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COR > SEC Filings for COR > Form 10-Q on 25-Apr-2014All Recent SEC Filings

Show all filings for CORESITE REALTY CORP

Form 10-Q for CORESITE REALTY CORP


25-Apr-2014

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 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 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 Factor" of our Annual Report on Form 10-K for the year ended December 31, 2013. 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 which we refer to in this Quarterly Report as our "Operating Partnership."

We deliver network-dense, cloud-enabled, enterprise-class data center products and services across eight key North American markets. We connect, protect and deliver a reliable performance environment and continued operation of mission-critical data and IT infrastructure for more than 800 of the world's leading enterprise and Internet, private networking, mobility, and cloud service providers. Across 16 high-performance data centers, we support the operation and growth of our customers' businesses by providing products and services aimed toward helping them establish connections with networks, cloud-service providers, and other technology-services providers, operate performance-sensitive applications, and secure their mission-critical information and communications technology equipment.

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 the New York, Northern Virginia and San Francisco Bay areas, Los Angeles, Chicago, Boston, Miami and Denver.

Our Portfolio

As of March 31, 2014, our property portfolio included 16 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 1.5 million NRSF is existing data center space, including pre-stabilized space. The development projects include land and space available for development and construction of new facilities in the San Francisco Bay, Northern Virginia and New York areas. Our operating portfolio includes approximately 298,000 NRSF of space readily


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available for lease, of which 225,000 NRSF is available for lease as data center space. Including the space currently under construction at March 31, 2014, vacant space and land targeted for future development, we own land and buildings sufficient to develop approximately 0.9 million NRSF of data center space. 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 March 31, 2014:

                                                                      Stabilized Operating NRSF
                                                                          Office and Light-                                 Pre-Stabilized   Development
                                                 Data Center(1)             Industrial(2)                  Total               NRSF(5)         NRSF(6)       Total
                             Annualized                    Percent                    Percent                   Percent                                    Portfolio
Market/Facilities          Rent ($000)(3)      Total     Occupied(4)     Total      Occupied(4)     Total     Occupied(4)       Total           Total        NRSF
Los Angeles
One Wilshire Campus
LA1*                      $         24,298     149,405          75.2 %      4,373          78.4 %   153,778          75.3 %              -             -     153,778
LA2                                 14,694     159,617          84.0        7,029          70.8     166,646          83.5           65,296       199,978     431,920
Los Angeles Total                   38,992     309,022          79.7       11,402          73.7     320,424          79.5           65,296       199,978     585,698

San Francisco Bay
SV1                                 11,566      84,045          87.5      206,255          80.2     290,300          82.3                -             -     290,300
SV2                                  6,346      76,676          69.8            -             -      76,676          69.8                -             -      76,676
Santa Clara Campus                  22,766     220,676          92.7       71,308          91.5     291,984          92.4           31,497       173,240     496,721
San Francisco Bay Total             40,678     381,397          86.9      277,563          83.1     658,960          85.3           31,497       173,240     863,697

Northern Virginia
VA1                                 22,802     201,719          77.0       61,050          79.4     262,769          77.6                -             -     262,769
VA2                                      -           -             -            -             -           -             -                -       198,000     198,000
DC1*                                 2,742      22,137          84.0            -             -      22,137          84.0                -             -      22,137
Northern Virginia Total             25,544     223,856          77.7       61,050          79.4     284,906          78.1                -       198,000     482,906

Boston
BO1                                 13,523     166,026          94.4       19,495          60.5     185,521          90.8                -        87,650     273,171

Chicago
CH1                                 11,504     158,167          86.6        4,946          62.3     163,113          85.9           20,240             -     183,353

New York
NY1*                                 4,927      48,404          69.9          209         100.0      48,613          70.0                -             -      48,613
NY2                                      -           -             -            -             -           -             -           52,692       202,367     255,059
New York Total                       4,927      48,404          69.9          209         100.0      48,613          70.0           52,692       202,367     303,672

Miami
MI1                                  1,731      30,176          45.7        1,934          38.6      32,110          45.2                -        13,154      45,264

Denver
DE1*                                   692       4,144         100.0            -             -       4,144         100.0                -             -       4,144
DE2*                                   137       5,140          75.4            -             -       5,140          75.4                -             -       5,140
Denver Total                           829       9,284          86.4            -             -       9,284          86.4                -             -       9,284
Total Facilities          $        137,728   1,326,332          83.0 %    376,599          80.6 % 1,702,931          82.5 %        169,725       874,389   2,747,045



* Indicates properties in which we hold a leasehold interest.

