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Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Table of Contents


UNITED STATES


SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2015

or

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From                To              

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2012

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From                      To                   

Commission file number 001-34877

CoreSite Realty Corporation

(Exact name of registrant as specified in its charter)

Maryland

27-1925611

Maryland
(State or other jurisdiction


of incorporation or organization)

27-1925611
(I.R.S. Employer


Identification No.)


10501001 17th Street, Suite 800

500
Denver, CO

80265


(Address of principal executive offices)



80202
(Zip Code)

(866) 777-2673


(Registrant’sRegistrant's telephone number, including area code)

          

Securities registered pursuant to Section 12(b) of the Act:

Title of Class

Name of Exchange On Which Registered

Common Stock, $0.01 par value per share

7.25 %

New York Stock Exchange
7.25% Series A Cumulative Redeemable

New York Stock Exchange
Preferred Stock, $0.01 par value per share

New York Stock Exchange

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ýx

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ýx    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ýx    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. ýx

          

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ýo

Accelerated filer ox

Non-accelerated filer o


(Do not check if a
smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No ýx

          

The aggregate market value of common equity held by non-affiliates of the registrant was approximately $360.9$1,027.9 million as of June 29, 2012,30, 2015, the last tradingbusiness day of the registrant’sregistrant's most recently completed second fiscal quarter. For purposes of the foregoing calculation, all directors and executive officers of the registrant and holders of more than 5%10% of the registrant’sregistrant's common equity are assumed to be affiliates of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

          

As of February 22, 2013,10, 2016, there were 21,202,61030,649,724 shares of the registrant’sregistrant's Common Stock, $0.01 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          

Portions of the registrant’sregistrant's definitive proxy statement to be issuedfiled in conjunction with the registrant’s 2013registrant's 2016 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the registrant’sregistrant's fiscal year ended December 31, 2012,2015, are incorporated by reference in Part III of this report.

   


Table of Contents


Table of Contents


Page

PART I

Page

4

PART I

4

ITEM 1. BUSINESS

4

ITEM 1A. RISK FACTORS

18

ITEM 1B. UNRESOLVED STAFF COMMENTS

35

41

ITEM 2. PROPERTIES

35

42

ITEM 3. LEGAL PROCEEDINGS

35

42

ITEM 4. MINE SAFETY DISCLOSURES

35

42

PART II


43

PART II

36

ITEM 5. MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

36

43

ITEM 6. SELECTED FINANCIAL DATA

38

45

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

40

47

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46

61

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

47

62

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

74

99

ITEM 9A. CONTROLS AND PROCEDURES

74

99

ITEM 9B. OTHER INFORMATION

74

100

PART III


101

PART III

75

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

75

101

ITEM 11. EXECUTIVE COMPENSATION

75

101

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

75

101

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

75

101

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

75

101

PART IV


102

PART IV

76

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

76

102

SIGNATURES


106

SIGNATURESExhibit 12.1

78

Exhibit 21.112.2

Exhibit 23.121.1

Exhibit 31.123.1

Exhibit 31.231.1

Exhibit 32.131.2

Exhibit 32.1

Exhibit 32.2


2


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Cautionary Note Regarding Forward-Looking Statements

        

This Annual Report on Form 10-K for the fiscal year ended December 31, 20122015 (this “Annual Report”"Annual 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”("PSLRA"), namely Section 27A of the Securities Act of 1933, as amended (the “Securities Act”"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"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”"believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "pro forma" or “anticipates”"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;Real Estate Investment Trust ("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.

        

In addition, important factors that could cause actual results to differ materially from the forward-looking statements include the risk factors in Item 1A. “Risk Factors”"Risk Factors" and elsewhere in this Annual Report. New risks and uncertainties arise from time to time, and we cannot predict those events or how they might affect us. We assume no obligation to update any forward-looking statements after the date of this Annual Report, except as required by applicable law. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

        

When we use the terms “we,” “us,” “our,” “the Company”"we," "us," "our," the "Company," "CoreSite" and “our company”"our company" in this Annual Report, we are referring 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 as “our"our Operating Partnership.”"


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PART I

ITEM 1.    BUSINESS

The Company

        

CoreSite Realty Corporation provides 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 14We deliver secure, reliable, high-performance data center campuses in nineand interconnection solutions, supported by industry-leading customer service, to a growing customer ecosystem across eight key North America markets, CoreSite connects customersAmerican markets. We bring together strong network and cloud communities to help them grow their business, run performance-sensitive applicationssupport the needs of the enterprise and secure their crucial data devices.

create a highly diverse customer ecosystem for more than 900 of the world's leading enterprises, network operators, cloud providers and supporting service providers. We formed CoreSite Realty Corporation as a Maryland corporation on February 17, 2010. While we initially elected to be treated as an S corporation for federal income tax purposes, we terminated our S corporation status shortly before completion ofcompleted our initial public offering of common stock on September 23, 2010 (the “IPO”("IPO"), thereby ending the S corporation tax year, and have elected to qualify. We operate as a real estate investment trust (“REIT”("REIT") for federal income tax purposes commencing with our partial taxable year ending on December 31, 2010. We alsoand conduct certain activities through our taxable REIT subsidiary (“TRS”), CoreSite Services, Inc., a Delaware corporation.subsidiaries.

At December 31, 2012, we updated the nomenclature used to reference our property portfolio. The table below reconciles between the nomenclature used in previous filings with the nomenclature found in this Annual Report:

New Property Name

Previous Property Name

SV1

55 S. Market

SV2

1656 McCarthy

Santa Clara Campus

- SV3

2901 Coronado

- SV4

2972 Stender

- SV5

2900 Stender

BO1

70 Innerbelt

NY1

32 Avenue of the Americas

VA1 & VA2

12100 Sunrise Valley

DC1

1275 K Street

CH1

427 S. LaSalle

One Wilshire Campus

- LA1

One Wilshire

- LA2

900 N. Alameda

MI1

2115 NW 22nd Street

DE1

910 15th Street

DE2

639 E. 18th Avenue

Our Initial Public Offering and Formation

On September 28, 2010, we closed on our IPO and completed the following transactions:

·      ��           We issued 19,435,000 shares of our common stock in exchange for proceeds of $289.2 million, net of underwriter discounts and commissions of $21.8 million;

·As part of our formation transactions, our Operating Partnership acquired 100% of the ownership interests in the various entities that owned our “Predecessor,” comprised of the real estate activities and interconnection services of four of our operating properties, SV2, NY1, VA1 and BO1, as well as the Santa Clara Campus, from certain real estate funds (the “Funds”) affiliated with The Carlyle Group (“Carlyle”), in exchange for 14,797,755 Operating Partnership units, or $236.8 million in value based on the $16.00 per share IPO price for our common stock;

·Our Operating Partnership also acquired 100% of the ownership interests in the entities that owned the “CoreSite Acquired Properties,” comprised of the continuing real estate operations at SV1, LA1, LA2, DC1, CH1, MI1 and 1050 17th Street, a non-revenue generating property that we lease for our corporate headquarters, as well as CoreSite, LLC, our management company, from the Funds and their affiliates in exchange for 19,802,245 Operating Partnership units, or $316.8 million in value based on the $16.00 per share IPO price;

·Concurrently with the closing of the IPO, we used a portion of the cash proceeds from the IPO to purchase from the Funds and their affiliates 8,435,000 Operating Partnership units for an aggregate purchase price of $125.5 million; and

·We purchased an additional 11,000,000 newly issued Operating Partnership units from our Operating Partnership for a purchase price of $163.7 million.

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Our Business

        

We are a fully integrated, self-administered, and self-managed real estate investment trust.REIT. Through our controlling interest in CoreSite, L.P., a Delaware limited partnership, our Operating"Operating Partnership," we are engaged in the business of ownership, acquisition, construction and managementoperation of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including Los Angeles, the Northern Virginia (including Washington D.C.), New York, and San Francisco Bay and Northern Virginia areas, (including Washington DC), Chicago, Los Angeles, Boston, New York City, Miami and Denver.

        

Data centers are highly specialized and secure buildings that house networking, storage and communications technology infrastructure, including servers, storage devices, switches, routers and fiber optic transmission equipment. These buildings are designed to provide the power, cooling and network connectivity necessary to efficiently operate this mission-critical equipment. Data centers located at points where many communications networks converge can also function as interconnection hubs where customers are able to connect to multiple networks and exchange traffic with each other. Our data centers feature advanced reliable and efficient power, cooling and security systems, including twenty-four hours a day, seven days a weektwenty-four-hours-a-day, seven-days-a-week in-house security staffing, and many are points of network interconnection that buildprovide the evolved ecosystems our customers need to meet their own competitive challenges and business goals. We believe we have the flexibility and scalability to satisfy the full spectrum of our customers’customers' growth requirements and corresponding data center needs by providing data center space ranging in size from an entire building or large dedicated suite to a cage or half cabinet. We work with a broad and growing customer base of over 750 customers that we arrange into our five key verticals as follows: networks and mobility, cloud and IT service providers, digital content and multimedia, systems integrators and managed services providers and enterprise customers of all sizes with a variety of space, power and interconnection needs. We believe our operational flexibility allows us to effectively match our data center space to its optimal use, depending on customer demand, regional economies and property characteristics.

