnings Per Share
Basic net income per share is calculated by dividing the net income attributable to common shares by the weighted-average number of common shares outstanding during the period. Diluted net income per share adjusts basic net income
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per share for the effects of potentially dilutive common shares, if the effect is not antidilutive. Potentially dilutive common stock consists of shares issuable under the 2010 Plan.
The following is a summary of basic and diluted net income per share (in thousands, except share and per share amounts):
In the calculations above, we have excluded weighted-average potentially dilutive securities of 100 and 1,003 for the three months ended September 30, 2019, and 2018, respectively, 1,810 and 121,373 for the nine months ended September 30, 2019, and 2018, respectively, as their effect would have been antidilutive.
13. Estimated Fair Value of Financial Instruments
Authoritative guidance issued by FASB establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy under the authoritative guidance are as follows:
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the assessment date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 — Unobservable inputs for the asset or liability.
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, interest rate swaps, the revolving credit facility, the senior unsecured term loans, senior unsecured notes, interest payable and accounts payable. The carrying values of cash and cash equivalents, accounts and other receivables, interest payable and accounts payable approximate fair values due to the short-term nature of these financial instruments. The interest rate swaps are recorded at fair value.
The valuation of our derivatives is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative, which reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy; however, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by our Operating Partnership and its counterparties. As of September 30, 2019, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustment is not significant to the overall valuation of our derivative portfolio. As a result, we classify our derivative valuation in Level 2 of the fair value hierarchy.
The total principal balance of our revolving credit facility, senior unsecured term loans, and senior unsecured notes was $1.4 billion and $1.1 billion as of September 30, 2019, and December 31, 2018, which approximates the fair value based
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on Level 3 inputs from the fair value hierarchy. Under the discounted cash flow method, the fair values of the revolving credit facility, the senior unsecured term loans, and the senior unsecured notes are based on our assumptions of market interest rates and terms available incorporating our credit risk for similar loan maturities.
Our lease liabilities are determined based on the estimated present value of our minimum lease payments under our lease agreements at lease commencement. The discount rate used to determine the lease liabilities is based on our estimated incremental borrowing rate at lease commencement, based on Level 3 inputs from the fair value hierarchy.
14. Commitments and Contingencies
Our properties require periodic investments of capital for general capital improvements and for tenant-related capital expenditures. We enter into various construction and equipment contracts with third parties for the development of our properties. At September 30, 2019, we had open commitments related to construction contracts of approximately $216.3 million.
Additionally, we have commitments related to telecommunications capacity used to connect data centers located within the same market or geographical area, power usage, and company-wide improvements that are ancillary to revenue generation. At September 30, 2019, we had open commitments related to these contracts of approximately $73.8 million, of which $3.3 million is scheduled to be met during the remainder of the year ending December 31, 2019.
On April 27, 2018, we filed suit against DGEB Management, LLC and its affiliates, the landlord of our DE1 facility (the “Landlord”), in the District Court, City and County of Denver, State of Colorado (the “District Court”), for certain claims relating to the building where our DE1 facility is located. The parties asserted various claims and counterclaims related to three primary areas: (1) a construction project within the DE1 building to house electrical transformers used to supply power, (2) our usage of images of the DE1 building on our website, and (3) the protocol for cross-connections within the DE1 building. The Landlord demanded approximately $21 million in damages, which included approximately $2.8 million related to the construction project, and further sought to hold us in default under the lease. On August 22, 2019, the jury found in our favor on all claims and counterclaims on which it was asked to decide, and awarded us nominal damages. Upon unopposed application, the District Court vacated deadlines for post-trial matters, including our application for reimbursement of legal fees under the lease, to provide time for the parties to discuss settlement of these post-trial matters. If the parties are unable to reach a settlement, we will request that the District Court reinstate these post-trial deadlines. We estimate a minimum reimbursement in attorneys’ fees and costs of $3.1 million, which was recorded in other assets on our condensed consolidated balance sheet.
In the ordinary course of business, we are subject to claims and administrative proceedings. Except as described above, we are not presently party to any proceeding, which we believe to be material or which we would expect to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations. The outcome of litigation and administrative proceedings is inherently uncertain. Therefore, if one or more legal or administrative matters are resolved against us in a reporting period for amounts in excess of management’s expectations, our financial condition, cash flows or results of operations for that reporting period could be materially adversely affected.
26
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”), together with other statements and information publicly disseminated by our company, contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), namely Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the PSLRA and include this statement for purposes of complying with these safe harbor provisions.
In particular, statements pertaining to our capital resources, portfolio performance, business strategies and results of operations contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma” or “anticipates” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) the geographic concentration of our data centers in certain markets and any adverse developments in local economic conditions or the amount of supply of or 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, including indirect competition from cloud service providers, 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 develop and lease available space to existing or new customers; (viii) our failure to obtain necessary outside financing; (ix) our ability to service existing debt; (x) our failure to qualify or maintain our status as a real estate investment trust (“REIT”); (xi) financial market fluctuations; (xii) changes in real estate and zoning laws and increases in real estate taxes; (xiii) delays or disruptions in third-party network connectivity; (xiv) service failures or price increases by third party power suppliers; (xv) inability to renew net leases on the data center properties we lease; and (xvi) other factors affecting the real estate or technology industries 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, except as required by applicable law. The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Quarterly Report. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the United States Securities and Exchange Commission (“SEC”) pursuant to the Exchange Act. We discussed a number of material risks in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 8, 2019. Those risks continue to be relevant to our performance and financial condition. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Overview
Unless the context requires otherwise, references in this Quarterly Report to “we,” “our,” “us” and “our company” refer to CoreSite Realty Corporation, a Maryland corporation, together with our consolidated subsidiaries, including CoreSite, L.P., a Delaware limited partnership of which we are the sole general partner and to which we refer in this Quarterly Report as our “Operating Partnership.”
We are engaged in the business of ownership, acquisition, construction and operation of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including the San Francisco Bay area,
27
Los Angeles, the Northern Virginia area (including Washington D.C.), the New York area, Boston, Chicago, Denver and Miami.
We deliver secure, reliable, high-performance data center and interconnection solutions to a growing customer ecosystem across eight key North American communication markets. More than 1,350 of the world’s leading enterprises, network operators, cloud providers, and supporting service providers choose us to connect, protect and optimize their performance-sensitive data, applications and computing workloads.
Our focus is to bring together a network and cloud community to support the needs of enterprises, and create a diverse customer ecosystem. Our growth strategy includes (i) increasing cash flow from in-place data center space, (ii) capitalizing on embedded expansion opportunities within existing data centers, (iii) selectively pursuing acquisition and development opportunities in existing and new markets, (iv) expanding existing customer relationships, and (v) attracting new customers.
Our Portfolio
As of September 30, 2019, our property portfolio included 23 operating data center facilities, office and light-industrial space and multiple potential development projects that collectively comprise over 4.6 million net rentable square feet (“NRSF”), of which over 2.5 million NRSF is existing data center space. The approximately 1.7 million NRSF of development projects includes space available for development and construction of new data center facilities. We expect that this development potential plus any incremental investment into existing or new markets will enable us to accommodate existing and future customer demand and position us to continue to increase our operating cash flows.
