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COR > SEC Filings for COR > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for CORESITE REALTY CORP


1-Nov-2013

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, financial condition, cash flows 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, 2012. 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 provide data center solutions to more than 750 of the world's leading carriers and mobile operators, content and cloud providers, media and entertainment companies and global enterprises. Across 14 high-performance data center campuses in eight North America markets, we connect customers to help them grow their businesses, run performance-sensitive applications and secure their crucial data devices.

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.

Our Portfolio

As of September 30, 2013, our property portfolio included 14 operating data center facilities and multiple development projects which collectively comprise over 2.7 million net rentable square feet of space ("NRSF"), of which approximately 1.3 million NRSF is existing data center space, including pre-stabilized space. The development projects include construction of new facilities in the San Francisco Bay, Northern Virginia and New York areas. The operating portfolio includes approximately 315,000 NRSF of space readily available for lease, of which 238,000 NRSF is available for lease as data center space. Including the space currently under construction or in preconstruction at September 30, 2013, vacant space and land targeted for future development, we own land and buildings sufficient to develop approximately 1.1 million square feet of data center space.


Table of Contents

We expect that this development potential plus any potential expansion into new markets will enable us to accommodate existing and future customer demand and position us to significantly increase our cash flows. We intend to pursue 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 properties as of September 30, 2013:

                                                             Stabilized Operating NRSF (1)
                                                                   Office and Light-                                Pre-Stabilized   Development
                                           Data Center(2)            Industrial(3)                 Total               NRSF(7)         NRSF(8)       Total
                       Annualized                    Percent                  Percent                   Percent                                    Portfolio
Market/Facilities    Rent ($000)(4)      Total     Occupied(5)    Total     Occupied(5)   Total(6)    Occupied(5)       Total           Total       NRSF(1)

Los Angeles
One Wilshire
Campus
LA1*                $         23,856     150,278          75.2 %    7,500          41.0 %   157,778          73.6 %              -             -     157,778
LA2                           14,403     159,617          87.0      6,055          72.7     165,672          86.4           31,585       236,902     434,159
Los Angeles Total             38,259     309,895          81.3     13,555          55.2     323,450          80.2           31,585       236,902     591,937

San Francisco Bay
SV1                           11,366      84,045          87.3    206,255          80.2     290,300          82.3                -             -     290,300
SV2                            6,186      76,676          65.5          -             -      76,676          65.5                -             -      76,676
Santa Clara
Campus                        19,305     119,067          82.8     71,196          91.7     190,263          86.1           31,497       274,490     496,250
San Francisco Bay
Total                         36,857     279,788          79.5    277,451          83.2     557,239          81.3           31,497       274,490     863,226

Northern Virginia
VA1                           22,169     201,719          76.5     61,050          79.7     262,769          77.2                -             -     262,769
VA2                                -           -             -          -             -           -             -                -       198,000     198,000
DC1*                           2,603      22,137          84.6          -             -      22,137          84.6                -             -      22,137
Northern Virginia
Total                         24,772     223,856          77.3     61,050          79.7     284,906          77.8                -       198,000     482,906

Boston
BO1                           11,927     166,026          93.3     19,495          54.2     185,521          89.2                -        87,650     273,171

Chicago
CH1                           11,212     158,167          84.0      4,946          62.3     163,113          83.4           20,240             -     183,353

New York
NY1*                           4,746      48,404          67.1        209         100.0      48,613          67.3                -             -      48,613
NY2                                -           -             -          -             -           -             -                -       283,000     283,000
New York Total                 4,746      48,404          67.1        209         100.0      48,613          67.3                -       283,000     331,613

Miami
MI1                            1,676      30,176          44.2      1,934          57.9      32,110          45.0                -        13,154      45,264

Denver
DE1*                             646       4,144          80.9          -             -       4,144          80.9                -             -       4,144
DE2*                             143       5,140          66.3          -             -       5,140          66.3                -             -       5,140
Denver Total                     789       9,284          72.8          -             -       9,284          72.8                -             -       9,284
Total Facilities    $        130,238   1,225,596          80.6 %  378,640          79.7 % 1,604,236          80.4 %         83,322     1,093,196   2,780,754



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

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

(4) Represents the monthly contractual rent under existing commenced customer leases as of September 30, 2013, 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 annualized rent was approximately $135.7 million as of September 30, 2013, which reflects the addition of $5.5 million in operating expense reimbursements to contractual net rent under modified gross and triple-net leases.

(5) Includes customer leases that have commenced and are occupied as of September 30, 2013. The percent occupied is determined based on leased square feet as a proportion of total operating NRSF. The percent occupied for data center space, office and light industrial space, and space in total would have been 82.2%, 79.7%, and 81.6%, respectively, if all leases signed in current and prior periods had commenced.