        

The first data center in our portfolio was purchased in 2000 by certain real estate funds (the "Funds") affiliated with The Carlyle Group, our Predecessor, in 2000 and since then we have continued to acquire, develop and operate these types of data center facilities. Our properties are self-managed, including with respect to construction project management in connection with our development initiatives. As of December 31, 2012,2015, our property portfolio included 1417 operating data center facilities, office and light-industrial space and multiple development projects and space, which collectively comprise over 2.72.8 million net rentable square feet (“NRSF”("NRSF"), of which over 1.21.6 million NRSF is existing data center space.

2012 and Recent Developments

On February 7, 2012, we repaid a $25.0 million senior mortgage loan secured by CH1.

On April 19, 2012, we acquired a leasehold interest in DE1 and DE2 for $2.6 million, net of cash received, through the acquisition of Comfluent, a Denver, Colorado based data center operator.

On October 9, 2012, we exercised our two-year option extending the maturity date to October 9, 2014, on our $59.8 million mortgage loan secured by SV1.

On December 12, 2012, the Company issued 4,600,000 shares of 7.25% Series A Cumulative Redeemable Preferred Stock for total net proceeds, after underwriting discounts and offering expenses, of $110.6 million, including the proceeds from the exercise of the full underwriters’ over-allotment option.

During the year ended December 31, 2012, we completed and placed into service 139,671 NRSF in our VA1, SV4, and CH1 properties. At December 31, 2012, we had 94,650 NRSF under construction with completion expected in 2013.

On January 3, 2013, we amended and restated our revolving credit facility, which among other things, extended the maturity date from December 2014 to January 2018 (including the one-year extension option), and increased our borrowing capacity under the credit facility from $225.0 million to $355.0 million. The new credit facility is unsecured, compared to the prior facility which was secured by five properties.

On February 7, 2013, we acquired a 283,000 square-foot building, which we refer to as NY2, on 10 acres of land in Secaucus, New Jersey. We expect to invest approximately $65.0 million in 2013 that includes acquiring the facility, developing the powered shell, and completing the initial phase of development, consisting of 65,000 NRSF.

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Table of ContentsOur Competitive Strengths

        

Our Competitive Strengths

We believe the following key competitive strengths position us to efficiently scale our business, capitalize on the growing demand for data center space and interconnection services, and thereby grow our cash flow.

High Quality Data Center Portfolio.        As of December 31, 2012, our property portfolio included 14 state-of-the-artSecure, Reliable, and Compliant.    We help businesses protect mission-critical data, performance sensitive applications and IT infrastructure by delivering secure, reliable, and compliant data center facilities and multiple development projects.


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solutions. Our data centers feature advanced efficient power and cooling infrastructure to support our customers performance-sensitive applicationscustomer's IT infrastructure with additional power capacity to support continued growth. ManyWe provide twenty-four-hours-a-day, seven-days-a-week in-house security guard monitoring with customizable security features. We also provide the infrastructure and physical security required to support many of our customers' compliance needs.

        High Performance.    We offer cloud-enabled, network-rich data center campuses with over 20,000 interconnections across our portfolio and direct access to over 300 carriers and ISPs, over 275 leading cloud and IT service providers and inter-site connectivity. Our offerings include the CoreSite Open Cloud Exchange, the CoreSite Open Internet Exchange Hub and the Any2 Internet Exchange. We believe that the diverse network connectivity options at many of our data centers support interconnected communitiesprovide us with a competitive advantage because network-dense facilities offering high levels of network and mobility services providers, cloud services providers, digital content organizations, systems integrators, managed service providers and enterprise customers that rely on interconnection and colocation. We believe these communities enhance our tenants’ business operations, reduce operational risks and increase the attractiveness of our buildings.connectivity typically take many years to establish. Many providers in our data center facilities can leverage our sites as revenue opportunities by offering their services directly to other customers within our data centers, while enterprises can reduce their total cost of operations by directly connecting to service providers in the same data center in a cost effective manner.

Significant Network Density.        Many of ourScalable.    Across 17 operating data centers are points of dense network interconnection that provide our customers with valuable networking opportunities that help us retain existing customersin eight key North American markets, we lease space to enterprises through multiple sub-verticals such as financial, healthcare, education, government, manufacturing, and attract new ones.professional services. We believe our ability to be both flexible and scalable is a key differentiator. We offer many space, power, and interconnection options that allow customers to select products and services that meet their needs. We believe we have a compelling combination of presence in most of the extensive diverse network connectivity options at these data centers provide us with a significant competitive advantage because network-dense facilities offering high levels of connectivity typically take many years to establish. Our portfolio houses over 275 unique network service providers. To facilitate access to these networking opportunities, we provide services enabling interconnection among ourtop data center customers, including private cross connections and publicly switched peering services. Currently, we manage over 15,000 interconnections across our portfolio.

We own and operatemarkets in the Any2 Internet Exchange, which isU.S. with the largest internet exchange on the west coast with over 250 members. We provide direct access to Any2 switches from each of our data centers, with regional exchanges accessible in California and the Northeast (Boston, New York, Washington DC). Multiple switches feature a dual core set-up for increased reliability and improved network recovery.

Expansion Capability. By leasing readily available data center space and expanding our operating data center space, we anticipate that we will be ableability to meet thecustomers' growing demand from our existing and prospective customers.capacity requirements within those markets.

        At December 31, 2012,2015, our data center facilities have approximately 278,120170,000 NRSF of space readily available for lease. Including NY2, which was acquired February 7, 2013 and our portfolio at December 31, 2012, weunoccupied space. We have the ability to expand our operatingoccupied data center square footage by approximately 99.7%1,039,000 NRSF, or 70%, or approximately 1.2 million NRSF, through leasing our unoccupied space and the development of (1) 94,650370,000 NRSF space under construction as of December 31, 2012, (2) 216,250 NRSF planned to commence development during 2013 at NY22015, and on land that we currently own at VA2 and our Santa Clara Campus, and 3) 894,286approximately 498,000 NRSF at multiple facilities as shown in thethat are available for future development table on page 9, that may be developed over time based on market supply demandand demand.

        Best-in-Class Customer Experience.    We believe our 391 professionals deliver best-in-class service by placing customer needs first in supporting the planning, implementation and operating requirements of customers. We provide dedicated implementation resources to ensure a seamless onboarding process for customers. Our leasing and sales professionals can develop complex data center solutions for the most demanding customer requirements and our financial capabilities.experienced and committed operations and facilities personnel are available for extensive management support.

Facilities in Key Markets.    Our portfolio is concentrated in some of the largest and most important U.S. metropolitan markets and we expect to continue benefitting from this proximityconcentration as customers seek new, high-quality data center space and interconnections within our markets, which are many of the key North American network, financial, cloud and commercial hubs. Our data centers are located in Los Angeles, the Northern Virginia (including Washington D.C.), New York and San Francisco Bay and Northern Virginia areas, (including Washington DC), Chicago, Los Angeles, Boston, New York City, Miami and Denver. These locations offer access to the abundantutility power required to effectively run the data center facilities. Many of our facilities are also situated in close proximity to a concentration of key businesses and corporations, driving demand for our data center space and interconnection services, which help these organizations to reach their potential customers, enabling them to meet their short- and long-term business goals.services.

Flexibility and Scalability. We believe our ability to be both flexible and scalable is a key differentiator for our company. We offer many space, power, and interconnection options that allow customers to select the options that meet their needs. We believe that many of our customers have chosen us because we offer space and power flexibility and numerous interconnection services to accommodate their growth. We have a compelling combination of presence in most of the top data center hubs with ability to meet customers’ growing capacity requirements within those markets. We offer diverse connectivity options throughout all of the data center campuses in our portfolio, and a healthy and growing community of network and mobility, cloud and IT service providers selling value added services. Also, we lease space to enterprises across multiple sub-verticals like financial, healthcare, legal, manufacturing, and government, who want to securely and cost-effectively buy these services as needed.

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Diversified Customer Base.We have a diverse, global customer base, of over 750 customers, which we believe is a reflection of our strong reputation and proven track record, as well as our customers’customers' trust in our ability to house their mission-critical applications and vital communications technology and the flexibility and scalability to meet their unique needs. Astechnology. Our diverse


Table of December 31, 2012, one customer represented 7.9% of our annualized rent and our top ten customers represented 31.9% of our annualized rent. We group our customers into vertical market segments, referred to as verticals, with similar businesses that have specific and specialized needs. Our diverse Contents

customer base spans many industries and includesacross eight key North America markets. In addition to geographic markets, we group our customers into the following fiveindustry verticals:

    •
    Enterprise:

    ·

    •
    Digital Content and Multimedia

    •
    Systems Integrators and Managed Services Providers ("SI & MSP")

    •
    Other (financial, healthcare, education, government, manufacturing and professional services)

    •
    Cloud and IT Service Providers

    •
    Networks and Mobility: domestic and international telecommunications carriers, ISPs (Internet Service Providers) and CDNs (Content Delivery Networks)

·Digital Content and Multimedia

·Cloud and IT Service Providers

·Systems Integrators and Managed Services Providers

·Enterprises: financial, healthcare, educational institutions, government agencies, manufacturing, and professional services

Experienced Management Team. Our management team has significant experience in the real estate and communications industry, specifically the colocation and data center market. Notably, our Chief Executive Officer has over 24 years of experience in the acquisition, financing and operation of commercial real estate, which includes over 13 years in the data center industry and eight years at publicly traded REITs. Additionally, our Chief Financial Officer has approximately 25 years of financial experience, including five years with a publicly traded REIT where he served as Managing Director and Chief Accounting Officer and 18 years in public accounting with significant history as a partner with KPMG and Arthur Andersen, where he served as the Partner in charge of the real estate and financial services practices in Denver, Colorado. Our Chief Operating Officer and our Senior Vice President of Sales each bring over 25 years of successful go-to-market strategy development and tactical execution within the communications industry and specifically within the data center sector. Also, our General Counsel has over 13 years of experience, including seven years with a publicly traded REIT and three years in private practice in the communications industry.