28
The following table provides an overview of our property portfolio as of September 30, 2019:
|
* |
Indicates properties in which we hold a leasehold interest. |
| (1) | Represents NRSF at each operating facility that is currently occupied or readily available for lease as data center space and pre-stabilized data center space. Both occupied and available data center NRSF includes a factor based on management’s estimate to account for a customer’s proportionate share of the required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas, which may be updated on a periodic basis to reflect the most current build-out of our properties. Operating data center NRSF may require investment of Deferred Expansion Capital (see definition on page 33). |
| (2) | Pre-stabilized NRSF represents projects or facilities that recently have been developed and are in the initial lease-up phase. Pre-stabilized projects or facilities become stabilized operating properties at the earlier of achievement of 85% occupancy or 24 months after development completion. |
| (3) | Represents incremental data center capacity currently vacant in existing facilities in our portfolio that requires significant capital investment in order to develop into data center facilities. Includes NRSF under construction for which substantial activities are ongoing to prepare the property for its intended use following development. The NRSF reflects management’s estimate of engineering drawings and required support space and is subject to change based on final demising of space. |
| (4) | Represents the monthly contractual rent under existing commenced customer leases as of September 30, 2019, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement. On a gross basis, our total portfolio annualized rent was approximately $312.4 million as of September 30, 2019, which includes $5.6 million in operating expense reimbursements under modified gross and triple-net leases. |
29
| (5) | Includes customer leases that have commenced and are occupied as of September 30, 2019. The percent occupied is determined based on occupied square feet as a proportion of total operating NRSF as of September 30, 2019. The percent occupied for stabilized data center space would have been 91.2%, rather than 90.4%, if all leases signed in the current and prior periods had commenced. The percent occupied for our total portfolio, including stabilized data center space, pre-stabilized space and office and light-industrial space, would have been 85.1%, rather than 83.7%, if all leases signed in current and prior periods had commenced. |
| (6) | On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our Santa Clara campus, for a purchase price of $26 million. We expect to develop a turn-key data center building on the acquired land parcel, which we refer to as SV9, as the existing office tenants vacate upon expiration of their leases and upon the receipt of necessary entitlements. Included within the Santa Clara campus development NRSF is 200,000 NRSF that is being held for development related to SV9. |
| (7) | Included within our Reston Campus Expansion held for development space is 82,801 NRSF that is currently operating as office and light-industrial space. |
| (8) | Represents space that is currently occupied or readily available for lease as space other than data center space, which typically is offered for office or light-industrial uses. |
30
“Same-Store” statistics are based on space within each data center facility that was leased or available to be leased as of December 31, 2017, excluding space for which development was completed and became available to be leased after December 31, 2017. We track Same-Store space leased or available to be leased at the computer room level within each data center facility. The following table shows the September 30, 2019, Same-Store operating statistics. For comparison purposes, the operating activity totals as of December 31, 2018, and 2017, for this space are provided at the bottom of this table.
|
* |
Indicates properties in which we hold a leasehold interest. |
| (1) | Represents the monthly contractual rent under existing commenced customer leases as of each respective period, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement. |
| (2) | Includes customer leases that have commenced and are occupied as of each respective period. The percent occupied is determined based on occupied square feet as a proportion of total operating NRSF. |
| (3) | The percent occupied for data center space, office and light-industrial space, and total space would have been 90.8%, 83.0% and 89.5%, respectively, if all leases signed in the current and prior periods had commenced. |
Same-Store annualized rent decreased to $277.3 million at September 30, 2019, compared to $283.8 million at December 31, 2018. The decrease is primarily due to the move-out of a customer at our BO1 property during the three months ended September 30, 2019, partially offset by the commencement of new and expansion leases.
31
Development space is unoccupied space or land that requires significant capital investment in order to develop data center facilities that are ready for use. The following table summarizes the NRSF under construction and NRSF held for development throughout our portfolio, each as of September 30, 2019:
| (1) | Represents NRSF for which substantial construction activities are ongoing to prepare the property for its intended use following development. The NRSF reflects management’s estimate of engineering drawings and required support space and is subject to change based on final demising of space. |
| (2) | Represents estimated incremental data center capacity currently vacant in existing facilities or on vacant land in our portfolio that requires significant capital investment in order to develop into data center facilities. |
| (3) | The NRSF for these facilities reflect management’s estimates based on our current construction plans and expectations regarding entitlements. These estimates are subject to change based on current economic conditions, final zoning approvals, and the supply and demand dynamics of the market. |
| (4) | On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our Santa Clara campus, for a purchase price of $26 million. We expect to develop an approximately 200,000 NRSF turn-key data center building on the acquired land parcel, which we refer to as SV9. We began pre-construction, including environmental permitting and other processes, and will commence development as the existing office tenants vacate upon expiration of their leases and upon receipt of the necessary entitlements. |
| (5) | In addition to our development opportunities disclosed within this table, we have land adjacent to our NY2 facility, in the form of an existing parking lot. By utilizing this land, we believe that we could develop 100,000 NRSF on our available acreage in Secaucus, New Jersey, upon receipt of necessary entitlements. |
Capital Expenditures
The following table sets forth information regarding capital expenditures during the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
|
|
September 30, 2019 |
|
|
|
Data center expansion |
|
$ |
285,941 |
|
|
Non-recurring investments |
|
|
4,323 |
|
|
Tenant improvements |
|
|
3,094 |
|
|
Recurring capital expenditures |
|
|
3,936 |
|
|
Total capital expenditures |
|
$ |
297,294 |
|
32
During the nine months ended September 30, 2019, we incurred approximately $297.3 million of capital expenditures, of which approximately $285.9 million related to data center expansion activities, including new data center construction, the development of capacity within existing data centers and other revenue generating investments. As we construct data center capacity, we work to optimize both the amount of capital we deploy on power and cooling infrastructure and the timing of that capital deployment. As such, we generally construct our power and cooling infrastructure supporting our data center NRSF based on our estimate of customer utilization. This practice can result in our investment at a later time in “Deferred Expansion Capital”. We define Deferred Expansion Capital as our estimate of the incremental capital we may invest in the future to add power or cooling infrastructure to support existing or anticipated future customer utilization of NRSF within our operating data centers.
During the nine months ended September 30, 2019, we completed development of one computer room at LA1, three computer rooms at LA2, one computer room at SV8, and an infrastructure building, a data center core and shell building, and therein one computer room at VA3. As of September 30, 2019, we have ongoing development projects at BO1, CH2, LA3, NY2, and SV8 scheduled to complete at various times during the years ending December 31, 2019, and 2020. The following table sets forth capital expenditures spent on data center expansion NRSF placed into service during the nine months ended September 30, 2019, and under construction as of September 30, 2019:
| (1) | Represents NRSF under construction for which substantial activities are ongoing to prepare the property for its intended use following development. |
| (2) | On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our Santa Clara campus, for a purchase price of $26 million. We expect to develop an approximately 200,000 NRSF turn-key data center building on the acquired land parcel, which we refer to as SV9. We began pre-construction, including environmental permitting and other processes, and will commence development as the existing office tenants vacate upon expiration of their leases and upon receipt of the necessary entitlements. We have included SV9 within our held for development NRSF. |
During the nine months ended September 30, 2019, we incurred approximately $4.3 million in non-recurring investments, of which $2.0 million was a result of internal information technology software development and the remaining $2.3 million was a result of other non-recurring investments, such as remodel or upgrade projects.
During the nine months ended September 30, 2019, we incurred approximately $3.1 million in tenant improvements, which related to tenant-specific power installations at various properties.
During the nine months ended September 30, 2019, we incurred approximately $3.9 million of recurring capital expenditures within our portfolio, which includes required equipment upgrades at our various facilities that have a future economic benefit and was offset by a $1.7 million energy efficiency rebate received from the power utility related to the replacement of our chiller plant at LA2.
Factors that May Influence our Results of Operations
A complete discussion of factors that may influence our results of operations can be found in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 8, 2019, which is accessible on the SEC’s website at www.sec.gov.
33
Our ability to re-lease expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. We have 321 and 1,288 data center leases representing approximately 5.5% and 19.0% of the NRSF in our operating data center portfolio which are scheduled to expire during the remainder of 2019 and the year ending December 31, 2020, respectively. These leases represent current annualized rent of $26.1 million and $92.7 million with annualized rental rates of $158 per NRSF and $165 per NRSF expiring during the remainder of 2019 and the year ending December 31, 2020, respectively.
Our aggregate NRSF available to lease in Chicago, Los Angeles, the New York area, and the San Francisco Bay area, which historically have comprised four of our top five markets as measured by annualized rent, is currently lower than our historical NRSF available to lease in these markets as a percentage of total portfolio NRSF. We expect the 249,000 NRSF of data center projects currently under construction in these markets to increase our aggregate NRSF available to lease in these markets during 2020. The lower NRSF available to lease in these markets may compress our revenue and earnings growth rates until such time as the additional NRSF under construction becomes available to lease and is leased up sufficiently to generate positive net operating income and cash flow from such properties.
Results of operations may be affected by the amount of pre-stabilized properties in our portfolio. As we place new development projects into service, the initial investment returns may be lower compared to stabilized properties due to operating expenses being less dependent on occupancy levels than revenues. We expect property operating expenses to increase as we place new data center NRSF into service. As projects become stabilized, we expect the investment returns to increase as operating expenses become more dependent on occupancy levels.