(6) Represents the NRSF at an operating facility currently occupied or readily available for lease. This excludes existing vacant space held for development and pre-stabilized NRSF.

(7) Represents pre-stabilized NRSF of projects/facilities which recently have been developed and are in the initial lease-up phase. Effective January 1, 2013, new pre-stabilized projects/facilities are excluded from stabilized operating NRSF. Pre-stabilized projects/facilities become stabilized operating properties at the earlier of achievement of 85% occupancy or 24 months after development completion.

(8) Represents vacant space and entitled land in our portfolio that requires significant capital investment in order to develop into data center facilities as of September 30, 2013. Includes NRSF under construction for which substantial activities are ongoing to prepare the property for its intended use following development.


Table of Contents

Our property portfolio has experienced consistent growth since our IPO. The following table shows the September 30, 2013, operating statistics for space that was leased and available to be leased as of December 31, 2011, at each of our properties, and excludes space for which development was completed and became available to be leased after December 31, 2011. For comparison purposes, the operating activity totals as of December 31, 2012, and 2011, for this space are provided at the bottom of this table.

                                                 Same Store Property Portfolio (in NRSF)
                                                            Office and Light-
                                        Data Center            Industrial               Total
                      Annualized                Percent               Percent                Percent
Market/Facilities    Rent ($000)      Total     Occupied    Total     Occupied     Total     Occupied
Los Angeles
One Wilshire
Campus
LA1*                 $     23,856     150,278       75.2 %    7,500       41.0 %   157,778       73.6 %
LA2                        14,274     156,366       86.7      5,147       85.5     161,513       86.7
Los Angeles Total          38,130     306,644       81.1     12,647       59.1     319,291       80.2

San Francisco Bay
SV1                        11,366      84,045       87.3    206,255       80.2     290,300       82.3
SV2                         6,186      76,676       65.5          -          -      76,676       65.5
Santa Clara Campus         12,667      68,116       88.2     70,760       91.6     138,876       90.0
San Francisco Bay
Total                      30,219     228,837       80.3    277,015       83.1     505,852       81.8

Northern Virginia
VA1                        19,364     137,670       95.1     61,050       79.7     198,720       90.4
DC1*                        2,603      22,137       84.6          -          -      22,137       84.6
Northern Virginia
Total                      21,967     159,807       93.7     61,050       79.7     220,857       89.8

Boston
BO1                        10,589     148,795       92.5     13,063       31.7     161,858       87.6

Chicago
CH1                        10,347     128,906       93.7      4,946       62.3     133,852       92.6

New York
NY1*                        4,746      48,404       67.1        209      100.0      48,613       67.3

Miami
MI1                         1,676      30,176       44.2      1,934       57.9      32,110       45.0
Total Facilities
at September 30,
2013(1)              $    117,674   1,051,569       84.3 %  370,864       79.5 % 1,422,433       83.0 %

Total Facilities
at December 31,
2012                 $    114,206                   84.2 %                79.1 %                 82.8 %

Total Facilities
at December 31,
2011                 $    103,502                   83.5 %                83.5 %                 83.5 %



* Indicates properties in which we hold a leasehold interest.

(1) The percent occupied for data center space, office and light industrial space, and space in total would have been 85.6%, 79.5%, and 84.0%, respectively, if all leases signed in current and prior periods had commenced.

DE1 and DE2 were both acquired subsequent to December 31, 2011, and are not included in our same store property portfolio.


Table of Contents

Development space is unoccupied space or entitled land that requires significant capital investment in order to develop data center facilities that are ready for use. The following table summarizes the NRSF under development and NRSF held for development throughout our portfolio as of September 30, 2013:

                            Development Opportunities (in NRSF)
                             Under           Held for
Facilities              Construction(1)   Development(2)     Total
Los Angeles
One Wilshire Campus
LA2                              33,711          203,191     236,902
San Francisco Bay
Santa Clara Campus(3)           101,250          173,240     274,490
Northern Virginia
VA2                              50,000          148,000     198,000
Boston
BO1                                   -           87,650      87,650
Chicago
CH1                                   -                -           -
New York
NY2                              65,000          218,000     283,000
Miami
MI1                                   -           13,154      13,154
Total Facilities                249,961          843,235   1,093,196



(1) Reflects NRSF at a facility for which the initiation of substantial development activities to prepare the property for its intended use has commenced prior to September 30, 2013.

(2) Reflects NRSF held for development at a facility which will require substantial development activities to prepare the property for its intended use. NRSF held for development is management's estimate based on engineering drawings and required support space and is subject to change based on final demising of the space.

(3) We plan and are entitled to develop approximately 274,000 NRSF of data center space at this campus. Incremental to the 274,000 NRSF disclosed in the table above, we have approximately 71,000 NRSF of office and light-industrial space in our operating portfolio which we may develop into data center space and we plan to develop an additional 116,000 NRSF of data center space at this campus upon our receipt of the necessary entitlement.