Balance Sheet Positioned to Fund Continued Growth. As of December 31, 2012, we had approximately $174.8 million of total long-term debt and preferred stock equal to approximately 18.4% of the undepreciated book value of our total assets and we had $8.1 million of cash available on our balance sheet. Upon amending and restating our credit facility, we had the ability to borrow $355.0 million, subject to satisfying certain financial covenants which we currently meet. We believe this available capital will be sufficient to fund our general corporate needs, including the completion of 94,650 NRSF of data center space under construction as of December 31, 2012, and the development of an additional 216,250 NRSF of space prior to December 31, 2013.

Business and Growth Strategies

        

Our business objective is to continue growing our position as a provider of strategically located data center space in North America. The key elementsKey components of our strategy are as follows:include the following:

Increase Cash Flow of In-PlaceIn-Place Data Center SpaceSpace..    We actively manage and lease our properties to increase cash flow by:

    •
    ·Increasing Interconnection in our Facilities. During the year ended December 31, 2012, we increased our customer count to over 750 customers compared to approximately 700 customers as of December 31, 2011, an increase of approximately 7%. As more customers locate in our facilities, it benefits their business partners and customers to colocate with CoreSite in order to gain the full economic and performance benefits of our interconnection services. This ecosystem of customers continues to drive new and existing customer growth, and in turn, increases the volume of interconnection services and the number of value-add power services such as breakered AC and DC primary and redundant power.

    ·Leasing of Available Space.  We have the ability to increase both our revenue and our revenue per square foot by leasing additional space, power and interconnection services to new and existing data center customers. As of December 31, 2012,2015, substantially all of our data center facilities had space and power available to offer our customers the ability to increase their square footage under lease as well as the amount of power they use per square foot. In total, ourOur existing data center facilities have 278,120approximately 170,000 NRSF of space currently available for lease.unoccupied. We believe this space, together with available power, enables us to generate incremental revenue within our existing data center footprint.



    •
    Increasing Interconnection in our Facilities.  As more customers locate in our facilities, it benefits their business partners and customers to colocate with CoreSite in order to gain the full economic and performance benefits of our interconnection services. We believe this ecosystem of customers continues to drive new and existing customer growth, and in turn, increases the volume of interconnection services and the amount of value-add power services such as breakered AC and DC primary and redundant power.

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Capitalize on Embedded Expansion Opportunities.    Including the space currently under construction or in preconstruction at December 31, 2012, vacant spaceWe plan to grow by developing new secure, reliable and land targeted for future development and NY2, which was acquired February 7, 2013, we own land and buildings sufficient to develop approximately 1.2 million square feet ofhigh-performance data center space. Our development opportunities include ground-up construction on vacant parcels of land that we currently own and leveraging existing in-place infrastructure and entitlements in currently operating properties or campuses. In many cases, we are able to strategically deploy capital by developing space in incremental phases to meet customer demand.

As of Including the space currently under construction at December 31, 2012, the largest projects in our2015, vacant space and land targeted for future development, portfolio included 198,000we own land and buildings sufficient to develop approximately 869,000 NRSF at VA2 and 305,987 NRSF at the Santa Clara Campus, a 15.75-acre property housing seven buildings in Santa Clara, California. The Santa Clara Campus currently includes:

·SV3, a 50,000 NRSF fully leased data center,

·SV4, a 101,000 NRSFof data center of which 69,503 NRSF was completed as of December 31, 2012, and 31,497 NRSF which was under construction as of December 31, 2012, with an anticipated completion date in first quarter of 2013;

·SV5, a 101,250 NRSF development project that is expected to commence in the first quarter 2013; and

·a 9.1 acre development site with five buildings consisting of 173,240 NRSF of entitled data center space which we plan to develop in 2014 and beyond based upon market supply and demand. In addition, we have approximately 71,000 NRSF of office and light-industrial space in our operating portfolio which we may develop into data center space. This development site currently provides us with the ability to develop additional data center space in one of the fastest growing and most important data center markets in North America.

Following our acquisition of NY2 on February 7, 2013, we added 283,000 NRSF to our development portfolio, relating to the development of NY2.

8



Table of Contents

        

The following table summarizes the NRSF under construction and NRSF held for development opportunities throughout our portfolio, each as of December 31, 2012, with the exception of NY2, which was acquired February 7, 2013.

Development Opportunities (in NRSF)

Facilities

 

Under
Construction(1)

 

Near-Term(2)

 

Long-Term(3)

 

Total

 

Los Angeles

 

 

 

 

 

 

 

 

 

One Wilshire Campus

 

 

 

 

 

 

 

 

 

LA1

 

—

 

—

 

7,309

 

7,309

 

LA2

 

19,250

 

—

 

246,933

 

266,183

 

San Francisco Bay

 

 

 

 

 

 

 

—

 

Santa Clara Campus(4)

 

31,497

 

101,250

 

173,240

 

305,987

 

Northern Virginia

 

 

 

 

 

 

 

—

 

VA2(5)

 

—

 

50,000

 

148,000

 

198,000

 

Boston

 

 

 

 

 

 

 

—

 

BO1

 

23,663

 

—

 

87,650

 

111,313

 

Chicago

 

 

 

 

 

 

 

—

 

CH1

 

20,240

 

—

 

—

 

20,240

 

New York

 

 

 

 

 

 

 

 

 

NY2(6)

 

—

 

65,000

 

218,000

 

283,000

 

Miami

 

 

 

 

 

 

 

 

 

MI1

 

—

 

—

 

13,154

 

13,154

 

Total Facilities

 

94,650

 

216,250

 

894,286

 

1,205,186

 

2015:

 
 Development Opportunities (in NRSF) 
Facilities
 Under
Construction(1)		 Held for
Development(2)		 Total 

San Francisco Bay

          

Santa Clara campus(3)

  216,580  150,000  366,580 

Los Angeles

          

One Wilshire campus

          

LA2

  43,345  127,202  170,547 

Northern Virginia

          

VA2

  96,274  —  96,274 

Boston

          

BO1

  14,031  73,619  87,650 

New York

          

NY2

  —  134,508  134,508 

Miami

          

MI1

  —  13,154  13,154 
​​​ ​ ​​ ​​​ ​ ​

Total Facilities(4)

  370,230  498,483  868,713 
​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​

(1)Reflects
Represents NRSF at a facility for which the initiation of substantial development activities are ongoing to prepare the property for its intended use has commenced prior to December 31, 2012.

(2)Reflectsfollowing development. The NRSF at a facility for which the initiationreflects management's estimate of substantial development activities to prepare the property for its intended use is planned to commence after December 31, 2012, but prior to December 31, 2013.

(3)The long-term 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 plan and are entitled to develop approximately 306,000 NRSF of

(2)
Represents incremental data center space at this campus. Incremental to the 306,000 NRSF, we have approximately 71,000 NRSF of office and light-industrial spacecapacity currently vacant in existing facilities in our operating portfolio which we maythat requires significant capital investment in order to develop into data center space andfacilities.

(3)
In April 2015, we plan to develop an additional 116,000began construction on 136,580 NRSF of data center space at this campus pursuant to the terms of a build-to-suit lease entered into on the same date with a strategic customer for a 100% pre-leased powered shell, which will be known as SV6. We expect to deliver SV6 during the first half of 2016. In September 2015, we commenced development of a new 230,000 NRSF data center, SV7, and we expect to complete the first phase of 80,000 NRSF during the second quarter of 2016.

(4)
In addition to our development opportunities disclosed within this table, we have entitled and unentitled land adjacent to our NY2 and LA2 facilities, in the form of existing parking lots. By utilizing existing parking lots, we believe that we could develop 100,000 NRSF and 200,000 NRSF buildings at NY2 and LA2, respectively, upon our receipt of the necessary entitlement.

entitlements.

(5)We plan and are entitled to develop approximately 198,000 NRSF, 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 after December 31, 2012, but prior to December 31, 2013.

(6)We plan to develop approximately 283,000 of data center space at this property, of which 65,000 NRSF will commence development after December 31, 2012, but prior to December 31, 2013.