The amount of revenue generated by the properties in our portfolio depends on several factors, including our ability to lease available unoccupied and under construction space at attractive rental rates. As of September 30, 2019, we had approximately 673,000 NRSF of unoccupied or under construction data center space of which approximately 135,000 NRSF is leased with a future commencement date.
The loss of multiple significant customers could have a material adverse effect on our results of operations because our top ten customers in the aggregate account for 31.9% of our total operating NRSF and 40.4% of our total annualized rent as of September 30, 2019. During the nine months ended September 30, 2019, we entered into new and expansion leases totaling approximately 248,000 NRSF, and experienced rental churn of 8.2%. The following table summarizes our leasing activity during the nine months ended September 30, 2019:
| (1) | Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases. |
| (2) | GAAP annualized rent represents the monthly average contractual rent as stated on customer contracts, multiplied by 12. This amount is inclusive of any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating reimbursement. |
| (3) | Total leased NRSF is determined based on contractually leased square feet, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas. |
| (4) | GAAP rental rates represent GAAP annualized rent divided by leased NRSF. |
34
| (5) | GAAP rent growth represents the increase in rental rates on renewed leases commencing during the period, as compared with the previous period’s rental rates for the same space. |
| (6) | During the second quarter of 2019, a customer’s lease for a reserved expansion space commenced. The contractual reservation payment was included in a prior quarter’s GAAP annualized rent. As such, it is excluded from the second quarter GAAP annualized rent; however, the rent per leased NRSF includes the reservation payment. |
Results of Operations
Three Months Ended September 30, 2019, Compared to the Three Months Ended September 30, 2018
The discussion below relates to our financial condition and results of operations for the three months ended September 30, 2019, and 2018. A summary of our operating results for the three months ended September 30, 2019, and 2018, is as follows (in thousands):
Operating Revenue
Operating revenue during the three months ended September 30, 2019, and 2018, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
2019 |
|
2018 |
|
$ Change |
|
% Change |
|
|||
|
Data center revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental, power, and related revenue |
|
$ |
122,598 |
|
$ |
118,590 |
|
$ |
4,008 |
|
3.4 |
% |
|
Interconnection revenue |
|
|
19,082 |
|
|
17,701 |
|
|
1,381 |
|
7.8 |
|
|
Total data center revenue |
|
|
141,680 |
|
|
136,291 |
|
|
5,389 |
|
4.0 |
|
|
Office, light-industrial and other revenue |
|
|
3,211 |
|
|
2,889 |
|
|
322 |
|
11.1 |
|
|
Total operating revenues |
|
$ |
144,891 |
|
$ |
139,180 |
|
$ |
5,711 |
|
4.1 |
% |
The increase in operating revenues was primarily due to a $4.0 million, or 3.4%, increase in data center rental, power, and related revenue during the three months ended September 30, 2019, compared to the 2018 period. Data center rental, power, and related revenue increased due to the organic growth of our customer revenue base through favorable renewals, new customer leases and lease expansions into new and existing space, and increased power consumption by our customers within their deployments. Most notably, data center rental, power, and related revenue at LA2 and SV8, where we have placed into service large contiguous data center NRSF within the last two years, increased $3.1 million, compared to the three months ended September 30, 2018. These increases were primarily due to the commencement of large scale leases throughout the twelve months ended September 30, 2019, and 2018, which experience variable revenue growth as customers deploy their IT equipment and increase their power consumption. The remaining increase in data center rental, power, and related revenue during the three months ended September 30, 2019, was due to the renewals and commencements of new and expansion leases at our remaining properties, partially offset by the move-out of a customer at our SV3 and SV4 properties and other existing customer leases at lower average rental rates.
In addition, interconnection revenue increased $1.4 million, or 7.8%, during the three months ended September 30, 2019, compared to the 2018 period. The increase is primarily a result of a net increase in the volume of cross connects from new and existing customers during the twelve months ended September 30, 2019, and revenue increases resulting from customers migrating to our higher priced fiber and logical cross connect products.
35
Operating Expenses
Operating expenses during the three months ended September 30, 2019, and 2018, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
2019 |
|
2018 |
|
$ Change |
|
% Change |
|
|||
|
Property operating and maintenance |
|
$ |
41,251 |
|
$ |
41,161 |
|
$ |
90 |
|
0.2 |
% |
|
Real estate taxes and insurance |
|
|
4,973 |
|
|
4,699 |
|
|
274 |
|
5.8 |
|
|
Depreciation and amortization |
|
|
40,546 |
|
|
36,264 |
|
|
4,282 |
|
11.8 |
|
|
Sales and marketing |
|
|
5,476 |
|
|
5,180 |
|
|
296 |
|
5.7 |
|
|
General and administrative |
|
|
10,671 |
|
|
10,074 |
|
|
597 |
|
5.9 |
|
|
Rent |
|
|
8,331 |
|
|
7,329 |
|
|
1,002 |
|
13.7 |
|
|
Total operating expenses |
|
$ |
111,248 |
|
$ |
104,707 |
|
$ |
6,541 |
|
6.2 |
% |
Property operating and maintenance expense was flat for the three months ended September 30, 2019, compared to the 2018 period, primarily as a result of an increase in power expense due to increased customer utilization related to the commencement of new and expansion leases during the twelve months ended September 30, 2019, partially offset by reduced power utilization from customer move outs and decreased maintenance expenses.
Real estate taxes and insurance increased $0.3 million, or 5.8%, during the three months ended September 30, 2019, compared to the 2018 period, primarily as a result of increased real estate tax assessments across our markets. In addition, upon completion of projects under development, we cease capitalization of project costs, and we incur additional real estate taxes and insurance expense. These increases were partially offset by a property tax refund at SV2.
Depreciation and amortization expense increased $4.3 million, or 11.8%, during the three months ended September 30, 2019, compared to the 2018 period, primarily as a result of an increase in depreciation expense from approximately 175,000 NRSF of new data center expansion projects placed into service with a cost basis of approximately $179.6 million.
Rent expense increased by $1.0 million, or 13.7%, during the three months ended September 30, 2019, compared to the 2018 period. As a result of placing a computer room at LA1 into service during the three months ended June 30, 2019, we incurred an additional $0.5 million of rent expenses during the three months ended September 30, 2019, compared to the 2018 period. Also, as a result of placing DC2, a leasehold data center property, into service during the three months ended December 31, 2018, we incurred an additional $0.2 million of rent expenses during the three months ended September 30, 2019, compared to the 2018 period.
Interest Expense
Interest expense for the three months ended September 30, 2019, and 2018, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
2019 |
|
2018 |
|
$ Change |
|
% Change |
|
|||
|
Interest expense and fees |
|
$ |
13,819 |
|
$ |
10,143 |
|
$ |
3,676 |
|
36.2 |
% |
|
Amortization of deferred financing costs and hedge amortization |
|
|
901 |
|
|
637 |
|
|
264 |
|
41.4 |
|
|
Capitalized interest |
|
|
(3,734) |
|
|
(1,347) |
|
|
(2,387) |
|
177.2 |
|
|
Total interest expense |
|
$ |
10,986 |
|
$ |
9,433 |
|
$ |
1,553 |
|
16.5 |
% |
|
Percent capitalized |
|
|
25.4 |
% |
|
12.5 |
% |
|
|
|
|
|
Interest expense increased $1.6 million, or 16.5%, during the three months ended September 30, 2019, compared to the 2018 period, primarily as a result of the increase in overall debt outstanding and increased interest rates. The weighted average principal debt outstanding was $1.4 billion and $1.1 billion during the three months ended September 30, 2019, and 2018, respectively. Our daily weighted average interest rate increased from 3.63% during the three months ended September 30, 2018, to 3.88% during the three months ended September 30, 2019, as a result of an increase in the average London Interbank Offered Rate (“LIBOR”) for the period. These increases were offset by additional capitalized interest of $2.4 million during the three months ended September 30, 2019, compared to the 2018 period, related to an increase in overall construction activities.
