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COR > SEC Filings for COR > Form 10-K on 14-Feb-2014All Recent SEC Filings

Show all filings for CORESITE REALTY CORP

Form 10-K for CORESITE REALTY CORP


14-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our results of operations, financial condition and liquidity in conjunction with our consolidated financial statements and the related notes included elsewhere in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategies for our business, statements regarding the industry outlook, our expectations regarding the future performance of our business and the other non-historical statements contained herein are forward-looking statements. See "Cautionary Note Regarding Forward-Looking Statements." You should also review the "Risk Factors" in Item 1A. of this report for a discussion of important factors that could cause actual results to differ materially from the results described herein or implied by such forward-looking statements.

Overview

CoreSite Realty Corporation delivers network-dense, cloud-enabled, enterprise-class data center products and services across eight key North American markets. We are an owner, developer and operator of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including the New York, Los Angeles, San Francisco Bay and Northern Virginia areas, Chicago, Boston, 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 are able to satisfy the full spectrum of our customers' data center requirements by providing data center space ranging in size from an entire building or large dedicated suites to a cage or cabinet. We lease our space to a broad and growing customer base ranging from enterprise customers to less space-intensive, more network-centric customers. Our operational flexibility allows us to selectively lease data center space to its highest and best use depending on customer demand, regional economies and property characteristics.

As of December 31, 2013, our property portfolio included 16 operating data center facilities, multiple development projects and space and land held for development, which collectively comprise the potential for over 2.7 million NRSF, of which approximately 1.4 million NRSF is existing data center space. These stabilized properties include approximately 320,000 NRSF of space readily available for lease, of which approximately 243,000 NRSF is available for lease as data center space. Including the space currently under construction or in preconstruction at December 31, 2013, we own land and buildings sufficient to develop an additional 946,000 NRSF of data center space.

Factors which May Influence our Results of Operations

Market and economic conditions. We are impacted by general business and economic conditions in the United States. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets and broad trends in industry and finance, all of which are beyond our control. Macro-economic conditions that affect the economy and the economic outlook of the United States could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition.


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Operating revenue. 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 December 31, 2013, the occupancy rate of the data center properties in our portfolio was approximately 81.7% of our NRSF. Negative trends in one or more of these factors could adversely affect our operating revenue in future periods. Future economic downturns or regional downturns affecting our markets or downturns in the technology industry that impair our ability to renew or re-lease space and the ability of our customers to fulfill their lease commitments, as in the case of customer bankruptcies, could adversely affect our ability to maintain or increase operating revenue at our properties.

Operating expenses. Our operating expenses primarily consist of utility costs, including power, site maintenance, real estate taxes and insurance, personnel salaries and benefits, including stock based compensation, depreciation, as well as rental expenses on our properties in which we hold a leasehold interest. A substantial majority of our operating expenses is fixed in nature and should not vary significantly from period to period, unless we expand our existing data centers or acquire new data centers, which would entail additional operations, security and facility personnel, as well as utility, operating and maintenance expenses. Our buildings require significant power to support data center operations. We expect the cost of power will generally increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by the customer. In addition, the cost of power is generally higher in summer months as compared to other times of the year. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change; such increased costs could materially impact our financial condition, results of operations and cash flows.

Substantially all of our data center NRSF is subject to the breakered-amp or sub-metered (branch circuit monitoring) power pricing models. We recover all or substantially all of our electricity costs for our leased data center space under either model. Under the sub-metered model, a customer pays us monthly for the power attributable to its equipment in the data center as well as for its ratable allocation of the power used to provide the cooling, lighting, security and other requirements supporting the data center, in each case, at a rate substantially equivalent to our then current cost of electricity. Under the breakered-amp model, a customer pays a fixed monthly fee per committed available ampere of connected power. The extent to which this fixed monthly fee correlates to the monthly amount we pay to our utility provider for electricity at each data center facility varies depending upon the amount of power each customer utilizes each month relative to the amount of committed power purchased.


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During the year ended December 31, 2013, new and expansion leases totaling approximately 235,000 NRSF commenced. The following table provides an overview of our new and expansion data center leasing activity for the periods indicated (in NRSF):

                                   December 31,     September 30,    June 30,    March 31,
                                       2013             2013           2013         2013
New and expansion leases signed
but not yet commenced at
beginning of period                      126,418           140,367     152,240      148,817
Adjustments(1)                               562                 -         (11 )          -
New and expansion leases signed
during the period                         26,276            23,294      30,810       42,799
New and expansion leases signed
during the period which have
commenced                                 (6,918 )         (14,811 )   (13,191 )    (14,679 )
New and expansion leases signed
in previous periods which
commenced during the period             (109,134 )         (22,432 )   (29,481 )    (24,697 )


Total leases signed but not yet
commenced at end of period                37,204           126,418     140,367      152,240


--------------------------------------------------------------------------------
    (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.