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Table of Contents

Selectively Pursue Acquisition and Development Opportunities in New and Existing Markets.    We opportunistically evaluate opportunities to acquire or develop data center space with abundant power and/or dense points of interconnection in key markets that will expand our customer base and broaden our geographic footprint. Such acquisitions may entail subsequent development, which requires significant capital expenditures. We will also intend to continue to implement the “hub-and-spoke strategy”"hub-and-spoke strategy" that we have successfully deployed in our threefour largest markets, namely the Los Angeles, New York, San Francisco Bay and Northern Virginia markets.Virginia. In these markets, we have extended our data center footprint by connecting our newer facilities, the spokes, to our established data centers, our hubs, which allows our customers leasing space at the spokes to leverage the significant interconnection capabilities of our hubs. In order to deploy our “hub-and-spoke"hub-and-spoke strategy,”" we typically rely on third-party providers of network connectivity to establish highly reliable network connectivity within and between certainfacilities.


Table of our data centers.Contents

Leverage Existing Customer Relationships and Reach New Customers.    Our strong customer and industry relationships, combined with our national footprint and sales force, afford us insight into the size, timing and location of customers’customers' planned growth. We historically have historically been successful in leveraging this market visibility to expand our footprint and customer base in existing and new markets. We intend to continue to strengthen and expand our relationships with existing customers and to further grow and diversify our customer base by targeting growing customers and segments, such as domestic and international telecommunications carriers, content and media entertainment providers, cloud providers and other enterprise customers, including financial, andhealth care, educational institutions and government agencies.

    Our Portfolio

        

As of December 31, 2012, including NY2, acquired on February 7, 2013,2015, our property portfolio included 1417 operating data center facilities, office and light-industrial space and multiple development sites. Our operating portfolio and development sitesprojects that collectively comprise over 2.72.8 million NRSF, of which approximately 1.2over 1.6 million NRSF is existing data center space. Our operating properties include approximately 358,929The 0.9 million NRSF of development projects includes space readily available for lease, of which 278,120 NRSF is available for lease as data center space. Including the space currently under construction or in preconstruction at December 31, 2012, vacant space and land targeted for future development and NY2, we own land and buildings sufficient to develop approximately 1.2 million square feetconstruction of incremental data center space.new facilities. We expect that this development potential plus any potential expansionincremental investment into existing or new markets will enable us to accommodate existing and future customer demand and position us to significantlycontinue to increase our operating 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 new and expansion data center leasing activity (in NRSF) during the year ended December 31, 2012:

 

 

Three Months Ended:

 

 

 

December 31,
2012

 

September
30, 2012

 

June 30,
2012

 

March 31,
2012

 

New and expansion leases signed but not yet commenced at beginning of period

 

12,941

 

41,545

 

32,436

 

25,571

 

Adjustments(1)

 

544

 

—

 

—

 

—

 

New and expansion leases signed during the period(2)

 

156,704

 

11,387

 

26,290

 

37,563

 

New and expansion leases signed during the period which have commenced

 

(14,414

)

(5,699

)

(8,157

)

(15,195

)

New and expansion leases signed in previous periods which commenced during period

 

(6,958

)

(34,292

)

(9,024

)

(15,503

)

Total leases signed but not yet commenced at end of period

 

148,817

 

12,941

 

41,545

 

32,436

 

(1) Adjustment 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.

(2) During the three months ended December 31, 2012, we signed a 101,250 NRSF built-to-suit powered shell lease which we expect to commence in the second half of 2013.

10


Table of Contents

The following table provides an overview of our properties, eachproperty portfolio as of December 31, 2012, with the exception of NY2, which was acquired February 7, 2013.

 

 

 

 

Operating Portfolio (in NRSF)

 

 

 

 

 

Operating(1)

 

 

 

 

 

 

 

 

 

Data Center(2)

 

Office and Light-
Industrial(3)

 

Total

 

Development(7)

 

 

 

 

 

Annualized

 

 

 

Percent

 

 

 

Percent

 

 

 

Percent

 

 

 

Total

 

Market/Facilities

 

Rent ($000)(4)

 

Total

 

Leased(5)

 

Total

 

Leased(5)

 

Total(6)

 

Leased(5)

 

Total

 

Portfolio

 

Los Angeles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One Wilshire Campus

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LA1*

 

$

24,403

 

150,278

 

76.7

%

7,500

 

45.5

%

157,778

 

75.2

%

7,309

 

165,087

 

LA2

 

12,327

 

159,617

 

75.3

 

8,360

 

33.7

 

167,977

 

73.3

 

266,183

 

434,160

 

Los Angeles Total

 

36,730

 

309,895

 

76.0

 

15,860

 

39.3

 

325,755

 

74.2

 

273,492

 

599,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco Bay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SV1

 

11,277

 

84,045

 

88.4

 

206,255

 

80.2

 

290,300

 

82.6

 

—

 

290,300

 

SV2

 

5,968

 

76,676

 

66.4

 

—

 

—

 

76,676

 

66.4

 

—

 

76,676

 

Santa Clara Campus

 

15,735

 

119,067

 

68.4

 

71,196

 

91.7

 

190,263

 

77.1

 

305,987

 

496,250

 

San Francisco Bay Total

 

32,980

 

279,788

 

79.5

 

277,451

 

83.2

 

557,239

 

78.5

 

305,987

 

863,226

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern Virginia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VA1

 

20,888

 

201,719

 

72.4

 

61,050

 

76.4

 

262,769

 

73.3

 

—

 

262,769

 

VA2

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

198,000

 

198,000

 

DC1*

 

2,028

 

22,137

 

74.8

 

—

 

—

 

22,137

 

74.8

 

—

 

22,137

 

Northern Virginia Total

 

22,916

 

223,856

 

72.6

 

61,050

 

76.4

 

284,906

 

73.4

 

198,000

 

482,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boston

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BO1

 

9,955

 

148,795

 

92.5

 

13,063

 

39.3

 

161,858

 

88.2

 

111,313

 

273,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chicago

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CH1

 

9,834

 

158,167

 

82.5

 

4,946

 

56.9

 

163,113

 

81.7

 

20,240

 

183,353

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NY1*

 

5,088

 

48,404

 

69.1

 

—

 

—

 

48,404

 

69.1

 

—

 

48,404

 

NY2

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

283,000

 

283,000

 

New York Total

 

5,088

 

48,404

 

69.1

 

—

 

—

 

48,404

 

69.1

 

283,000

 

331,404

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miami

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MI1

 

1,724

 

30,176

 

56.3

 

1,934

 

100.0

 

32,110

 

58.9

 

13,154

 

45,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denver

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DE1*

 

766

 

4,144

 

93.4

 

—

 

—

 

4,144

 

93.4

 

—

 

4,144

 

DE2*

 

172

 

5,140

 

61.3

 

—

 

—

 

5,140

 

61.3

 

—

 

5,140

 

Denver Total

 

938

 

9,284

 

75.7

 

—

 

—

 

9,284

 

75.7

 

—

 

9,284

 

Total Facilities

 

$

120,165

 

1,208,365

 

77.0

%

374,304

 

78.4

%

1,582,669

 

77.3

%

1,205,186

 

2,787,855

 

2015:

 
 Data Center Operating NRSF(1)  
  
 
 
  
 Total
NRSF		 
 
  
 Stabilized Pre-Stabilized(2) Total Development
NRSF(3)		 
 
 Annualized
Rent ($000)(4)		  
 Percent
Occupied(5)		  
 Percent
Occupied(5)		  
 Percent
Occupied(5)		 Total
Portfolio		 
Market/Facilities
 Total Total Total Total 

San Francisco Bay

                            

SV1

 $6,760  85,932  84.9% —  —% 85,932  84.9% —  85,932 

SV2

  8,086  76,676  95.8  —  —  76,676  95.8  —  76,676 

Santa Clara campus(6)

  32,985  252,009  97.3  —  —  252,009  97.3  366,580  618,589 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

San Francisco Bay Total

  47,831  414,617  94.4  —  —  414,617  94.4  366,580  781,197 

Los Angeles

                            

One Wilshire campus

                            

LA1*

  26,981  139,053  88.2  —  —  139,053  88.2  —  139,053 

LA2

  23,455  203,131  90.0  51,212  63.4  254,343  84.6  170,547  424,890 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​

Los Angeles Total

  50,436  342,184  89.3  51,212  63.4  393,396  85.9  170,547  563,943 

Northern Virginia

                            

VA1

  28,922  201,719  92.5  —  —  201,719  92.5  —  201,719 

VA2

  6,149  69,010  100.0  23,163  80.0  92,173  95.0  96,274  188,447 

DC1*

  3,244  22,137  89.4  —  —  22,137  89.4  —  22,137 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​

Northern Virginia Total

  38,315  292,866  94.0  23,163  80.0  316,029  93.0  96,274  412,303 

Boston

                            

BO1

  14,959  166,026  97.6  —  —  166,026  97.6  87,650  253,676 

Chicago

                            

CH1

  16,199  166,776  91.8  11,631  80.2  178,407  91.1  —  178,407 

New York

                            

NY1*

  5,892  48,404  77.3  —  —  48,404  77.3  —  48,404 

NY2

  6,900  52,339  94.9  49,404  40.4  101,743  68.5  134,508  236,251 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

New York Total

  12,792  100,743  86.4  49,404  40.4  150,147  71.3  134,508  284,655 

Miami

                            

MI1

  1,860  30,176  82.2  —  —  30,176  82.2  13,154  43,330 

Denver

                            

DE1*

  1,134  5,878  93.0  —  —  5,878  93.0  —  5,878 

DE2*

  384  5,140  86.6  —  —  5,140  86.6  —  5,140 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

Denver Total

  1,518  11,018  90.0  —  —  11,018  90.0  —  11,018 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​

Total Data Center

 $183,910  1,524,406  92.5% 135,410  59.3% 1,659,816  89.7% 868,713  2,528,529 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​

Office and Light-Industrial(7)

  7,180  354,721  72.6  —  —  354,721  72.6  —  354,721 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Total Portfolio

 $191,090  1,879,127  88.7% 135,410  59.3% 2,014,537  86.7% 868,713  2,883,250 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

*
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 estimateTable 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 operating NRSF and total development NRSF, but excludes our office space at a facility and our corporate headquarters.Contents

(2)

(1)
Represents the NRSF at each operating facility that is currently leasedoccupied or readily available for lease as data center space and pre-stabilized data center space. Both leasedoccupied and available data center NRSF includes a factor based on management's estimate to account for a customer’scustomer'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 Operating data center space, which is typically space offered for officeNRSF may require investment of Deferred Expansion Capital, see definition on page 11.

