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COR > SEC Filings for COR > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for CORESITE REALTY CORP


2-Nov-2012

Quarterly Report


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

Forward-Looking Statements

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

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

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

Overview

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

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

Our Portfolio

As of September 30, 2012, our property portfolio included 14 operating data center facilities and one development site, which collectively comprise over 2.1 million net rentable square feet of space ("NRSF"), of which approximately 1.2 million NRSF is existing data center space. These properties include 355,294 NRSF of space readily available for lease, of which 274,553 NRSF is available for lease as data center space. Including the space currently under construction or in preconstruction at September 30, 2012, and including currently operating space targeted for future redevelopment, we own land and buildings sufficient to develop or redevelop 1,006,784 square feet of data center space, comprised of
(1) 70,840 NRSF of data center space currently under construction, (2) 390,694 NRSF of office and industrial space currently available for redevelopment, and
(3) 545,250 NRSF of new data center space that can be developed in Reston, Virginia, and on land that we currently own at our Coronado-Stender


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

The following table provides an overview of our new and expansion data center leasing activity (in NRSF):

                                                            Three Months Ended:
                                           September 30,    June 30,    March 31,    December 31,
                                               2012           2012        2012           2011
New and expansion leases signed but not
yet commenced at beginning of period              41,545      32,436       25,571          28,974
New and expansion leases signed during
the period                                        11,387      26,290       37,563          35,461
New and expansion leases signed during
the period which have commenced                   (5,699 )    (8,157 )    (15,195 )       (22,824 )
New and expansion leases signed in
previous periods which commenced during
period                                           (34,292 )    (9,024 )    (15,503 )       (16,040 )
Total leases signed but not yet
commenced at end of period                        12,941      41,545       32,436          25,571

During the three months ended September 30, 2012, new and expansion leases signed were below our trailing quarterly average. We believe that this decrease in new and expansion leases signed was due primarily to a disruption in our staffing and execution model resulting from our realignment of our sales and marketing functions from a geographical structure to a vertical structure. This realignment to a vertical structure aligns our go to market platform with our customers by industry vertical. We also anticipate expanding our sales and marketing team and believe that this investment, together with our vertical focus, will benefit future periods by improving our ability to understand and address customer needs across our entire portfolio.

The following table provides an overview of our properties as of September 30, 2012:

                                                                                                                           NRSF
                                                                                             Operating(1)
                                                                                           Office and Light-
                                                                     Data Center(2)          Industrial(3)              Total             Redevelopment and Development(10)
                                 Acquisition      Annualized                   Percent               Percent                 Percent          Under                               Total
Market/Facilities                  Date(4)      Rent ($000)(5)      Total     Leased(6)    Total    Leased(6)   Total(7)    Leased(6)   Construction(11)    Vacant     Total    Portfolio

Los Angeles
One Wilshire*                      Aug. 2007   $         23,787     157,587        72.2 %   7,500        45.5 %   165,087        71.0 %                 -         -         -     165,087
900 N. Alameda                     Oct. 2006             12,172     159,617        78.0     8,360        33.7     167,977        75.8                   -   266,183   266,183     434,160
Los Angeles Total                                        35,959     317,204        75.1    15,860        39.3     333,064        73.4                   -   266,183   266,183     599,247

San Francisco Bay
55 S. Market                       Feb. 2000             11,173      84,045        88.6   206,255        80.2     290,300        82.6                   -         -         -     290,300
2901 Coronado                      Feb. 2007              9,357      50,000       100.0         -           -      50,000       100.0                   -         -         -      50,000
1656 McCarthy                      Dec. 2006              5,433      76,676        68.5         -           -      76,676        68.5                   -         -         -      76,676
Coronado-Stender Properties(8)     Feb. 2007                785           -           -    70,760        91.6      70,760        91.6                   -    58,440    58,440     129,200
2972 Stender(9)                    Feb. 2007              5,124      49,964        60.8       436       100.0      50,400        61.1              50,600         -    50,600     101,000
San Francisco Bay Total                                  31,872     260,685        79.5   277,451        83.2     538,136        81.4              50,600    58,440   109,040     647,176

Northern Virginia
12100 Sunrise Valley(12)           Dec. 2007             20,571     201,719        72.0    61,050        77.1     262,769        73.2                   -    50,000         -     312,769
1275 K Street*                     June 2006              1,883      22,137        72.0         -           -      22,137        72.0                   -         -         -      22,137
Northern Virginia Total                                  22,454     223,856        72.0    61,050        77.1     284,906        73.1                   -    50,000         -     334,906

Boston
70 Innerbelt                       Apr. 2007              9,709     148,795        90.8    13,063        39.3     161,858        86.6                   -   111,313   111,313     273,171

Chicago
427 S. LaSalle                     Feb. 2007              8,936     158,167        77.2     4,946        56.9     163,113        76.6              20,240         -    20,240     183,353

New York
32 Avenue of the Americas*         June 2007              5,582      48,404        70.9         -           -      48,404        70.9                   -         -         -      48,404