(1) 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.

(2) 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.

(3) Represents the monthly contractual rent on stabilized operating NRSF under existing commenced customer leases as of March 31, 2014, 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 $144.1 million as of March 31, 2014, which reflects the addition of $6.4 million in operating expense reimbursements to contractual net rent under modified gross and triple-net leases.

(4) Includes customer leases that have commenced and are occupied as of March 31, 2014. 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 84.7%, 83.0%, and 84.3%, respectively, if all leases signed in current and prior periods had commenced.

(5) Represents pre-stabilized NRSF of projects/facilities which recently have been developed and are in the initial lease-up phase. Pre-stabilized projects/facilities become stabilized operating properties at the earlier of achievement of 85% occupancy or 24 months after development completion. Annualized rent and NRSF percent occupied for pre-stabilized NRSF is $3.0 million and 15.6%, respectively, as of March 31, 2014.

(6) Represents vacant space and entitled land in our portfolio that requires significant capital investment in order to develop into data center facilities as of March 31, 2014. Includes NRSF under construction for which substantial activities are ongoing to prepare the property for its intended use following development. In addition to the amounts above, we may develop an additional 138,000 NRSF at the Santa Clara Campus and 100,000 NRSF at NY2 upon our receipt of the necessary entitlements.


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Our property portfolio has experienced consistent growth since our IPO. The following table shows the March 31, 2014, operating statistics for space that was leased and available to be leased as of December 31, 2012, at each of our properties, and excludes space for which development was completed and became available to be leased after December 31, 2012. For comparison purposes, the operating activity totals as of December 31, 2013, and 2012, 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)(1)      Total     Occupied(2)    Total    Occupied(2)     Total     Occupied(2)
Los Angeles
One Wilshire Campus
LA1*                   $         24,298     149,405          75.2 %   4,373          78.4 %   153,778          75.3 %
LA2                              14,694     159,617          84.0     5,147          96.7     164,764          84.4
Los Angeles Total                38,992     309,022          79.7     9,520          88.3     318,542          80.0

San Francisco Bay
SV1                              11,566      84,045          87.5   206,255          80.2     290,300          82.3
SV2                               6,346      76,676          69.8         -             -      76,676          69.8
Santa Clara Campus               19,830     118,955          86.4    71,308          91.5     190,263          88.3
San Francisco Bay
Total                            37,742     279,676          82.2   277,563          83.1     557,239          82.6

Northern Virginia
VA1                              22,802     201,719          77.0    61,050          79.4     262,769          77.6
DC1*                              2,742      22,137          84.0         -             -      22,137          84.0
Northern Virginia
Total                            25,544     223,856          77.7    61,050          79.4     284,906          78.1

Boston
BO1                              11,145     148,795          93.7    13,063          41.0     161,858          89.4

Chicago
CH1                              11,504     158,167          86.6     4,946          62.3     163,113          85.9

New York
NY1*                              4,915      48,404          69.9         -             -      48,404          69.9

Miami
MI1                               1,731      30,176          45.7     1,934          38.6      32,110          45.2

Denver
DE1*                   $            692       4,144         100.0         -             -       4,144         100.0
DE2*                                137       5,140          75.4         -             -       5,140          75.4
Denver Total                        829       9,284          86.4         -             -       9,284          86.4

Total Facilities at
March 31, 2014(3)      $        132,402   1,207,380          81.4 % 368,076          80.6 % 1,575,456          81.2 %

Total Facilities at
December 31, 2013      $        129,959                      79.9 %                  79.3 %                    79.8 %

Total Facilities at
December 31, 2012      $        120,165                      77.0 %                  79.1 %                    77.5 %



* 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 leased square feet as a proportion of total operating NRSF.

(3) The percent occupied for data center space, office and light industrial space, and space in total would have been 83.2%, 83.1%, 83.1% respectively, if all leases signed in current and prior periods had commenced.


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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 construction and NRSF held for development throughout our portfolio as of March 31, 2014:

                           Development Opportunities (in NRSF)
                             Under           Held for
Facilities              Construction(1)   Development(2)    Total
Los Angeles
One Wilshire Campus
LA2                                   -          203,191   203,191
San Francisco Bay
Santa Clara Campus(3)                 -          173,240   173,240
Northern Virginia
VA2                              50,000          148,000   198,000
Boston
BO1                                   -           87,650    87,650
New York
NY2(4)                                -          202,367   202,367
Miami
MI1                                   -           13,154    13,154
Total Facilities                 50,000          827,602   877,602



(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 March 31, 2014.