As of December 31, 2013, we had 1,393 leases with over 750 customers, the majority of our leases contained annual base rent escalations that were either fixed (generally ranging from 2% to 5%) or indexed based on a consumer price index or other similar inflation related index.

Scheduled Lease Expirations. Our ability to minimize churn and renew expiring leases or otherwise lease vacant space affects our results of operations. The data center leases scheduled to expire in 2014 and 2015 represent approximately 23.1% and 21.1%, respectively, of our annualized rent and 12.3% and 9.8%, respectively, of our stabilized occupied data center NRSF as of December 31, 2013.

We continue to see demand in our markets for data center space. For the years ended December 31, 2013, rents on re-leased/renewed space increased by an average of 13.3% on a GAAP basis compared to the expiring rents for the same space. Our past performance may not be indicative of future results, and we cannot assure you that leases will be renewed or that our properties will be re-leased at all or at rental rates equal to or above the current average rental rates. Further, re-leased/renewed rental rates in a particular market may not be consistent with rental rates across our portfolio as a whole due to a number of factors, including local real estate conditions, local supply and demand for data center space, the condition of the property and whether the property, or space within the property, has been developed.

Acquisitions, Development and Financing. Our ability to grow rental and operating revenue depends on our ability to acquire, develop and lease data center space at favorable rental rates. As of December 31, 2013, we had approximately 946,000 NRSF of future development and under development space or approximately 34% of the total space in our portfolio. We may encounter development delays, excess development costs, or encounter delays in leasing development space to customers. We generally fund the cost of data center development from additional capital, which, for future developments, we would expect to obtain through our revolving credit facility and other unsecured and secured borrowings, construction financings and the issuance of additional equity and debt securities, when market conditions permit. We will require additional capital to finance future development activities, which may not be available or may not be available on terms acceptable to us.


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Conditions in Significant Markets. Our operating properties are located in San Francisco Bay areas, Los Angeles, Northern Virginia areas, Boston, Chicago, New York, Miami and Denver. These markets comprised 29.8%, 28.7%, 18.2%, 9.4%, 8.4%, 3.6%, 1.3%, and 0.6%, respectively, of our annualized rent as of December 31, 2013. Positive or negative changes in conditions including supply and demand, rental rates, utility costs, and general economic conditions in these markets will impact our overall performance.

Results of Operations

Year Ended December 31, 2013, Compared to Year Ended December 31, 2012

    The discussion below relates to our financial condition and results of
operations for the years ended December 31, 2013, and 2012. A summary of our
operating results for the years ended December 31, 2013, and 2012, is as follows
(in thousands).

                                     Year Ended
                                    December 31,
                                  2013        2012      $ Change     % Change
            Operating revenue   $ 234,833   $ 206,934    $ 27,899         13.5 %
            Operating expense     200,163     189,891      10,272          5.4 %
            Operating income       34,670      17,043      17,627        103.4 %
            Interest expense        2,689       5,236      (2,547 )      -48.6 %
            Net income             31,612      10,716      20,896        195.0 %

Operating Revenue

    Operating revenue during the years ended December 31, 2013, and 2012, was as
follows (in thousands):

                                                 Year Ended
                                                December 31,
                                              2013        2012      $ Change     % Change
Data center revenue:
Rental revenue                              $ 131,080   $ 116,146    $ 14,934         12.9 %
Power revenue                                  59,663      53,672       5,991         11.2 %
Interconnection revenue                        28,932      21,637       7,295         33.7 %
Tenant reimbursement and other                  7,317       7,088         229          3.2 %
Office, light industrial and other
revenue                                         7,841       8,391        (550 )       -6.6 %


Total operating revenues                    $ 234,833   $ 206,934    $ 27,899         13.5 %

The operating revenue increase was primarily due to a $14.9 million increase in data center rental revenue during the year ended December 31, 2013, compared to 2012. The increase in data center rental revenue is primarily due to the commencement of 235,000 NRSF of new and expansion leases during the year ended December 31, 2013. Included within the 235,000 NRSF are 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 data center rental revenue by $4.9 million which represents 33% of the total increase in data center rental revenue. The increase was partially offset by lease expirations that were not renewed which resulted in a data center rental revenue churn rate of 7.8% during the year ended December 31, 2013.

Interconnection revenue increased $7.3 million due to an increase in the volume and pricing of cross connects from new and existing customers during the year ended December 31, 2013, compared to 2012. In addition, power revenue increased $6.0 million during the year ended December 31, 2013, compared to 2012, as a result of the new and expansion leases entered into and the overall increase in occupied NRSF and data center rental revenue.