(2)
Pre-stabilized NRSF represents projects or light-industrial uses.

(4)facilities that recently have been developed and are in the initial lease-up phase. Pre-stabilized projects or facilities become stabilized operating properties at the earlier of achievement of 85% occupancy or 24 months after development completion.

(3)
Represents the monthly contractual rent under existing customer leases as of December 31, 2012, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and it excludes operating expense reimbursement, power revenue and interconnection revenue. 

(5)Includes customer leases that have commenced as of December 31, 2012. The percent leased is determined based on leased square feet as a proportion of total operating NRSF.  The percent leased forincremental data center space, office and light industrial space, and spacecapacity currently vacant in total would have been 81.3%, 78.8%, and 80.8%, respectively, if all leases signed in current and prior periods had commenced.

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

(7)Represents vacant space and entitled land in our portfoliofacilities that requirerequires significant capital investment in order to develop into data center facilities. Includes NRSF under construction for which substantial activities are ongoing to prepare the property for its intended use following development. Total developmentThe NRSF reflects management's estimate of engineering drawings and required support space and is subject to change based on final demising of space.

(4)
Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2015, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes power revenue, interconnection revenue and operating expense reimbursement. On a gross basis, our total portfolio annualized rent was approximately $196.6 million as of December 31, 2015, which reflects the addition of $5.5 million in operating expense reimbursements to contractual net rent under modified gross and triple-net leases. See footnote (6) below for more information regarding annualized rent for the Santa Clara campus.

(5)
Includes customer leases that have commenced and are occupied as of December 31, 2015. The percent occupied is determined based on leased square feet as a proportion of total operating NRSF representas of December 31, 2015. The percent occupied for stabilized data center space would have been 93.4%, rather than 92.5%, if all leases signed in the current and prior periods had commenced. The percent occupied for our total NRSF atportfolio, including stabilized data center space, pre-stabilized space and office and light-industrial space, would have been 87.6%, rather than 86.7%, if all leases signed in current and prior periods had commenced.

(6)
The annualized rent for the Santa Clara campus includes amounts associated with a given facility.

restructured lease agreement involving a customer that has vacated its leased space and is paying discounted rent payments that may be applied to new lease arrangements elsewhere in our portfolio on a dollar-for-dollar basis until the original lease terms expire. The amounts payable pursuant to this agreement are scheduled to expire as follows: $1.9 million in the second quarter of 2016 and $4.2 million in the second quarter of 2017.

(7)
Represents space that is currently occupied or readily available for lease as space other than data center space, which typically is offered for office or light-industrial uses.

11


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The following table shows the December 31, 2012 operatingOur ("Same-Store") statistics forare based on space within each data center facility that was leased andor available to be leased as of December 31, 2010, at each of our properties, and excludes2013, excluding space for which development was completed and became available to be leased after December 31, 2010 (the2013. We track Same-Store space leased or available to be leased at the computer room level within each data center facility. The following table shows the December 31, 2010, same store pool).2015, Same-Store operating statistics. For comparison purposes, the operating activity totals as of December 31, 2011,2014, and 2010,2013, for this space are provided at the bottom of this table.

 

 

 

 

Same Store Property Portfolio (in NRSF)

 

 

 

 

 

Data Center

 

Office and Light-
Industrial

 

Total

 

Market/Facilities

 

Annualized
Rent ($000)

 

Total

 

Percent
Leased

 

Total

 

Percent
Leased

 

Total

 

Percent
Leased

 

Los Angeles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LA1*

 

$

24,403

 

150,278

 

76.7

%

7,500

 

45.5

%

157,778

 

75.2

%

LA2

 

11,911

 

149,473

 

76.9

 

8,360

 

33.7

 

157,833

 

74.7

 

Los Angeles Total

 

36,314

 

299,751

 

76.8

 

15,860

 

39.3

 

315,611

 

74.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

San Francisco Bay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SV1

 

11,277

 

84,045

 

88.4

 

206,255

 

80.2

 

290,300

 

82.6

 

SV2

 

5,968

 

76,676

 

66.4

 

—

 

—

 

76,676

 

66.4

 

Santa Clara Campus

 

9,732

 

50,000

 

100.0

 

34,000

 

82.5

 

84,000

 

92.9

 

San Francisco Bay Total

 

26,977

 

210,721

 

83.2

 

240,255

 

80.5

 

450,976

 

81.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Northern Virginia

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

VA1

 

14,618

 

116,499

 

96.5

 

61,050

 

76.4

 

177,549

 

89.6

 

DC1*

 

2,028

 

22,137

 

74.8

 

—

 

—

 

22,137

 

74.8

 

Northern Virginia Total

 

16,646

 

138,636

 

93.0

 

61,050

 

76.4

 

199,686

 

88.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Boston

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BO1

 

9,569

 

133,646

 

99.1

 

13,063

 

39.3

 

146,709

 

93.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Chicago

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CH1

 

9,608

 

128,906

 

97.4

 

—

 

—

 

128,906

 

97.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New York

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NY1*

 

5,088

 

48,404

 

69.1

 

—

 

—

 

48,404

 

69.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Miami

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MI1

 

1,724

 

30,176

 

56.3

 

1,934

 

100.0

 

32,110

 

58.9

 

Total Facilities at December 31, 2012(1)

 

$

105,926

 

990,240

 

85.1

%

332,162

 

76.3

%

1,322,402

 

82.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 
 Same-Store Property Portfolio (in NRSF) 
 
  
 Data Center Office and Light-
Industrial		 Total 
Market/Facilities
 Annualized
Rent ($000)(1)		 Total Percent
Occupied(2)		 Total Percent
Occupied(2)		 Total Percent
Occupied(2)		 

San Francisco Bay

                      

SV1

 $11,863  85,932  84.9% 234,238  74.5% 320,170  77.3%

SV2

  8,086  76,676  95.8  —  —  76,676  95.8 

Santa Clara campus(3)

  33,006  252,009  97.3  712  84.3  252,721  97.2 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

San Francisco Bay Total

  52,955  414,617  94.4  234,950  74.6  649,567  87.2 

Los Angeles

  
 		  
 		  
 		  
 		  
 		  
 		  
 		 

One Wilshire campus

                      

LA1*

  27,155  139,053  88.2  4,373  84.8  143,426  88.1 

LA2

  20,513  201,090  89.9  7,029  96.9  208,119  90.1 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

Los Angeles Total

  47,668  340,143  89.2  11,402  92.3  351,545  89.3 

Northern Virginia

  
 		  
 		  
 		  
 		�� 
 		  
 		  
 		 

VA1

  30,019  201,719  92.5  61,050  83.3  262,769  90.3 

DC1*

  3,244  22,137  89.4  —  —  22,137  89.4 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

Northern Virginia Total

  33,263  223,856  92.2  61,050  83.3  284,906  90.3 

Boston

  
 		  
 		  
 		  
 		  
 		  
 		  
 		 

BO1

  15,242  166,026  97.6  19,495  63.6  185,521  94.1 

Chicago

  
 		  
 		  
 		  
 		  
 		  
 		  
 		 

CH1

  14,750  166,776  91.8  4,946  69.9  171,722  91.2 

New York

  
 		  
 		  
 		  
 		  
 		  
 		  
 		 

NY1*

  5,904  48,404  77.3  209  100.0  48,613  77.4 

NY2

  2,184  18,103  92.1  —  —  18,103  92.1 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

New York Total

  8,088  66,507  81.3  209  100.0  66,716  81.4 

Miami

  
 		  
 		  
 		  
 		  
 		  
 		  
 		 

MI1

  1,882  30,176  82.2  1,934  57.1  32,110  80.7 

Denver

  
 		  
 		  
 		  
 		  
 		  
 		  
 		 

DE1*

  891  4,726  91.3  —  —  4,726  91.3 

DE2*

  384  5,140  86.6  —  —  5,140  86.6 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​

Denver Total

  1,275  9,866  88.9  —  —  9,866  88.9 
​​​​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Total Facilities at December 31, 2015(4)

 $175,123  1,417,967  92.0% 333,986  76.0% 1,751,953  88.9%
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

Total Facilities at December 31, 2014

 $155,334     85.5%    72.5%    82.8%
​​​ ​ ​​​​​ ​​​​​​ ​ ​​​​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​
​​​​ ​​​​​ ​ ​​​​​ ​ ​​​​​ ​ ​

Total Facilities at December 31, 2013

 $136,470     77.7%    71.9%    76.5%
​​​ ​ ​​​​​ ​​​​​​ ​ ​​​​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​
​​​​ ​​​​​ ​ ​​​​​ ​ ​​​​​ ​ ​

*
Indicates properties in which we hold a leasehold interest.