Miami
2115 NW 22nd Street                June 2006              1,690      30,176        55.2     1,890        82.6      32,066        56.8                   -    13,198    13,198      45,264

Denver
910 15th Street*                   Apr. 2012                777       4,144        94.4         -           -       4,144        94.4                   -         -         -       4,144
639 E. 18th Avenue*                Apr. 2012                177       5,140        60.6         -           -       5,140        60.6                   -         -         -       5,140
Denver Total                                                954       9,284        75.7         -           -       9,284        75.7                   -         -         -       9,284
Total Facilities                               $        117,156   1,196,571        77.1 % 374,260        78.4 % 1,570,831        77.4 %            70,840   499,134   519,974   2,140,805



* Indicates properties in which we hold a leasehold interest.

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

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

(3) Represents the NRSF at each operating facility that is currently leased or readily available for lease as space other than data center space, which is typically space offered for office or light-industrial uses.

(4) Reflects date property was acquired by CoreSite or by certain real estate funds affiliated with the Carlyle Group and not the date of our acquisition upon consummation of our initial public offering. In the case of a leased property, indicates the date the initial lease commenced.

(5) Represents the monthly contractual rent under existing customer leases as of September 30, 2012, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to such lease. On a gross basis, our annualized rent was approximately $120.4 million as of September 30, 2012, which reflects the addition of $3.2 million in operating expense reimbursements to contractual net rent under modified gross and triple-net leases.

(6) Includes customer leases that have commenced as of September 30, 2012. The percent leased is determined based on leased square feet as a proportion of total operating NRSF. The percent leased for data center space, office and light industrial space, and space in total would have been 77.7%, 78.4%, and 77.9%, respectively, if all leases signed in current and prior periods had commenced.

(7) Represents the NRSF at an operating facility currently leased or readily available for lease. This excludes existing vacant space held for redevelopment or development.

(8) The Coronado-Stender Business Park became entitled for our proposed data center development upon receipt of the mitigated negative declaration from the city of Santa Clara in the first quarter of 2011. We have the ability to develop 345,250 NRSF of data center space at this property, which is in addition to the 50,400 NRSF of data center space and 50,600 NRSF of unconditioned core and shell space completed or under construction at 2972 Stender.

(9) We have completed construction on 50,400 NRSF of space at this property. As of September 30, 2012, we have commenced construction on the remaining 50,600 NRSF of space at the building.

(10) Represents vacant space in our portfolio that requires significant capital investment in order to redevelop or develop into data center facilities. Total redevelopment and development NRSF and total operating NRSF represent the total NRSF at a given facility.

(11) Reflects NRSF for which substantial activities are ongoing to prepare the property for its intended use following redevelopment or development, as applicable. All of the 70,840 NRSF under construction as of September 30, 2012, was data center space.

(12) The 12100 Sunrise Valley property became entitled for our proposed data center development from Fairfax County, Virginia, in the third quarter 2012. We have the ability to develop approximately 200,000 of useable square feet, comprised of data center, supporting infrastructure and general building support space, of which 50,000 NRSF is planned for near term development.


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The following table shows the September 30, 2012, operating statistics for space that was leased and available to be leased as of December 31, 2010, at each of our properties, and excludes space for which development or redevelopment was completed and became available to be leased after December 31, 2010 (the "December 31, 2010, same store pool"). For comparison purposes, the operating activity totals as of December 31, 2011, and 2010, for this space are provided at the bottom of this table.

                                                                                          Operating NRSF
                                                                                        Office and Light-
                                                                    Data Center            Industrial                Total
                                                 Annualized                 Percent                Percent                 Percent
Market/Facilities           Acquisition Date     Rent ($000)      Total     Leased      Total      Leased       Total      Leased

Los Angeles
One Wilshire*                  Aug. 2007        $      23,787    157,587       72.2 %     7,500       45.5 %    165,087       71.0 %
900 N. Alameda                 Oct. 2006               11,840    149,473       79.8       8,360       33.7      157,833       77.4
Los Angeles Total                                      35,627    307,060       75.9      15,860       39.3      322,920       74.1

San Francisco Bay
55 S. Market                   Feb. 2000               11,173     84,045       88.6     206,255       80.2      290,300       82.6
2901 Coronado                  Feb. 2007                9,357     50,000      100.0           -          -       50,000      100.0
1656 McCarthy                  Dec. 2006                5,433     76,676       68.5           -          -       76,676       68.5
Coronado-Stender
Properties                     Feb. 2007                  375          -          -      34,000       82.5       34,000       82.5
2972 Stender                   Feb. 2007                    -          -          -           -          -            -          -
San Francisco Bay Total                                26,338    210,721       84.0     240,255       80.5      450,976       82.2