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Operating Expenses

    Operating expenses during the years ended December 31, 2013, and 2012, was
as follows (in thousands):

                                              Year Ended
                                             December 31,
                                           2013        2012      $ Change     % Change
    Property operating and maintenance   $  64,260   $  61,235    $  3,025          4.9 %
    Real estate taxes and insurance          8,458       8,765        (307 )       -3.5 %
    Depreciation and amortization           65,785      64,327       1,458          2.3 %
    Sales and marketing                     14,405      10,330       4,075         39.4 %
    General and adminstrative               27,317      25,910       1,407          5.4 %
    Rent                                    19,659      18,711         948          5.1 %
    Transaction costs                          279         613        (334 )      -54.5 %


    Total operating expenses             $ 200,163   $ 189,891    $ 10,272          5.4 %

The overall increase in operating expenses was primarily due to additional sales and marketing expense of $4.1 million as a result of an increase in payroll and benefits expense due to an increase in the number of sales and marketing employees. During the year ended December 31, 2013, we increased our sales and marketing team to conform to and support the diversified customer base, as well as increase our penetration and deepen our resources in the eight markets where we operate.

Property operating and maintenance expense increased $3.0 million as a result of an increase in payroll and benefits expense due to the increase in headcount of facilities personnel associated with data center expansion. In addition, power expense increased due to the overall increase in occupancy and customer power draw which is demonstrated by the commencement of 235,000 NRSF of new and expansion leases during the year ended December 31, 2013. These increases were partially offset by $1.5 million of additional capitalized construction personnel salaries as a result of the increase of development activities in our development pipeline during the year ended December 31, 2013, compared to 2012.

Real estate taxes and insurance decreased as a result of a reduction of accrued real estate taxes associated with estimated amounts from 2010 due to a change in ownership in California. The final tax amounts for certain, but not all, properties became known in the fourth quarter 2013 and, therefore, the estimated accruals were reconciled to the actual expenses, resulting in a $0.3 million reduction in the expense.

Depreciation and amortization increased $1.5 million as a result of the placement into service of approximately 226,000 NRSF of new operating and pre-stabilized space during the year ended December 31, 2013.

General and administrative expense increased $1.4 million primarily due to additional payroll and benefits expense as a result of an increase in corporate headcount during the year ended December 31, 2013, compared to 2012. The increases were partially offset by a litigation settlement expense of $1.8 million during the year ended December 31, 2012.


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Interest Expense

    The decrease in interest expense was primarily a result of an additional
$2.5 million of capitalized interest during the year ended December 31, 2013,
compared to 2012, primarily due to the data center developments at NY2, SV5, VA2
and LA2 during the year ended December 31, 2013, compared to December 31, 2012.
A summary of interest expense for the years ended December 31, 2013, and 2012,
is as follows (in thousands):

                                                 Year Ended
                                                December 31,
                                               2013       2012     $ Change     % Change
  Interest expense and fees                  $  5,312   $  5,392    $    (80 )       -1.5 %
  Amortization of deferred financing costs      1,739      1,681          58          3.5 %
  Capitalized interest                         (4,362 )   (1,837 )    (2,525 )      137.5 %


  Total interest expense                     $  2,689   $  5,236    $ (2,547 )      -48.6 %

Percent capitalized 61.9 % 26.0 %

Year Ended December 31, 2012, Compared to Year Ended December 31, 2011

The discussion below relates to our financial condition and results of operations for the years ended December 31, 2012, and 2011. A summary of our operating results for the years ended December 31, 2012, and 2011 is as follows (in thousands).

                                     Year Ended
                                    December 31,
                                  2012        2011      $ Change     % Change
            Operating revenue   $ 206,934   $ 172,846    $ 34,088         19.7 %
            Operating expense     189,891     179,936       9,955          5.5 %
            Operating income       17,043      (7,090 )    24,133        340.4 %
            Interest expense        5,236       5,275         (39 )       -0.7 %
            Net income             10,716     (10,779 )    21,495        199.4 %

Operating Revenue

    Operating revenue during the years ended December 31, 2012, and 2011, was as
follows (in thousands):

                                                 Year Ended
                                                December 31,
                                              2012        2011      $ Change     % Change
Data center revenue:
Rental revenue                              $ 116,146   $ 101,449    $ 14,697         14.5 %
Power revenue                                  53,672      43,661      10,011         22.9 %
Interconnection revenue                        21,637      12,677       8,960         70.7 %
Tenant reimbursement and other                  7,088       6,610         478          7.2 %
Office, light industrial and other
revenue                                         8,391       8,449         (58 )       -0.7 %


Total operating revenues                      206,934     172,846    $ 34,088         19.7 %

The operating revenue increase was primarily due to a $14.7 million increase in data center rental revenue during the year ended December 31, 2012, compared to 2011. The increase in data center rental revenue is primarily due to the commencement of 336 leases comprising 109,059 NRSF of new and expansion leases during the year ended December 31, 2012. The increase was partially offset by lease expirations that were not renewed which resulted in a data center rental revenue churn rate of 8.5% during the year ended December 31, 2012.