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(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 annualized rent for the Santa Clara campus includes amounts associated with a restructured lease agreement involving a customer that has vacated its leased space and is paying discounted rent payments that may be applied to new lease arrangements elsewhere in our portfolio on a dollar-for-dollar basis until the original lease terms expire. The amounts payable pursuant to this agreement are scheduled to expire as follows: $1.9 million in the second quarter of 2016 and $4.2 million in the second quarter of 2017.

(4)
The percent occupied for data center space, office and light industriallight-industrial space, and total space in total would have been 85.5%92.9%, 76.4%, and 83.2%89.8%, respectively, if all leases signed in the current and prior periods had commenced.

        Same-Store annualized rent increased to $175.1 million at December 31, 2015, compared to $155.3 million at December 31, 2014. The increase of $19.8 million in annualized rent is due primarily to a 10.1% increase in data center occupancy in the Northern Virginia market, a 7.0% increase in data center occupancy in the Los Angeles market and the new and restructured lease agreements at the Santa Clara campus involving a customer that has vacated its leased space and is paying discounted rent payments that may be applied to new lease arrangements elsewhere in our portfolio on a dollar-for-dollar basis until the original lease terms expire.

DevelopmentCapital Expenditures

        The following table sets forth information regarding capital expenditures during the year ended December 31, 2015 (in thousands):

 
 Year Ended
December 31, 2015		 

Data center expansion

 $132,786 

Non-recurring investments

  9,971 

Tenant improvements

  8,037 

Recurring capital expenditures

  5,828 
​​​ ​ ​

Total capital expenditures

 $156,622 
​​​ ​ ​
​​​​​
​​​ ​ ​

During the year ended December 31, 2012,2015, we incurred approximately $88.0$156.6 million on development projects. Of the total $88.0 million spent during 2012,of capital expenditures, of which approximately $27.9$132.8 million related to data center expansion activities, including new data center construction, the development of capacity within existing data centers and other revenue generating investments. As we construct data center capacity, we work to optimize both the Santa Clara Campus. During 2012,amount of the capital we placed three computer rooms into servicedeploy on power and cooling infrastructure and the timing of that capital deployment; as such, we generally construct our power and cooling infrastructure supporting our data center NRSF based on our estimate of customer utilization. This practice can result in our investment at SV4, which increaseda later time in Deferred Expansion Capital. We define Deferred Expansion Capital as our estimate of the incremental capital we may invest in the future to add power or cooling infrastructure to support existing or anticipated future customer utilization of NRSF within our operating data center space by 50,951 NRSF. We estimate the remaining computer rooms at SV4 totaling 31,497 NRSF will be completed during the first quarter of 2013.centers.

We spent approximately $18.1 million on our development project at CH1. At CH1, we placed one computer room into service, which increased our operating data center space by 29,261 NRSF. The remaining 20,240 NRSF is scheduled to be completed in 2013.

Also during 2012, we spent $9.5 million related to development at LA2. The remaining $32.5 million spent during 2012 on development projects primarily related to the construction of computer rooms and tenant improvements across several of our properties.

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Table of Contents

        During the year ended December 31, 2015, we completed development of nine computer rooms placed into service at five properties. The following table sets forth capital expenditures spent on data center NRSF placed into service or under construction during the year ended December 31, 2015:

 
  
 NRSF 
Property
 Data Center
Expansion		 Placed into
Service		 Under
Construction		 

BO1

 $9,160  —  14,031 

CH1

  6,249  11,631  — 

LA2

  7,592  17,501  43,345 

NY2

  12,928  49,050  — 

SV6

  16,899  —  136,580 

SV7

  23,508  —  80,000 

VA2

  35,282  92,173  96,274 

Other

  21,168  3,194  — 
​​​ ​ ​​ ​​​ ​ ​

Total

 $132,786  173,549  370,230 
​​​ ​ ​​​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​

        During the year ended December 31, 2015, we incurred approximately $10.0 million in non-recurring investments, of which $4.3 million is a result of internal IT software development and the remaining $5.7 million is a result of other non-recurring investments, such as remodel or upgrade projects.

        During the year ended December 31, 2015, we incurred approximately $8.0 million in tenant improvements, of which $2.5 million relates to two customer leases at our VA1 property and the remaining $5.5 million relates to other tenant improvements at various properties.

        During the year ended December 31, 2015, we incurred approximately $5.8 million of recurring capital expenditures within our portfolio for required equipment upgrades that have a future economic benefit.

Customer Diversification

As of December 31, 2012, our portfolio was leased to over 750 customers, many of which are nationally recognized firms.        The following table sets forth information regarding the ten largest customers in our portfolio based on total portfolio annualized rent as of December 31, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

Percentage

 

Remaining

 

 

 

 

 

 

Number

 

Total

 

of Total

 

Annualized

 

of

 

Lease

 

 

 

 

 

 

of

 

Leased

 

Operating

 

Rent

 

Annualized

 

Term in

 

 

Industry

 

CoreSite Vertical

 

Locations

 

NRSF(1)

 

NRSF(2)

 

($000)(3)

 

Rent(4)

 

Months(5)

 

1

Technology

 

Digital Content & Multimedia

 

2

 

50,625

 

3.2

%

$

9,461

 

7.9

%

46

 

2

Technology

 

Systems Integrators & Managed Services Providers

 

3

 

52,902

 

3.3

 

6,362

 

5.3

 

56

 

3

Technology

 

Digital Content & Multimedia

 

7

 

38,992

 

2.5

 

4,526

 

3.8

 

11

 

4

Government*(6)

 

Enterprises

 

1

 

141,774

 

9.0

 

4,011

 

3.3

 

22

 

5

Technology

 

Cloud & IT Service Providers

 

1

 

26,842

 

1.7

 

3,494

 

2.9

 

64

 

6

Technology

 

Systems Integrators & Managed Services Providers

 

1

 

6,034

 

0.4

 

2,495

 

2.1

 

25

 

7

Government

 

Enterprises

 

2

 

16,266

 

1.0

 

2,271

 

1.9

 

21

 

8

Telecommunications

 

Network & Mobility

 

3

 

18,562

 

1.2

 

1,943

 

1.6

 

82

 

9

Technology

 

Cloud & IT Service Providers

 

3

 

9,719

 

0.6

 

1,883

 

1.6

 

8

 

10

Financial

 

Enterprises

 

2

 

11,670

 

0.7

 

1,856

 

1.5

 

26

 

 

Total/Weighted Average

 

 

 

373,386

 

23.6

%

$

38,302

 

31.9

%

39

 

2015:

 
 
Customer Industry
 CoreSite Vertical Number of
Locations		 Total
Occupied
NRSF(1)		 Percentage of
Total
Operating NRSF(2)		 Annualized
Rent ($000)(3)		 Percentage of
Total
Annualized Rent(4)		 Weighted
Average
Remaining
Lease
Term in
Months(5)		 

1

 

Technology

 Cloud  9  146,118  7.3%$10,238  5.4% 48 

2

 

Technology

 Enterprise—SI & MSP  3  63,348  3.1  8,743  4.6  37 

3

 

Technology(6)

 Enterprise—Digital Content  10  71,555  3.6  6,404  3.3  5 

4

 

Technology

 Enterprise—Digital Content  2  31,974  1.6  5,504  2.9  28 

5

 

Technology

 Cloud  2  70,630  3.5  4,514  2.4  77 

6

 

Technology

 Network  5  28,078  1.4  4,254  2.2  40 

7

 

Technology

 Enterprise—SI & MSP  2  20,032  1.0  4,246  2.2  18 

8

 

Technology

 Cloud  1  28,923  1.4  4,230  2.2  34 

9

 

Government*

 Enterprise—Other  1  130,960  6.5  3,895  2.0  85 

10

 

Technology

 Enterprise—Digital Content  6  36,634  1.8  3,354  1.8  40 
​​​​​​​​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

 

Total/Weighted Average(7)

  628,252  31.2%$55,382  29.0% 40 
​​​​​​​​​​ ​ ​​ ​​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​​
​​​​​​​​​​​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

*
Denotes customer using space for general office purposes.



(1)
Total leasedoccupied NRSF is determined based on contractually leased square feet for leases that have commenced on or before December 31, 2012.2015. We calculate occupancy based on factors in addition to contractually leased square feet, including

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    required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.

(2)
Represents the customer’scustomer's total leasedoccupied square feet divided by the total operating NRSF in the portfolio which, as of December 31, 2012,2015, consisted of 1,582,6692,014,537 NRSF.

(3)
Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2015, 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.

(4)
Represents the customer's total annualized rent divided by the total annualized rent as of December 31, 2015, which was approximately $191.1 million.

(5)
Weighted average based on percentage of total portfolio annualized rent expiring calculated as of December 31, 2015.