36
Nine Months Ended September 30, 2019, Compared to the Nine Months Ended September 30, 2018
The discussion below relates to our financial condition and results of operations for the nine months ended September 30, 2019, and 2018. A summary of our operating results for the nine months ended September 30, 2019, and 2018, is as follows (in thousands):
Operating Revenue
Operating revenue during the nine months ended September 30, 2019, and 2018, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
2019 |
|
2018 |
|
$ Change |
|
% Change |
|
|||
|
Data center revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental, power, and related revenue |
|
$ |
361,534 |
|
$ |
344,745 |
|
$ |
16,789 |
|
4.9 |
% |
|
Interconnection revenue |
|
|
56,274 |
|
|
51,683 |
|
|
4,591 |
|
8.9 |
|
|
Total data center revenue |
|
|
417,808 |
|
|
396,428 |
|
|
21,380 |
|
5.4 |
|
|
Office, light-industrial and other revenue |
|
|
8,884 |
|
|
8,818 |
|
|
66 |
|
0.7 |
|
|
Total operating revenues |
|
$ |
426,692 |
|
$ |
405,246 |
|
$ |
21,446 |
|
5.3 |
% |
A majority of the increase in operating revenues was due to a $16.8 million, or 4.9%, increase to data center rental, power, and related revenue during the nine months ended September 30, 2019, compared to the 2018 period. Data center rental, power, and related revenue increased due to the organic growth of our customer revenue base through favorable renewals, new customer leases and lease expansions into new and existing space, and increased power consumption by our customers within their deployments. Most notably, data center rental, power, and related revenue at our SV7 and LA2 properties, where we have placed into service large contiguous data center NRSF within the last two years, has increased $3.9 million and $6.7 million, respectively, compared to the nine months ended September 30, 2018. These increases were primarily due to the commencement of large scale leases throughout the twelve months ended September 30, 2019, and 2018, which experience variable revenue growth as customers deploy their IT equipment and increase their power consumption. The remaining increase in data center rental, power, and related revenue during the nine months ended September 30, 2019, was due to the renewals and commencements of new and expansion leases at our remaining properties, partially offset by the move-out of a customer at our SV3 and SV4 properties and other existing customer leases at lower average rental rates.
In addition, interconnection revenue increased $4.6 million, or 8.9%, during the nine months ended September 30, 2019, compared to the 2018 period. The increase was primarily due to the net increase in volume of cross connects from new and existing customers during the twelve months ended September 30, 2019, and revenue increases resulting from customers migrating to our higher priced fiber and logical cross connect products.
37
Operating Expenses
Operating expenses during the nine months ended September 30, 2019, and 2018, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
2019 |
|
2018 |
|
$ Change |
|
% Change |
|
|||
|
Property operating and maintenance |
|
$ |
117,428 |
|
$ |
112,870 |
|
$ |
4,558 |
|
4.0 |
% |
|
Real estate taxes and insurance |
|
|
17,157 |
|
|
14,329 |
|
|
2,828 |
|
19.7 |
|
|
Depreciation and amortization |
|
|
113,188 |
|
|
105,598 |
|
|
7,590 |
|
7.2 |
|
|
Sales and marketing |
|
|
16,912 |
|
|
15,629 |
|
|
1,283 |
|
8.2 |
|
|
General and administrative |
|
|
33,123 |
|
|
29,556 |
|
|
3,567 |
|
12.1 |
|
|
Rent |
|
|
23,752 |
|
|
20,276 |
|
|
3,476 |
|
17.1 |
|
|
Transaction costs |
|
|
— |
|
|
75 |
|
|
(75) |
|
(100.0) |
|
|
Total operating expenses |
|
$ |
321,560 |
|
$ |
298,333 |
|
$ |
23,227 |
|
7.8 |
% |
Property operating and maintenance expense increased $4.6 million, or 4.0%, primarily as a result of an increase in power expense due to increased customer utilization related to the commencement of new and expansion leases during the twelve months ended September 30, 2019, partially offset by improvements in energy efficiency. In addition, maintenance expense increased due to 175,000 NRSF of data center space being placed into service during the twelve months ended September 30, 2019, and payroll and benefits expense increased due to an increase in facilities and operations headcount associated with the increased occupied data center NRSF. Pre-stabilized projects produce lower investment returns than stabilized properties due to operating and financing expenses being less dependent on occupancy levels than revenues. We expect property operating and maintenance expense to increase as we commence new and expansion leases and place new data center NRSF into service.
Real estate taxes and insurance increased $2.8 million, or 19.7%, during the nine months ended September 30, 2019, compared to the 2018 period, primarily as a result of increased real estate tax assessments across our markets. In addition, upon completion of projects under development, we cease capitalization of project costs, and we incur additional real estate taxes and insurance expense. These increases were partially offset by a property tax refund at SV2.
Depreciation and amortization expense increased $7.6 million, or 7.2%, during the nine months ended September 30, 2019, compared to the 2018 period, primarily as a result of an increase in depreciation expense from approximately 175,000 NRSF of new data center expansion projects placed into service with a cost basis of approximately $179.6 million.
Sales and marketing expense increased $1.3 million, or 8.2%, during the nine months ended September 30, 2019, compared to the 2018 period, primarily due to an increase in headcount and additional marketing expenses.
General and administrative expense increased $3.6 million, or 12.1%, during the nine months ended September 30, 2019, compared to the 2018 period, as a result of increased software license fees, payroll and benefits expenses, and litigation expenses.
Rent expense increased by $3.5 million, or 17.1%, during the nine months ended September 30, 2019, compared to the 2018 period. As a result of the extension of the lease term related to our LA1 facility, which occurred during the nine months ended September 30, 2018, and placing a computer room at LA1 into service during the three months ended June 30, 2019, we incurred an additional $1.8 million of rent expenses during the nine months ended September 30, 2019, compared to the 2018 period. As a result of placing DC2, a leasehold data center property, into service during the three months ended December 31, 2018, we incurred an additional $0.7 million of rent expenses during the nine months ended September 30, 2019, compared to the 2018 period.
38
Interest
Interest expense for the nine months ended September 30, 2019, and 2018, was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
||||
|
|
|
2019 |
|
2018 |
|
$ Change |
|
% Change |
|
|||
|
Interest expense and fees |
|
$ |
38,391 |
|
$ |
27,857 |
|
$ |
10,534 |
|
37.8 |
% |
|
Amortization of deferred financing costs and hedge amortization |
|
|
2,368 |
|
|
1,756 |
|
|
612 |
|
34.9 |
|
|
Capitalized interest |
|
|
(9,964) |
|
|
(3,535) |
|
|
(6,429) |
|
181.9 |
|
|
Total interest expense |
|
$ |
30,795 |
|
$ |
26,078 |
|
$ |
4,717 |
|
18.1 |
% |
|
Percent capitalized |
|
|
24.4 |
% |
|
11.9 |
% |
|
|
|
|
|
Interest expense increased $4.7 million, or 18.1%, during the nine months ended September 30, 2019, compared to the 2018 period, primarily as a result of the increase in overall debt outstanding and increased interest rates, partially offset by increased capitalized interest related to an increase in development space under construction. The weighted average principal debt outstanding was $1.3 billion and $1.0 billion during the nine months ended September 30, 2019, and 2018, respectively. Our daily weighted average interest rate increased from 3.53% during the nine months ended September 30, 2018, to 3.90% during the nine months ended September 30, 2019, primarily due to increased average LIBOR for the period.
Liquidity and Capital Resources
Discussion of Cash Flows
Nine Months Ended September 30, 2019, Compared to the Nine Months Ended September 30, 2018
Operating Activities
Net cash provided by operating activities was $187.7 million for the nine months ended September 30, 2019, compared to $188.7 million for the nine months ended September 30, 2018. The decrease of $1.0 million, or 0.5%, was primarily due to a decrease in customer cash collections, which increased accounts receivable, by $13.0 million during the nine months ended September 30, 2019, compared to the nine months ended September 30, 2018. In addition, other liabilities decreased by $7.6 million, primarily due to the settlement of an interest rate swap. The decrease was partially offset by organic growth of our customer revenue base through favorable renewals, expansions into new and existing space, as our customers increased their power consumption within their deployments, and a $9.5 million increase in accounts payable and accrued expenses as a result of the timing of vendor payments.
Investing Activities
Net cash used in investing activities increased by $93.6 million, or 53.5%, to $268.8 million for the nine months ended September 30, 2019, compared to $175.1 million for the nine months ended September 30, 2018. This increase was due primarily to higher construction spend on our BO1, CH2, LA3, NY2, SV8, and VA3 development properties and the acquisition of SV9 during the nine months ended September 30, 2019, compared to construction spending on active development projects during the nine months ended September 30, 2018.