Capital Expenditures

During the nine months ended September 30, 2013, we incurred approximately $173.1 million of capital expenditures, of which approximately $148.9 million related to new data center construction, development projects adding capacity to existing data centers and other revenue generating investments. The remaining $24.2 million includes non-recurring investments, such as upgrades to existing data center or office space, internal system development and system-wide security upgrades, tenant improvements and recurring capital expenditures.


Table of Contents

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, 2012, filed with the SEC on February 25, 2013, which is accessible on the SEC's website at www.sec.gov.

The amount of revenue generated by the properties in our portfolio depends on several factors, including our ability to maintain or improve the occupancy rates of currently leased space and to lease currently available and pre-stabilized space. Excluding pre-stabilized properties and space held for development, as of September 30, 2013, the occupancy rate of the properties in our portfolio was approximately 80.4% of our net rentable square feet. During the three months ended September 30, 2013, new and expansion leases totaling approximately 37,000 NRSF commenced. The following table provides an overview of our new and expansion data center leasing activity for the periods indicated (in NRSF):

                                 September 30,    June 30,    March 31,    December 31,    September 30,
                                     2013           2013        2013           2012            2012
New and expansion leases
signed but not yet commenced
at beginning of period                 140,367     152,240      148,817          12,941           41,545
Adjustments(1)                               -         (11 )          -             544                -
New and expansion leases
signed during the period                23,294      30,810       42,799         156,704           11,387
New and expansion leases
signed during the period
which have commenced                   (14,811 )   (13,191 )    (14,679 )       (14,414 )         (5,699 )
New and expansion leases
signed in previous periods
which commenced during the
period                                 (22,432 )   (29,481 )    (24,697 )        (6,958 )        (34,292 )
Total leases signed but not
yet commenced at end of
period                                 126,418     140,367      152,240         148,817           12,941



(1) Adjustments due to a change in the factor used to allocate support space to reflect the current build-out of certain properties. The adjustment does not alter the contractual rent we expect to receive under the affected leases.

Our ability to re-lease expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. In addition to approximately 315,000 NRSF of available space in our portfolio, which excludes pre-stabilized leasable space, leases representing approximately 6.8% and 19.2% of the NRSF in our portfolio are scheduled to expire during the remainder of 2013 and the year ending December 31, 2014, respectively.

Results of Operations

Three Months Ended September 30, 2013, Compared to the Three Months Ended September 30, 2012

The discussion below relates to our financial condition and results of operations for the three months ended September 30, 2013 and 2012. A summary of our operating results for the three months ended September 30, 2013 and 2012 is as follows (in thousands).

Three Months Ended September 30,

                          2013                  2012           $ Change    % Change
Operating revenue   $          60,635     $          53,762   $    6,873       12.8 %
Operating expense              51,376                48,703        2,673        5.5 %
Operating income                9,259                 5,059        4,200       83.0 %
Interest expense                  708                 1,595         (887 )    -55.6 %
Net income                      8,509                 2,947        5,562      188.7 %

Operating Revenue

The operating revenue increase was primarily due to a $3.7 million increase in rental revenue during the three months ended September 30, 2013, compared to 2012. The increase in rental revenue is due to the commencement of 141,000 NRSF of new and expansion leases during the twelve months ended September 30, 2013. Included within the 141,000 NRSF is a 19,103 NRSF built-to-suit lease at SV4 which commenced on January 1, 2013, and a 23,663 NRSF lease at BO1 which commenced on April 1, 2013. These two leases increased rental revenue by $1.4 million. The increase was partially offset by lease expirations that were not renewed, which resulted in a rental revenue churn rate of 8.0% during the twelve months ended September 30, 2013.

Interconnection revenue increased $1.3 million due to an increase in the volume of cross connects during the three months ended September 30, 2013, compared to 2012. In addition, power revenue increased $1.7 million during the three months ended September 30, 2013, compared to 2012, primarily as a result of the overall increase in occupied NRSF and rental revenue.


Table of Contents

Operating Expenses



Operating expenses during the three months ended September 30, 2013, and 2012
were as follows (in thousands):



                                Three Months Ended September 30,
                                   2013                  2012             $ Change        % Change
Property operating and
maintenance                  $          17,368     $          16,360    $       1,008            6.2 %
Real estate taxes and
insurance                                2,226                 2,158               68            3.2 %
Depreciation and
amortization                            16,424                16,583             (159 )         -1.0 %
Sales and marketing                      3,206                 2,231              975           43.7 %
General and adminstrative                7,045                 6,389              656           10.3 %
Rent                                     5,082                 4,689              393            8.4 %
Transaction costs                           25                   293             (268 )        -91.5 %
Total operating expenses     $          51,376     $          48,703    $       2,673            5.5 %

. . .

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