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Interconnection revenue increased $9.0 million due to an increase in the volume and pricing of cross connects during the year ended December 31, 2012, compared to 2011. In addition, power revenue increased $10.0 million during the year ended December 31, 2012, compared to 2011, as a result of the new and expansion leases entered into and the overall increase in occupied NRSF and data center rental revenue.

Operating Expenses

    Operating expenses during the years ended December 31, 2012, and 2011, was
as follows (in thousands):

                                              Year Ended
                                             December 31,
                                           2012        2011      $ Change     % Change
    Property operating and maintenance   $  61,235   $  55,049    $  6,186         11.2 %
    Real estate taxes and insurance          8,765       9,119        (354 )       -3.9 %
    Depreciation and amortization           64,327      68,967      (4,640 )       -6.7 %
    Sales and marketing                     10,330       5,744       4,586         79.8 %
    General and adminstrative               25,910      21,846       4,064         18.6 %
    Rent                                    18,711      18,336         375          2.0 %
    Transaction costs                          613         875        (262 )      -29.9 %


    Total operating expenses             $ 189,891   $ 179,936    $  9,955          5.5 %

The overall increase in operating expenses was primarily due to additional sales and marketing expense of $4.6 million as a result of an increase in payroll and benefits expense associated with internal headcount growth and an increase in the number of sales and marketing employees. During the year ended December 31, 2012, we increased our sales and marketing team to conform to and support our diversified customer base.

Property operating and maintenance expense increased $6.2 million as a result of an increase in payroll and benefits expense due to the increase in headcount of facilities personnel. In addition, power expense increased due to the overall increase in occupancy and customer power draw which is demonstrated by the commencement of 109,059 NRSF of new and expansion leases during the year ended December 31, 2012.

Depreciation and amortization decreased $4.6 million as a result of the short-term useful life of the lease intangibles acquired in connection with our IPO that were fully amortized during the years ended December 31, 2012, and 2011.

General and administrative expense increased $4.1 million primarily as a result of additional payroll and benefits expense from an increase in corporate headcount and a litigation settlement expense of $1.8 million during the year ended December 31, 2012, relating to the settlement of two outstanding litigation matters.


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Interest Expense

    Interest expense, including amortization of deferred financing costs, for
the year ended December 31, 2012, was $5.2 million compared to interest expense
of $5.3 million for the year ended December 31, 2011. The decrease in interest
was primarily a result of an increase in capitalized interest due to the number
of ongoing development projects partially offset by a higher average debt
balance during the year ended December 31, 2012. A summary of interest expense
for the years ended December 31, 2012, and 2011, is as follows:

                                                Year Ended
                                               December 31,
                                              2012       2011      $ Change     % Change
 Interest expense and fees                  $  5,392   $  5,311    $      81          1.5 %
 Amortization of deferred financing costs      1,681      1,556          125          8.0 %
 Capitalized interest                         (1,837 )   (1,592 )       (245 )       15.4 %


 Total interest expense                     $  5,236   $  5,275    $     (39 )       -0.7 %

Percent capitalized 26.0 % 23.2 %

Liquidity and Capital Resources

Discussion of Cash Flows

Year Ended December 31, 2013, Compared to Year Ended December 31, 2012

Net cash provided by operating activities was $97.7 million for the year ended December 31, 2013, compared to $68.6 million for the year ended December 31, 2012. The increased cash provided by operating activities of $29.1 million, or 42%, was primarily due to the growth in rental, power and interconnection revenue year-over-year from existing customers and completion and subsequent leasing of new data center space at several properties, the receipt of lease incentive payments as a result of lease extensions involving CoreSite as the lessee, a decrease in interest expense as a result of the lower average debt balance and increased capitalized interest, partially offset by an increase in operating expenses and leasing commissions as a result of new and expansion and lease renewals and development of internal-use software.

Net cash used in investing activities increased by $130.7 million to $214.5 million for the year ended December 31, 2013, compared to $83.8 million for the year ended December 31, 2012. This increase was primarily a result of the acquisition of NY2 for $21.9 million and cash invested in data center development projects at SV5, NY2, and VA2, where approximately 200,000 NRSF was under construction during the year ended December 31, 2013.

Net cash provided by financing activities was $113.9 million for the year ended December 31, 2013, compared to $16.7 million for the year ended December 31, 2012. The increase in cash provided by financing activities of $97.3 million was primarily a result of draws on our revolving credit facility of $174.3 million during year ended December 31, 2013 and $57.1 million of . . .

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