Financing Activities
Net cash provided by financing activities was $83.1 million during the nine months ended September 30, 2019, compared to net cash used in financing activities of $13.5 million during the nine months ended September 30, 2018.
During the nine months ended September 30, 2019, we received cash proceeds from the 2026 Notes and the 2029 Notes, each as defined below, for an aggregate of $400.0 million and we made net cash payments on the revolving credit facility of $149.3 million,
During the nine months ended September 30, 2018, we received cash proceeds from the 2023 senior unsecured Term Loan of $150.0 million and we made net cash payments on the revolving credit facility of $15.0 million.
39
We paid $165.3 million in dividends and distributions on our common stock and Operating Partnership units during the nine months ended September 30, 2019, compared to $143.8 million during the nine months ended September 30, 2018, as a result of an increase in our quarterly dividend from $2.99 per share or unit paid during the nine months ended September 30, 2018, to $3.42 per share or unit paid during the nine months ended September 30, 2019.
Analysis of Liquidity and Capital Resources
We have an effective shelf registration statement that allows us to offer for sale various unspecified classes of equity and debt securities. As circumstances warrant, we may issue debt and/or equity securities from time to time on an opportunistic basis, dependent upon market conditions and available pricing. We make no assurance that we can issue and sell such securities on acceptable terms or at all.
Our short-term liquidity requirements primarily consist of funds needed for interest expense, operating costs, including utilities, site maintenance costs, real estate and personal property taxes, insurance, rental expenses, sales and marketing and general and administrative expenses, certain capital expenditures, including for the development of data center space and future distributions to common stockholders and holders of our common Operating Partnership units during the next twelve months.
As of September 30, 2019, we had $4.7 million of cash and cash equivalents. Subject to our ability to obtain capital upon favorable terms, we estimate our anticipated development activity over the next twelve months will require approximately $350 million to $425 million of capital investment to expand our operating data center portfolio.
Our anticipated capital investment over the next twelve months includes a portion of the remaining estimated capital required to fund our current expansion projects under construction as of September 30, 2019, shown in the table below:
| (1) | Turn-Key Data Center (“TKD”) estimated development costs include two components: (1) general construction to ready the NRSF as data center space and (2) power, cooling and other infrastructure to provide the designed amount of power capacity for the project. Following development completion, incremental capital, referred to as Deferred Expansion Capital, may be invested to support existing or anticipated future customer utilization of NRSF within our operating data centers. |
| (2) | Includes a portion of the cost of infrastructure to support later phases of the development. |
We expect to meet our short-term liquidity requirements, including our anticipated development activity over the next twelve months, primarily through borrowing on our revolving credit facility, as well as net cash on hand and cash provided by operations. In addition, we anticipate addressing our 2020 and 2021 Term Loan maturities, and if available, increase the capacity on our revolving credit facility. Timing, pricing, and the type of debt is dependent on market conditions. We provide no assurances that we can issue and sell such debt on acceptable terms or at all.
On April 17, 2019, our Operating Partnership entered into a note purchase agreement (the “2026 Note Purchase Agreement”) pursuant to which the Operating Partnership agreed to issue and sell an aggregate principal amount of $200 million of the Operating Partnership’s 4.11% Series A Senior Notes (the “2026 Notes”) due April 17, 2026, and $200 million of its 4.31% Series B Senior Notes (the “2029 Notes” and, together with the 2026 Notes, the “Notes”) due April
40
17, 2029. An aggregate principal amount of $200 million of the 2026 Notes and $125 million of the 2029 Notes were issued on April 17, 2019. The Operating Partnership issued the remaining $75 million aggregate principal amount of the 2029 Notes on July 17, 2019. The Operating Partnership used the proceeds from the Notes to pay down all outstanding amounts on our senior unsecured revolving credit facility. Refer to Item 1. Financial Statements — Note 7 — Debt for additional information.
On April 19, 2018, our Operating Partnership and certain subsidiary co-borrowers amended and restated our previous credit agreement (as amended and restated, the “Amended and Restated Credit Agreement”), which provides a total commitment of $850 million. The accordion feature under the Amended and Restated Credit Agreement was also increased, which allows our Operating Partnership to increase the total commitment to $1.2 billion, under specified circumstances, including securing capital from new or existing lenders.
Our long-term liquidity requirements primarily consist of the costs to fund the Reston Campus Expansion, the ground up construction of new data center buildings, Deferred Expansion Capital, additional phases of our current projects under construction, future development of other space in our portfolio not currently scheduled, property acquisitions, future distributions to common stockholders and holders of our common Operating Partnership units, scheduled debt maturities and other capital expenditures. We expect to meet our long-term liquidity requirements through net cash provided by operations, after payment of dividends, and by incurring long-term indebtedness, such as drawing on our revolving credit facility, exercising our senior unsecured term loan accordion features or entering into new debt agreements with our bank group or existing and new accredited investors. We also may raise capital in the future through the issuance of additional equity or debt securities, subject to prevailing market conditions, and/or through the issuance of common Operating Partnership units. However, there is no assurance that we will be able to successfully raise additional capital on acceptable terms or at all.
Indebtedness
A summary of outstanding indebtedness as of September 30, 2019, and December 31, 2018, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity |
|
September 30, |
|
December 31, |
|
||
|
|
|
Interest Rate |
|
Date |
|
2019 |
|
2018 |
|
||
|
Revolving credit facility |
|
3.47% and 3.95% at September 30, 2019, and December 31, 2018, respectively |
|
April 19, 2022 |
|
$ |
62,250 |
|
$ |
211,500 |
|
|
2020 Senior unsecured term loan |
|
3.12% and 3.37% at September 30, 2019, and December 31, 2018, respectively |
|
June 24, 2020 |
|
|
150,000 |
|
|
150,000 |
|
|
2021 Senior unsecured term loan |
|
3.42% and 3.90% at September 30, 2019, and December 31, 2018, respectively |
|
February 2, 2021 |
|
|
100,000 |
|
|
100,000 |
|
|
2022 Senior unsecured term loan |
|
3.42% and 3.65% at September 30, 2019, and December 31, 2018, respectively |
|
April 19, 2022 |
|
|
200,000 |
|
|
200,000 |
|
|
2023 Senior unsecured term loan |
|
3.77% and 4.01% at September 30, 2019, and December 31, 2018, respectively |
|
April 19, 2023 |
|
|
150,000 |
|
|
150,000 |
|
|
2023 Senior unsecured notes |
|
4.19% at September 30, 2019, and December 31, 2018, respectively |
|
June 15, 2023 |
|
|
150,000 |
|
|
150,000 |
|
|
2024 Senior unsecured notes |
|
3.91% at September 30, 2019, and December 31, 2018, respectively |
|
April 20, 2024 |
|
|
175,000 |
|
|
175,000 |
|
|
2026 Senior unsecured notes |
|
4.52% at September 30, 2019 |
|
April 17, 2026 |
|
|
200,000 |
|
|
— |
|
|
2029 Senior unsecured notes |
|
4.31% at September 30, 2019 |
|
April 17, 2029 |
|
|
200,000 |
|
|
— |
|
|
Total principal outstanding |
|
|
|
` |
|
|
1,387,250 |
|
|
1,136,500 |
|
|
Unamortized deferred financing costs |
|
|
|
|
|
|
(6,709) |
|
|
(5,677) |
|
|
Total debt |
|
|
|
|
|
$ |
1,380,541 |
|
$ |
1,130,823 |
|
As of September 30, 2019, we were in compliance with the financial covenants under our revolving credit facility, senior unsecured term loans and senior unsecured notes. For additional information with respect to our outstanding indebtedness as of September 30, 2019, and December 31, 2018, as well as the available borrowing capacity under our existing revolving credit facility, debt covenant requirements, and future debt maturities, refer to Item 1. Financial Statements — Note 7 — Debt.
41
Funds From Operations
We consider funds from operations (“FFO”), a non-generally accepted accounting principles (“GAAP”) measure, to be a supplemental measure of our performance which should be considered along with, but not as an alternative to, net income and cash provided by operating activities as a measure of operating performance. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“Nareit”). Nareit defined FFO represents net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property and undepreciated land and impairment write-downs of depreciable real estate, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures.
Our management uses FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs.