(6)
Management is currently negotiating renewal leases with this customer at all locations. It is anticipated that the lease negotiations will be finalized at some of the locations during 2016 and that other locations will be vacated.

(7)
In addition to the ten largest customers, total annualized rent includes $6.1 million associated with a restructured lease agreement involving a customer at the Santa Clara campus that has vacated its leased space and is paying discounted rent payments that may be applied to new lease arrangements elsewhere in our portfolio on a dollar-for-dollar basis until the original lease terms expire. The amounts payable pursuant to this agreement are scheduled to expire as follows: $1.9 million in the second quarter of 2016 and $4.2 million in the second quarter of 2017.

Lease Expirations

(3)        The following table sets forth a summary schedule of the expirations for leases in place as of December 31, 2015, plus unoccupied space, for each of the five full calendar years beginning January 1, 2016, at the properties in our portfolio (excluding space held for development or under construction). The information set forth in the table assumes that customers exercise no renewal options or early termination rights.

Year of Lease Expiration
 Number of
Leases
Expiring(1)		 Total
Operating
NRSF of
Expiring
Leases		 Percentage
of Total
Operating
NRSF		 Annualized
Rent ($000)(2)		 Percentage
of Total
Annualized
Rent		 Annualized
Rent Per
Leased
NRSF(3)		 Annualized
Rent at
Expiration
($000)(4)		 Annualized
Rent Per
Leased
NRSF at
Expiration(5)		 

Unoccupied data center

  —  170,205  8.4%$—  —%$— $— $— 

Unoccupied office and light-industrial

  —  97,107  4.8  —  —  —  —  — 

2016

  741  322,416  16.0  45,588  23.8  136  45,915  137 

2017

  537  281,288  14.0  50,262  26.3  164  52,345  171 

2018

  291  295,395  14.7  40,057  21.0  136  46,200  156 

2019

  80  183,969  9.1  16,384  8.6  89  19,430  106 

2020

  37  100,112  5.0  8,641  4.5  86  12,285  123 

2021—Thereafter

  43  306,431  15.2  22,978  12.0  75  31,506  103 

Office and light-industrial(6)

  101  257,614  12.8  7,180  3.8  28  7,555  29 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​

Portfolio Total / Weighted Average

  1,830  2,014,537  100.0%$191,090  100.0%$106 $215,236 $120 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
(1)
Includes leases that upon expiration will automatically renew, primarily on a year-to-year basis. Number of leases represents each agreement with a customer; a large agreement could include multiple spaces and a customer could have multiple leases.

(2)
Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2015, multiplied by12. 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.

(3)
The annualized rent per leased NRSF and per leased NRSF at expiration does not include annualized rent of $6.1 million associated with a restructured lease agreement involving a customer at the Santa Clara campus

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    that has vacated its leased space and is paying discounted rent payments that may be applied to new lease arrangements elsewhere in our portfolio on a dollar-for-dollar basis until the original lease terms expire. The amounts payable pursuant to this agreement are scheduled to expire as follows: $1.9 million in the second quarter of 2016 and $4.2 million in the second quarter of 2017.

(4)
Represents the final monthly contractual rent under existing customer leases as of December 31, 2012,2015, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes operating expense reimbursement, power revenue and interconnection revenue.

(4)Represents the customer’s total annualized rent divided by the total annualized rent in the portfolio as of December 31, 2012, which was approximately $120.2 million.



(5)Weighted average based on percentage of total annualized rent expiring calculated as of December 31, 2012.

(6)The data presented represents an interim office space lease in place that expires in May 2014. Upon expiration of the interim lease and the substantial completion of building improvements by us, a new lease that has already been executed by both parties will commence. That lease includes 119,729 NRSF with a ten-year term and a termination option at the end of year eight.

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Lease Distribution

The following table sets forth information relating to the distribution of leases in the properties in our portfolio, based on NRSF (excluding space held for development) under lease as of December 31, 2012:

 

 

 

 

 

 

Total

 

Percentage

 

 

 

Percentage

 

 

 

Number

 

Percentage

 

Operating

 

of Total

 

Annualized

 

of

 

 

 

of

 

of All

 

NRSF of

 

Operating

 

Rent

 

Annualized

 

Square Feet Under Lease(1)

 

Leases(2)

 

Leases

 

Leases(3)

 

NRSF

 

($000)(4)

 

Rent

 

Available colocation(5)

 

—

 

—

%

278,120

 

17.6

%

$

—

 

—

%

Available office and light-industrial

 

—

 

—

 

80,809

 

5.1

 

—

 

—

 

Colocation NRSF Under Lease

 

 

 

 

 

 

 

 

 

 

 

 

 

1,000 or less

 

1,145

 

87.1

 

181,101

 

11.4

 

34,336

 

28.6

 

1,001 - 2,000

 

47

 

3.6

 

67,445

 

4.3

 

9,512

 

7.9

 

2,001 - 5,000

 

69

 

5.2

 

210,537

 

13.3

 

24,580

 

20.5

 

5,001 - 10,000

 

20

 

1.5

 

139,963

 

8.9

 

14,694

 

12.2

 

10,001 - 25,000

 

9

 

0.6

 

139,256

 

8.8

 

19,984

 

16.6

 

Greater than 25,000

 

2

 

0.2

 

61,614

 

3.9

 

6,614

 

5.5

 

Powered Shell

 

6

 

0.5

 

166,738

 

10.5

 

4,534

 

3.8

 

Office and light-industrial(6)

 

17

 

1.3

 

257,086

 

16.2

 

5,911

 

4.9

 

Portfolio Total

 

1,315

 

100.0

%

1,582,669

 

100.0

%

$

120,165

 

100.0

%

(1)Represents all leases in our portfolio, including data center and office and light-industrial leases.

(2)Includes leases that upon expiration will automatically be renewed, primarily on a month-to-month basis. Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.

(3)Represents the square feet at a building under lease as specified in the lease agreements plus management’s estimate of space available for lease to third parties based on engineers’ drawings and other factors, including required data center support space (such as mechanical, telecommunications and utility rooms) and building common areas.

(4)Represents the monthly contractual rent under existing customer leases as of December 31, 2012, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes operating expense reimbursement, power revenue and interconnection revenue.

(5)Excludes NRSF held for development or under construction.

(6)Excludes office and light-industrial space of 36,409 NRSF that is a component of colocation leases. The 36,409 NRSF of office and light-industrial space is leased to data center tenants as incremental space to their data center lease space.

Lease Expirations

The following table sets forth a summary schedule of the expirations for leases in place as of December 31, 2012, plus available space for each of the ten full calendar years beginning January 1, 2013, at the properties in our portfolio. Unless otherwise stated in the footnotes, the information set forth in the table assumes that customers exercise no renewal options or early termination rights.

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

Annualized

 

 

 

Number

 

Operating

 

Percentage

 

 

 

Percentage

 

Annualized

 

Annualized

 

Rent Per

 

 

 

of

 

NRSF of

 

of Total

 

 

 

of

 

Rent Per

 

Rent at

 

Leased

 

 

 

Leases

 

Expiring

 

Operating

 

Annualized

 

Annualized

 

Leased

 

Expiration

 

NRSF at

 

Year of Lease Expiration

 

Expiring(1)

 

Leases

 

NRSF

 

Rent ($000)(2)

 

Rent

 

NRSF(3)

 

($000)(4)

 

Expiration(5)

 

Available as of December 31, 2012(6)

 

—

 

358,929

 

22.7

%

$

—

 

—

%

$

—

 

$

—

 

$

—

 

2013

 

601

 

254,034

 

16.1

 

29,372

 

24.5

 

115.62

 

29,735

 

117.05

 

2014(7)

 

279

 

300,278

 

19.0

 

29,561

 

24.6

 

98.45

 

30,453

 

101.42

 

2015

 

201

 

103,625

 

6.5

 

16,943

 

14.1

 

163.50

 

19,597

 

189.11

 

2016

 

99

 

167,444

 

10.6

 

12,965

 

10.8

 

77.43

 

14,438

 

86.23

 

2017

 

95

 

126,045

 

8.0

 

14,739

 

12.3

 

116.93

 

20,202

 

160.28

 

2018

 

11

 

93,341

 

5.9

 

9,028

 

7.5

 

96.72

 

11,693

 

125.27

 

2019

 

3

 

80,708

 

5.1

 

1,615

 

1.3

 

20.01

 

1,788

 

22.15

 

2020

 

4

 

30,664

 

1.9

 

1,099

 

0.9

 

35.84

 

1,194

 

38.94

 

2021

 

9

 

18,155

 

1.1

 

1,980

 

1.6

 

109.06

 

2,876

 

158.41

 

2022

 

8

 

26,132

 

1.6

 

2,334

 

1.9

 

89.32

 

3,839

 

146.91

 

2023-Thereafter

 

5

 

23,314

 

1.5

 

529

 

0.5

 

22.69

 

661

 

28.35

 

Portfolio Total / Weighted Average

 

1,315

 

1,582,669

 

100.0

%

$

120,165

 

100.0

%

$

98.19

 

$

136,476

 

$

111.52

 

(1)Includes leases that upon expiration will automatically be renewed, primarily on a month-to-month basis. Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.