(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 may develop up to 382,000 NRSF at this campus. This includes entitlement of approximately 173,000 NRSF, included in the table above. Incremental to the 173,000 NRSF, we have approximately 71,000 NRSF of office and light industrial space at this campus which we may develop into data center space and we may develop an additional 138,000 NRSF of data center space at this campus upon our receipt of the necessary entitlement.

(4) We may develop up to 302,000 NRSF at NY2. This includes the existing shell building of 202,000 NRSF and we may develop an additional 100,000 NRSF of data center space upon our receipt of the necessary entitlement.

Capital Expenditures

During the three months ended March 31, 2014, we incurred approximately $27.5 million of capital expenditures, of which approximately $18.9 million related to new data center construction, development projects adding capacity to existing data centers and other revenue generating investments. The remaining $8.6 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.


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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, 2013, filed with the SEC on February 14, 2014, 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 March 31, 2014, the occupancy rate of the stabilized data center properties in our portfolio was approximately 83.0% of our net rentable square feet. During the three months ended March 31, 2014, new and expansion leases totaling approximately 28,000 NRSF commenced. The following table provides an overview of our new and expansion data center leasing activity for the periods indicated (in NRSF):

                                     March 31,    December 31,    September 30,   June 30,    March 31,
                                       2014           2013            2013          2013        2013
Leases signed but not yet
commenced at beginning of period        37,204         126,418          140,367    152,240      148,817
Adjustments(1)                             149             562                         (11 )
New and expansion leases signed
during the period                       39,783          26,276           23,294     30,810       42,799
New and expansion leases signed
during the period which have
commenced                              (12,792 )        (6,918 )        (14,811 )  (13,191 )    (14,679 )
New and expansion leases signed
in previous periods which
commenced                              (15,333 )      (109,134 )        (22,432 )  (29,481 )    (24,697 )
Total leases signed but not yet
commenced at end of period              49,011          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.

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 298,000 NRSF of available space in our portfolio, which excludes pre-stabilized leasable space, data center leases representing approximately 10.3% and 10.7% of the NRSF in our stabilized operating portfolio are scheduled to expire during the remainder of 2014 and the year ending December 31, 2015, respectively.

Results of Operations

Three Months Ended March 31, 2014, Compared to the Three Months Ended March 31, 2013

The discussion below relates to our financial condition and results of operations for the three months ended March 31, 2014, and 2013. A summary of our operating results for the three months ended March 31, 2014, and 2013 is as follows (in thousands):

Three Months Ended March 31,

                         2014               2013          $ Change    % Change
Operating revenue   $        63,731    $        55,091   $    8,640       15.7 %
Operating expense            54,422             48,286        6,136       12.7 %
Operating income              9,309              6,805        2,504       36.8 %
Interest expense              1,173                439          734      167.2 %
Net income                    8,118              6,195        1,923       31.0 %

Operating Revenue



Operating revenues during the three months ended March 31, 2014, and 2013, were
as follows (in thousands):



                                    Three Months Ended March 31,
                                      2014               2013            $ Change       % Change
Data center revenue:
Rental revenue                   $        34,899    $        31,309    $      3,590          11.5 %
Power revenue                             16,002             13,529           2,473          18.3 %
Interconnection revenue                    8,059              6,572           1,487          22.6 %
Tenant reimbursement and
other                                      2,756              1,789             967          54.1 %
Office, light industrial and
other revenue                              2,015              1,892             123           6.5 %
Total operating revenues         $        63,731    $        55,091    $      8,640          15.7 %

The increase in operating revenues was primarily due to a $3.6 million increase in data center rental revenue during the three months ended March 31, 2014, compared to the 2013 period. The increase in data center rental revenue is primarily due to the commencement of 224,000 NRSF of new and expansion leases during the twelve months ended March 31, 2014. Included within the 224,000 NRSF are a 101,721 NRSF built-to-suit lease at SV5, which commenced on November 7, 2013, a 7,711 NRSF lease at SV4, which commenced on September 1, 2013, and a 23,663 NRSF lease at BO1, which commenced on April 1, 2013. These three leases increased data center rental revenue by $1.8 million, which represents 50% of the total increase


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