We offer this measure because we recognize that FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes real estate related depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited. FFO is a non-GAAP measure and should not be considered a measure of liquidity, an alternative to net income, cash provided by operating activities or any other performance measure determined in accordance with GAAP, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. In addition, our calculations of FFO are not necessarily comparable to FFO as calculated by other REITs that do not use the same definition or implementation guidelines or interpret the Nareit 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 provides a reconciliation of our net income to FFO:
Distribution Policy
In order to comply with the REIT requirements of the Code, we generally are required to make annual distributions to our stockholders of at least 90% of our net taxable income. Our common stock distribution policy is to distribute as dividends, at a minimum, a percentage of our cash flow that ensures that we will meet the distribution requirements of the Code and any subsequent increases and/or anticipated increases are correlated to increases in our growth of cash flow.
We have made distributions every quarter since the completion of our initial public offering in 2010. During the nine months ended September 30, 2019, we declared quarterly dividends totaling $3.54 per share of common stock and Operating Partnership unit. 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 stock distributions is dependent upon our financial condition, operating results and REIT distribution requirements and may be adjusted at the discretion of our Board of Directors during the year.
42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The primary market risk to which we believe we are exposed is interest rate risk. Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk.
As of September 30, 2019, we had $662.3 million of consolidated principal debt outstanding that bore variable interest based on one-month LIBOR. As of September 30, 2019, we have two interest rate swap agreements in place to fix the interest rate on $150 million of our one-month LIBOR variable rate debt. Our interest rate risk not covered by an interest rate swap agreement is $512.3 million of variable rate debt outstanding as of September 30, 2019. See additional discussion in Item 1. Financial Statements – Note 8 – Derivatives and Hedging Activities.
We monitor our market interest rate risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market interest rate risk sensitive instruments assuming a hypothetical 100 basis points change in interest rates on our $512.3 million of unhedged variable rate debt. If interest rates were to increase or decrease by 100 basis points, the corresponding increase or decrease, as applicable, in interest expense on our unhedged variable rate debt would increase or decrease, as applicable, future earnings and cash flows by approximately $5.1 million per year.
These analyses do not consider the effect of any change in overall economic activity that could impact interest rates. Further, in the event of an increase in interest rates of significant magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of September 30, 2019, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2019.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
43
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of our business, we are subject to claims and administrative proceedings. Except as described below, we are not presently party to any proceeding which we believe to be material or which we would expect to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of operations.
On April 27, 2018, we filed suit against DGEB Management, LLC and its affiliates, the landlord of our DE1 facility (the “Landlord”), in the District Court, City and County of Denver, State of Colorado (the “District Court”), for certain claims relating to the building where our DE1 facility is located. The parties asserted various claims and counterclaims related to three primary areas: (1) a construction project within the DE1 building to house electrical transformers used to supply power, (2) our usage of images of the DE1 building on our website, and (3) the protocol for cross-connections within the DE1 building. The Landlord demanded approximately $21 million in damages, which included approximately $2.8 million related to the construction project, and further sought to hold us in default under the lease. On August 22, 2019, the jury found in our favor on all claims and counterclaims on which it was asked to decide, and awarded us nominal damages. Upon unopposed application, the District Court vacated deadlines for post-trial matters, including our application for reimbursement of legal fees under the lease, to provide time for the parties to discuss settlement of these post-trial matters. If the parties are unable to reach a settlement, we will request that the District Court reinstate these post-trial deadlines. We estimate a minimum reimbursement in attorneys’ fees and costs of $3.1 million, which was recorded in other assets on our condensed consolidated balance sheet.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors included in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 8, 2019, which is accessible on the SEC’s website at www.sec.gov.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SALES OF UNREGISTERED EQUITY SECURITIES
None.
REPURCHASES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
44
ITEM 6. EXHIBITS
|
|
|
|
|
Exhibit
|
|
Description |
|
3.1 |
|
Articles of Amendment and Restatement of CoreSite Realty Corporation.(1) |
|
|
|
|
|
3.2 |
|
Amended and Restated Bylaws of CoreSite Realty Corporation.(2) |
|
|
|
|
|
4.1 |
|
Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(3) |
|
|
|
|
|
|
|
|
|
10.1† |
|
|
|
31.1† |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2† |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1+ |
|
|
|
|
|
|
|
32.2+ |
|
|
|
|
|
|
|
101.INS |
|
XBRL Instance - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
|
|
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Labels Linkbase Document. |
|
|
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
|
|
|
101.DEF 104 |
|
XBRL Taxonomy Extension Definition Linkbase Document. Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
|
| (1) | Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010. |
| (2) | Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on March 9, 2017. |
| (3) | Incorporated by reference to our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010. |
† Filed herewith.
+ Furnished herewith.
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
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CORESITE REALTY CORPORATION |
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Date: November 1, 2019 |
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By: |
/s/ Jeffrey S. Finnin |
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Jeffrey S. Finnin |
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Chief Financial Officer |
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(Principal Financial Officer) |
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By: |
/s/ Mark R. Jones |
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Mark R. Jones |
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Chief Accounting Officer |
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(Principal Accounting Officer) |
46
EXHIBIT 10.1
CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THIS EXHIBIT
BECAUSE IT IS BOTH (I) NOT MATERIAL AND (II) WOULD LIKELY CAUSE COMPETITIVE
HARM TO THE REGISTRANT IF PUBLICLY DISCLOSED
EIGHTH AMENDMENT TO LEASE
THIS EIGHTH AMENDMENT TO LEASE (this “Amendment”) is dated for reference purposes only as of ___________, 2019 (the “Eighth Amendment Date”), by and between GI TC ONE WILSHIRE, LLC, a Delaware limited liability company (“Landlord”), and CORESITE ONE WILSHIRE, L.L.C., a Delaware limited liability company (formerly known as CRG West One Wilshire, L.L.C.) (“Tenant”).
RECITALS:
A. Hines REIT One Wilshire L.P., a Delaware limited partnership (“Hines”) and Tenant entered into that certain Lease dated as of August 1, 2007 (the “Original Lease”), as amended by that certain: (i) First Amendment to Lease dated as of May 1, 2008 (the “First Amendment”) between Hines and Tenant; (ii) Second Amendment to Lease dated as of November 5, 2009 (the “Second Amendment”) between Hines and Tenant; (iii) Third Amendment to Lease dated as of June 15, 2011 (the “Third Amendment”) between Hines and Tenant; (iv) Fourth Amendment to Lease dated as of January 9, 2013 (the “Fourth Amendment”) between Hines and Tenant; (v) Fifth Amendment to Lease dated as of May 29, 2015 (the “Fifth Amendment”) between Landlord (as successor-in-interest to Hines) and Tenant; (vi) Sixth Amendment to Lease dated as of April 29, 2016, between Landlord and Tenant (the “Sixth Amendment”); and (vii) Seventh Amendment to Lease dated as of June 30, 2018, between Landlord and Tenant (the “Seventh Amendment”).
B. The Original Lease, the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment and the Seventh Amendment are collectively referred to herein as the “Existing Lease.” Unless specifically indicated to the contrary, references in this Amendment to a definition in or section of the Original Lease shall mean such definition in or such section of the Original Lease as may have been amended in the First Amendment, Second Amendment, Third Amendment, Fourth Amendment, Fifth Amendment or Sixth Amendment.
C. Pursuant to the Existing Lease, (i) Tenant leases from Landlord certain premises consisting of approximately 176,685 rentable square feet inclusive of 2,301 rentable square feet in the Storage Space (the “Existing Premises”) within that certain office building located at 624 S. Grand Avenue, Los Angeles, California (the “Building”); (ii) Tenant has the right to use certain Conduits (as defined in Section 6.9.3 of the Original Lease) that existed in the Building as of the date of the Original Lease; and (iii) Tenant is licensing space in the Building to install and use the First Amendment Additional Conduits, the Second Amendment CS Additional Conduits, the Second Amendment TWC Additional Conduits, the Third Amendment CS Conduit, the Fourth Amendment Conduits, the Fifth Amendment Conduits, the Sixth Amendment Conduits and the Seventh Amendment Conduits (collectively the “Existing Amendment Conduits”).
D. From and after the Eighth Amendment Date, references to “this Lease” or “the Lease” in the Existing Lease, shall all mean and refer to the Existing Lease, as amended by this Amendment.