Northern Virginia
12100 Sunrise Valley           Dec. 2007               14,554    116,499       97.4      61,050       77.1      177,549       90.4
1275 K Street*                 June 2006                1,883     22,137       72.0           -          -       22,137       72.0
Northern Virginia Total                                16,437    138,636       93.4      61,050       77.1      199,686       88.4

Boston
70 Innerbelt                   Apr. 2007                9,402    133,646       98.6      13,063       39.3      146,709       93.3

Chicago
427 S. LaSalle                 Feb. 2007                8,890    128,906       94.8           -          -      128,906       94.8

New York
32 Avenue of the
Americas*                      June 2007                5,582     48,404       70.9           -          -       48,404       70.9

Miami
2115 NW 22nd Street            June 2006                1,690     30,176       55.2       1,890       82.6       32,066       56.8

Total Facilities at
September 30, 2012(1)                           $     103,966    997,549       84.6 %   332,118       76.3 %  1,329,667       82.6 %

Total Facilities at
December 31, 2011                               $     101,084                  85.6 %                 79.9 %                  83.9 %

Total Facilities at
December 31, 2010                               $      89,364                  80.5 %                 76.5 %                  79.4 %



* Indicates properties in which we hold a leasehold interest.

(1) The percent leased for data center space, office and light industrial space, and space in total would have been 85.1%, 76.3%, and 82.9%, respectively, if all leases signed in current and prior periods had commenced.


Table of Contents

The following table summarizes the redevelopment and development opportunities throughout our portfolio as of September 30, 2012:

Redevelopment NRSF



                                        Currently Vacant                     Currently Operating
                               Under         Near-     Long-               Near-    Long-             Incremental
Facilities                Construction(1)   Term(2)    Term      Total    Term(2)    Term    Total     Entitled      Total
Los Angeles
900 N. Alameda(3)                       -    19,250   246,933   266,183         -        -        -             -   266,183
Los Angeles Total                       -    19,250   246,933   266,183         -        -        -             -   266,183

San Francisco Bay
2972 Stender(4)                    50,600                   -    50,600         -        -        -             -    50,600
San Francisco Bay Total            50,600         -         -    50,600         -        -        -             -    50,600

Boston
70 Innerbelt(3)                         -    20,000    91,313   111,313         -        -        -             -   111,313

Chicago
427 S. LaSalle                     20,240         -         -    20,240         -        -        -             -    20,240

Miami
2115 NW 22nd Street                     -         -    13,198    13,198         -        -        -             -    13,198

Total Redevelopment                70,840    39,250   351,444   461,534         -        -        -             -   461,534

Development NRSF



San Francisco
Bay
Coronado-Stender
Properties(5)            -        -    58,440    58,440       -   70,760   70,760   216,050     345,250
Northern
Virginia
12100 Sunrise
Valley(6)                -   50,000         -    50,000       -        -        -   150,000     200,000
Total
Development              -   50,000    58,440   108,440       -   70,760   70,760   366,050     545,250

Total Facilities    70,840   89,250   409,884   569,974       -   70,760   70,760   366,050   1,006,784



* Indicates properties in which we hold a leasehold interest.

(1) Reflects NRSF at a facility for which the initiation of substantial activities to prepare the property for its intended use following redevelopment or development, as applicable, has commenced prior to the applicable period.

(2) Reflects NRSF at a facility for which the initiation of substantial activities to prepare the property for its intended use following redevelopment or development, as applicable, is planned to commence after September 30, 2012, but prior to September 30, 2013.

(3) The NRSF shown is our current estimate based on engineering drawings and required support space and is subject to change based on final demising of the space.

(4) We have completed construction on 50,400 NRSF of space at this property. As of September 30, 2012, we have commenced construction on the remaining 50,600 NRSF of space at the building.

(5) We are entitled to develop up to 345,250 NRSF of data center space at this property, or an incremental 216,050 NRSF, which is in addition to the leased and vacant NRSF existing at the property.

(6) We are entitled to develop approximately 200,000 useable square feet, comprised of data center, supporting infrastructure and general building support space, which is in addition to the leased and vacant NRSF existing at the property. We expect 50,000 NRSF to commence development in the near term.


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Customer Diversification

As of September 30, 2012, our portfolio was leased to over 750 customers, many of which are globally recognized firms. The following table sets forth information regarding the ten largest customers in our portfolio based on annualized rent as of September 30, 2012:

                                                                                               Weighted
                                                                                                Average
                                                     Percentage                   Percentage   Remaining
                                Number      Total     of Total      Annualized        of         Lease
                                  of       Leased    Operating         Rent       Annualized    Term in
            Customer           Locations   NRSF(1)    NRSF(2)       ($000)(3)      Rent(4)     Months(5)
1    Facebook, Inc.                2        50,625          3.2 %  $      9,461          8.1 %        49
2    Computer Sciences
     Corporation                   3        52,902          3.4           6,362          5.4          59
3    Akamai Technologies           7        35,573          2.3           4,170          3.6          12
4    General Services Admin
     - IRS* (6)                    1       141,774          9.0           4,011          3.4          25
. . .
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