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E. Landlord and Tenant now desire to amend the Existing Lease to: (i) provide for the licensing of additional space in and outside the Building for Tenant to install and use additional conduits which will penetrate the structure of the Building; and (ii) modify various other terms and provisions of the Existing Lease, all as hereinafter provided.
AGREEMENT:
NOW, THEREFORE, in consideration of the foregoing Recitals and the mutual covenants contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1. Recitals Incorporated. The Recitals set forth above are incorporated herein by this reference and shall be deemed terms and provisions hereof with the same force and effect as if fully set forth in this Section.
2. Eighth Amendment Structural Conduits.
2.1 Term. During the period (the “Eighth Amendment Structural Conduits Term”) commencing on the Eighth Amendment Date (the “Eighth Amendment Structural Conduits Commencement Date”) and expiring concurrently with the Second Extended Term, Tenant shall have the right to install and, after installation, the exclusive right to use, the Eighth Amendment Structural Conduits (as defined below). The “Eighth Amendment Structural Conduits” means (i) four (4) two inch (2”) in diameter conduits (Conduit Id Nos. 3083, 3084, 3085, and 3086) running from Grand Avenue through the southern side of the western wall of the Building (converting on the P1 level of the Building to two (2) four inch (4”) conduits (Conduit Id Nos. 3081 and 3082)) and intersecting with Tenant’s Existing Amendment Conduits ID Nos. 3055 and 3065 on the P1 level of the Building, and (ii) two (2) four inch (4”) in diameter conduits (Conduit Id Nos. 3079 and 3080) running from Grand Avenue through the northern side of the western wall of the Building and intersecting with Tenant’s Existing Amendment Conduits Id Nos. 3055 and 3065 on the P1 level of the Building (the “Eighth Amendment Structural Conduits”), as further described in the attached Exhibit A. Except as otherwise provided in this Section 2, all of the terms of the Lease related to the Supplemental Equipment and Supplemental Areas shall apply with respect to the Eighth Amendment Structural Conduits (including, without limitation, the applicable provisions of the Special Use Conditions set forth in Section 2.1 of the Summary in the Original Lease, and Section 6.9 of the Original Lease). The first three (3) sentences of the second paragraph of Section 6.9.10 of the Original Lease shall not apply with respect to the Eighth Amendment Structural Conduits. The Eighth Amendment Structural Conduits shall be deemed to be part of the Supplemental Equipment and the areas of the Building and other areas on the Property located outside the Building in which the Eighth Amendment Structural Conduits are located shall be deemed to be part of the Supplemental Areas. For purposes of Section 10.4 of the Fourth Amendment, as amended by Section 14.6 of the Seventh Amendment, (i) the Eighth Amendment Structural Conduits shall be Amendment Conduits, and (ii) the Eighth Amendment Structural Conduit Term shall be an Amendment Conduit Term.
2.2 Use. The Eighth Amendment Structural Conduits may be used solely for the purposes of connecting the buildings located at 900 N. Alameda Street, Los Angeles, California, to the termination point of Tenant’s Existing Amendment Conduits Id. Nos. 3055 and
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3065 on the P1 level of the Building installed by Tenant (the “Eighth Amendment Structural Conduits Permitted Use”). Tenant shall not permit any other party to connect to any Eighth Amendment Structural Conduit or to install an offshoot or coupling thereto. Any use of the Eighth Amendment Structural Conduits for any purpose other than the Eighth Amendment Structural Conduits Permitted Use shall be an Event of Default, subject to the notice and cure periods set forth in Section 18.1.2 of the Original Lease provided that the cure period shall not exceed 90 days, and permit Landlord to terminate Tenant’s right to use the same.
2.3 Rent. [***].
2.4 Installation. The Eighth Amendment Structural Conduits and any wiring or cabling installed therein, shall be installed by Tenant at Tenant’s sole cost and expense in accordance with Section 6.9 and Article 8 of the Original Lease, as those sections are modified by the terms of this Section 2 below, and in accordance with the Method of Procedure attached hereto as Exhibit B. Landlord shall not be obligated to perform, provide or pay for any improvements, work or services related to the Supplemental Areas for the Eighth Amendment Structural Conduits, and Tenant shall occupy and accept the same in its “AS IS” condition. Tenant and its engineer and contractor shall be responsible to verify, in the field, the conditions of the Building and other portions of the Project, and Landlord shall have no responsibility in connection therewith. Notwithstanding that any plans and specifications for Alterations are reviewed by Landlord or any of its employees, contractors or agents, and notwithstanding any advice or assistance which may be rendered to Tenant or any of its employees, contractors or agents by Landlord or any of its employees, contractors or agents, Landlord shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in plans and specifications for Alterations. Tenant shall reimburse Landlord upon demand, without additional markup, for all reasonable and documented costs incurred by Landlord in connection with the Eighth Amendment Structural Conduits and the related Alterations proposed to be made by Tenant. Notwithstanding anything to the contrary set forth in the Lease, the Eighth Amendment Structural Conduits and all related Alterations (as defined in Section 8.1 of the Original Lease) proposed by Tenant may only be installed and later modified in strict compliance with plans and specifications for the same approved by Landlord, which approval shall not be unreasonably withheld; provided, however, Landlord may withhold approval in its sole discretion with respect to any aspect of the Eighth Amendment Structural Conduits and/or related Alterations which may (i) affect the Building Structure, (ii) affect the appearance of the exterior of the Building or any portion of the Project located outside the Building, (iii) affect any Building Systems, or (iv) affect the operations of Landlord, any tenant or any other occupant of the Project or any of their
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occupancies, systems or equipment on the Project. It is anticipated that no steel or other reinforcement element of the Building Structure will be encountered or affected by Alterations proposed by Tenant. If any steel or other reinforcement element of the Building Structure is encountered during the course performing any work on Alterations, Tenant shall immediately discontinue the subject work and the continued performance of the same shall be subject to Landlord’s approval of alternative plans and additional requirements for the same. As a condition of its consent to the installation or repair of the Eighth Amendment Structural Conduits and related Alterations or repairs to the same, Landlord may impose commercially reasonable requirements, and with respect to those which are subject to the approval of Landlord in its sole discretion, any requirements which Landlord may elect in its sole and absolute discretion, including, but not limited to, the requirement that Tenant utilize for such purposes only architects, engineers, contractors and subcontractors, materials, mechanics and materialmen approved by Landlord, except that Landlord may designate the engineers, contractors and subcontractors to design or perform all work affecting the Building Structure. If Tenant fails to comply with the terms of this Section 2, Landlord may cause the cessation of construction or installation of the subject work until such time as Tenant complies with the terms of this Section 2. If any Alteration is made without Landlord’s prior consent, Landlord shall have the right to remove and correct such Alteration and restore the Project to its condition immediately prior thereto or to require Tenant to do the same, and Tenant shall pay to Landlord upon demand all costs incurred by Landlord in connection therewith. Notwithstanding the foregoing, as of the date of this Eighth Amendment, Landlord acknowledges its consent to the work for the Eighth Amendment Conduits described on Exhibit A attached hereto, and to each of Tenant’s contractors for the same identified on Exhibit C attached here only with respect to the work expressly identified next to each such contractor’s name. Upon completion of any such Alterations, Tenant shall, at its expense, deliver to Landlord: (1) certifications executed by Tenant’s engineers and contractors for such Alterations, which certifications shall certify that the “record-set” of as-built drawings for such Alterations are true and correct; (2) copies of all permits, other approvals of governmental authorities and warranties and guaranties relating to such Alterations; and (3) two (2) hard copy sets of as-built drawings and an electronic file for such Alterations in a format compatible with Landlord’s computer-aided design software. If Tenant fails to provide Landlord with said documents, Tenant shall reimburse Landlord upon demand for costs incurred by Landlord in causing the Project plans to be modified to reflect such Alterations.
2.5 Indemnification. Except to the extent caused by Landlord’s negligence or willful misconduct, Tenant shall indemnify, defend and hold harmless the Landlord Parties from and against any and all claims suffered or incurred arising from or related to Alterations performed in connection with the Eighth Amendment Structural Conduits.
3. CASp. For purposes of Section 1938(a) of the California Civil Code, Landlord hereby discloses to Tenant, and Tenant hereby acknowledges, that the Premises have not undergone inspection by a Certified Access Specialist (CASp). In addition, the following notice is hereby provided pursuant to Section 1938(e) of the California Civil Code:
"A Certified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of the applicable construction-related accessibility standards under state law. Although state law does not require a CASp
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inspection of the subject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of the subject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties shall mutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, and the cost of making any repairs necessary to correct violations of construction-related accessibility standards within the premises."
In furtherance of and in connection with such notice, Landlord and Tenant hereby agree as follows (which constitute the mutual agreement of the parties as to the matters described in the last sentence of the foregoing notice): (i) Tenant shall have the one-time right to make a request for and obtain a CASp inspection of the Premises ("Tenant CASp Inspection"); (ii) the Tenant CASp Inspection shall be conducted (a) during the Building Hours (as defined in the Original Lease), (b) only after 10 days' prior written notice to Landlord, (c) by a CASp designated by Landlord and without any damage to the Premises or Project, and (d) at Tenant's expense, including, without limitation, Tenant's payment of the fee for the Tenant CASp Inspection, and the fee for any reports prepared by the CASp in connection with the Tenant CASp Inspection (collectively, the "CASp Reports"); (iii) Tenant shall deliver a copy of any CASp Reports to Landlord within 3 business days after Tenant's receipt thereof; (iv) Tenant, at its expense, shall be responsible for making any improvements, alterations and/or repairs to or within the Premises (other than to the structural portions of the Building, except to the extent the structural modification is required as a result of Tenant’s operations in or improvements to the Premises) to correct violations of construction-related accessibility standards disclosed by the Tenant CASp Inspection as and to the extent required by Applicable Laws; and (v) if the Tenant CASp Inspection identifies any improvements, alterations and/or repairs necessary to correct violations of construction-related accessibility standards relating to (a) those items of the Project located outside the Premises and/or (b) any structural portions of the Building that are Landlord's obligation to perform as set forth in the Lease (except to the extent structural modifications are required as a result of Tenant’s operations in or improvements to the Premises), then Landlord shall perform such work as and to the extent required by Applicable Laws, and, except as may be provided in the next paragraph of this Section 3, Tenant shall reimburse Landlord for the cost of such work within 30 days after Tenant's receipt of Landlord's invoice therefor.
The parties hereby agree that if a CASp inspection is required to be obtained by Tenant by (1) a court order in a legal action initiated against Tenant or (2) a notice from a governmental authority, then (x) clause (i) and, to the extent in conflict which such court order or notice, clause (ii) of the immediately preceding paragraph shall not apply to such inspection, and (y) Tenant's reimbursement obligations set forth in clause (v) of the immediately preceding paragraph shall not apply, it being agreed that payment of costs for any work required by such inspection shall be governed by the provisions of the Lease applicable to compliance of the Premises and the Project with Applicable Laws.
4. Representations.
4.1 Tenant represents and warrants to Landlord that, as of the Eighth Amendment Date: (i) Tenant is duly formed, validly existing and in good standing under the laws
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of the state of its organization; (ii) Tenant is authorized to do business as a foreign entity in the state in which the Premises is located; (iii) Tenant owns and holds the entire leasehold interest of the tenant under the Lease; (iv) Tenant has not assigned or encumbered its interest in the Lease or any part thereof; and (v) to Tenant’s knowledge, Landlord is not in default of any of its obligations under the Existing Lease.
4.2 Landlord represents and warrants to Tenant that as of the Eighth Amendment Date (i) Landlord is duly formed, validly existing in good standing under the laws of the state of its organization; (ii) Landlord is authorized to do business as a foreign entity in the state in which the Premises is located; and (iii) to Landlord’s knowledge, Tenant is not in default of any of its obligations under the Existing Lease.
5. Brokers. Landlord represents and warrants to Tenant that (i) it has had no dealings with any real estate broker or agent in connection with the negotiation and execution of this Amendment; and (ii) it knows of no other real estate broker or agent who is entitled to a commission as a result of the representation of Landlord in connection with this Amendment. Tenant represents and warrants to Landlord that (a) it has had no dealings with any real estate broker or agent in connection with the negotiation and execution of this Amendment, and (b) it knows of no real estate broker or agent who is entitled to a commission as a result of the representation of Tenant in connection with this Amendment. Each of Landlord and Tenant agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments and costs and expenses (including reasonable attorneys’ fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of the breach by the indemnifying party of any of such indemnifying party’s representations, warranties and/or covenants set forth above in this Section.
6. No Further Modification. Except as set forth in this Amendment, all of the terms and provisions of the Existing Lease shall remain unmodified and in full force and effect.
7. Counterparts and Electronic Signatures. This Amendment may be executed in multiple counterparts, each of which is to be deemed original for all purposes, but all of which together shall constitute one and the same instrument. Signatures to this Amendment transmitted by facsimile or via electronic mail (by pdf or similar file types) shall be valid and effective to bind the party so signing.
8. Interpretation; Construction. Landlord and Tenant have jointly prepared this Amendment, each with access to counsel, and (i) none of the provisions hereof shall be construed against one party on the ground that such party is the author of this Amendment or any part hereof; and (ii) the usual rule of contract construction that resolves ambiguities against the drafter shall not apply. All defined terms have the meanings given them for all purposes, and such meanings are equally applicable to both the singular and plural forms of the terms defined. Any agreement, instrument or law defined or referred to herein (a) means such agreement or instrument or law as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of law) by succession of comparable successor laws; and (b) includes (in the case of agreements or instruments) all attachments thereto and instruments incorporated therein. The words “including” and “includes” and terms of similar import shall be deemed to mean “including, without limitation”. The terms “hereby,” “hereof,”
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“hereto,” “herein,” “hereunder,” and any similar terms, refer to this Amendment. Article, Section, exhibit, schedule and addendum headings in and any table of contents and index of defined terms are solely for convenience and do not constitute a part, and shall not affect the meaning, construction or effect, of this Amendment. Capitalized words used as defined terms are used solely for convenience and such words do not affect the definitions assigned to them. Except to the extent specified to the contrary in this Amendment, references to Articles, Sections, Exhibits, schedules and addenda are to the Articles, Sections, Exhibits, Schedules and Addenda of this Amendment and all such Exhibits, Schedules and Addenda attached to this Amendment are incorporated herein and made a part hereof. If there is any conflict between such attached Exhibits, Schedules or Addenda and the terms of this Amendment, the terms of this Amendment shall control.
SIGNATURE PAGE CONTINUED ON NEXT PAGE
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IN WITNESS WHEREOF, this Amendment has been executed by each of the parties as of the day and year written immediately below their respective signatures to be effective as of the Eighth Amendment Date.
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LANDLORD |
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GI TC ONE WILSHIRE, LLC,
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TENANT |
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CORESITE ONE WILSHIRE, L.L.C.,
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EXHIBIT A
EIGHTH AMENDMENT CONDUITS
[Construction Drawings Attached on Following Pages]
A-1
EXHIBIT B
METHOD OF PROCEDURE
[Attached on Following Pages]
B-1
EXHIBIT C
APPROVED CONTRACTORS
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Zayo LLC - Prime service contractor for CoreSite - for purposes of managing end-to-end project. |
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Pacific West Space Communications, Inc. (PWC) – Prime general contractor for Zayo - for purposes of core drilling and overseeing safety and work functions. |
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Technico TV, Inc. – PWC’s subcontractor - for purposes of excavating in right of ways. |
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Zero DB Communications, LLC – for purposes of fiber splicing. |
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Day Electric – for purposes of conduit installation. |
C-1
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Paul E. Szurek, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoreSite Realty Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: November 1, 2019
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By: |
/s/ Paul E. Szurek |
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Paul E. Szurek |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jeffrey S. Finnin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CoreSite Realty Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Dated: November 1, 2019
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By: |
/s/ Jeffrey S. Finnin |
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Jeffrey S. Finnin |
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Chief Financial Officer |
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(Principal Financial Officer) |
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Exhibit 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
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of CoreSite Realty Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i) The accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the period covered by the Report.
Dated: November 1, 2019
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/s/ Paul E. Szurek |
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Paul E. Szurek |
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Chief Executive Officer |
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Exhibit 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
Pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of CoreSite Realty Corporation (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i) The accompanying Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(ii) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the period covered by the Report.
Dated: November 1, 2019
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/s/ Jeffrey S. Finnin |
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Jeffrey S. Finnin |
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Chief Financial Officer |
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