(2)Represents the monthly contractual rent under existing customer leases as of December 31, 2012, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and excludes operating expense reimbursement, power revenue and interconnection revenue.

(3)Annualized rent as defined above, divided by the square footage of leases expiring in the given year.

(4)Represents the final monthly contractual rent under existing customer leases as of December 31, 2012, multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and it excludes operating expense reimbursement, power revenue and interconnection revenue.

(5)

Annualized rent at expiration as defined above, divided by the square footage of leases expiring in the given year. This metric reflects the rent growth inherent in the existing base of lease agreements.

(6)
Of the occupied office and light industrial leases, 39,357 NRSF, 13,882 NRSF, 12,598 NRSF, 31,640 NRSF, 4,937 NRSF and 155,200 NRSF are scheduled to expire in 2016, 2017, 2018, 2019, 2020 and 2021 and thereafter, respectively, which accounts for (in thousands) $989, $365, $423, $798, $166 and $4,439 of annualized rent scheduled to expire during each respective period.

Lease Distribution

(6)Excludes        The following table sets forth information relating to the distribution of leases in the properties in our portfolio, based on NRSF (excluding space held for development or under construction.construction) under lease as of December 31, 2015:

(7)Includes an

NRSF Under Lease(1)
 Number of
Leases(2)		 Percentage
of All
Leases		 Total
Operating
NRSF of
Leases		 Percentage
of Total
Operating
NRSF		 Annualized
Rent ($000)(3)		 Percentage
of Total
Annualized
Rent		 

Unoccupied data center

  —  —% 170,205  8.4%$—  —%

Unoccupied office and light-industrial

  —  —  97,107  4.8  —  — 

Data center NRSF:

                   

5,000 or less

  1,659  90.6  590,448  29.4  93,553  49.0 

5,001 - 10,000

  31  1.7  205,753  10.2  26,080  13.6 

10,001 - 25,000

  20  1.1  290,286  14.4  36,444  19.0 

Greater than 25,000

  3  0.2  105,532  5.2  11,239  5.9 

Powered shell and other(4)

  16  0.9  297,592  14.8  16,594  8.7 

Office and light-industrial

  101  5.5  257,614  12.8  7,180  3.8 
​​​ ​ ​​​ ​​ ​ ​​ ​​​ ​ ​​ ​​

Portfolio Total

  1,830  100.0% 2,014,537  100.0%$191,090  100.0%
​​​ ​ ​​​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​
(1)
Represents all leases in our portfolio, including data center and office and light-industrial leases.

(2)
Number of leases represents each agreement with a customer; a lease whichagreement could include multiple spaces and a customer could have multiple leases.

(3)
Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2015, 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.

(4)
The annualized rent for powered shell and other includes $6.1 million associated with a restructured lease agreement involving a customer at the Santa Clara campus that has vacated its leased space and is an interim lease in placepaying discounted rent payments that expires on May 31, 2014. Upon the expiration of the interim lease and the substantial completion of tenant improvements by us, amay be applied to new lease that has already been executed by both parties will commence.arrangements elsewhere in our portfolio on a dollar-for-dollar basis until the original terms expire. The new lease includes 119,729 NRSF with a ten-year termamounts payable pursuant to this agreement are scheduled to expire as follows: $1.9 million in the second quarter of 2016 and a termination option at$4.2 million in the endsecond quarter of year eight.

2017.

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Competition

        

We compete with numerous developers, owners and operators of technology-related real estate and data centers, many of which own properties similar to ours in the same markets in which our properties are located, including AT&T Inc., CenturylinkCenturyLink Inc., Savvis, Inc., a CenturylinkCenturyLink company, CyrusOne, Inc., Digital Realty Trust, Inc., DuPont Fabros Technology, Inc., Equinix, Inc., Internap Network Services Corporation, Quality Technology Services, RagingWire Data Centers, SABEY Corporation, Telx Group Inc., Verizon / Terremark Worldwide, Inc., Shaw Communications Inc. / ViaWest, Inc., and Zayo Colocation Inc. In addition, we may face competition from new entrants into the data center market. Some of our competitors and potential competitors may have significant advantages over us, including greater name recognition, longer operating histories, pre-existing relationships with current or potential customers, significantly greater financial, marketing and other resources, and access to less expensive power, all of which could allow them to respond more quickly to new or changing opportunities. If our competitors offer space, power and/or interconnection services at rates below current market rates, or below the rates we currently charge our customers, we may lose potential customers and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers when our customers’customers' leases expire.

        

As a developer of data center space and provider of interconnection services, we also compete for the services of key third-party providers of services, including engineers and contractors with expertise in the development of data centers. The competition for the services of specialized contractors and other third-party providers required for the development of data centers is intense, increasing the cost of engaging such providers and the risk of delays in completing our development projects.

        

In addition, we face competition from real estate developers in our sector and in other industries for the acquisition of additional properties suitable for the development of data centers. Such competition may reduce the number of properties available for acquisition, increase the price of these properties and reduce the demand for data center space in the markets we seek to serve.

Regulation

15


Table of ContentsGeneral

        

Regulation

General

Data centers in our markets are subject to various laws, ordinances and regulations, including regulations relating to common areas. We believe that each of our properties has the necessary permits and approvals to operate our business.

Americans with Disabilities Act

        

Our properties must comply with Title III of the American with Disabilities Act, or the ADA, to the extent that such properties are places of “public accommodation”"public accommodation" or “commercial facilities”"commercial facilities" as defined by the ADA. The ADA requires properties that are places of “public accommodation”"public accommodation" to, among other things, remove existing barriers to access by persons with disabilities where such removal is readily achievable. The ADA also requires places of “public accommodation”"public accommodation" as well as “commercial facilities”"commercial facilities" undergoing new construction or alterations to conform to the ADA Accessibility Guidelines, which provide design standards that permit accessibility by individuals with disabilities. Further, if entities on our properties offer certain examinations or courses (i.e., those related to applications, licensing, certification, or credentialing for secondary or postsecondary education, professional, or trade purposes), they must be offered in an accessible place and manner or with alternative accessible arrangements. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to those properties to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of monetary damages and civil penalties in lawsuits brought by the Attorney General or an award of attorneys’attorneys' fees to private litigants. The obligation to make readily achievable accommodations as


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required by the ADA is an ongoing one, and we will continue to assess our properties and make alterations as appropriate.

Environmental Matters

        

Under various federal, state and local laws and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for contamination resulting from the presence or discharge of hazardous or toxic substances at that property, and may be required to investigate and clean up such contamination at that property or emanating from that property. Such laws and regulations often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of the contaminants, and a party may be liable for all of the cleanup costs, even when more than one person was responsible for the contamination. Previous owners used some of our properties for industrial and retail purposes, so those properties may contain some level of environmental contamination. The presence of contamination or the failure to remediate contamination at our properties may expose us to third-party liability or materially adversely affect our ability to sell, lease or develop the real estate or to borrow using the real estate as collateral. In addition, we could incur costs to comply with such laws and regulations, the violation of which could lead to substantial fines and penalties.

        

Environmental laws and regulations also require that asbestos-containing building materials be properly managed and maintained and may impose fines and penalties on building owners or operators for failure to comply with these requirements. Further, third parties could potentially seek recovery from owners or operators for personal injury associated with exposure to asbestos-containing building materials.

        

In addition, certain of our customers, particularly those that lease light-industrial space from us, routinely handle hazardous substances and wastes as part of their operations at our properties. Environmental laws and regulations subject our customers, and potentially us, to liability resulting from these activities or from previous industrial or other uses of those properties. Environmental liabilities could also affect a customer’scustomer's ability to make rental payments to us. We require our customers to comply with these environmental laws and regulations and to indemnify us for any related liabilities.

        

Independent environmental consultants have conducted Phase I or similar environmental site assessments on all owned properties in our portfolio. Each of the site assessments has been either completed or updated since 2005. Site assessments are intended to collect and evaluate information regarding the environmental condition of the surveyed property and surrounding properties. These assessments do not generally include soil sampling, subsurface investigations or asbestos sampling. Although prior commercial or industrial operations at some of our properties may have released hazardous materials and some of our properties contain or may contain asbestos-containing building materials, none of the recent site assessments revealed any past or present environmental liability that we believe would have a material adverse effect on our business, assets or results of operations. However, the assessments may have failed to reveal all environmental conditions, liabilities or compliance concerns. Material environmental conditions, liabilities or compliance concerns may have arisen after the reviews were completed or may arise in the future; and future laws, ordinances or regulations may impose material additional environmental liability. See “Risk"Risk Factors—Risks Related to the Real Estate Industry—Our Business and Operations—Environmental problems are possible and can be costly.”

"

16


Table of ContentsInsurance

        

Insurance

We carry comprehensive liability, fire, extended coverage, earthquake, business interruption, rental loss, and umbrella liability insurance covering all of the properties in our portfolio augmented by excess liability coverage in an amount that we believe to be appropriate. We select policy specifications and insured limits which we believe to be appropriate given the relative risk of loss, the cost of the coverage


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and industry practice and, in the opinion of our management, the properties in our portfolio are currently adequately insured. We do not carry insurance for generally uninsured losses such as loss from riots, war or acts of God. In addition, we carry earthquake insurance on our properties in an amount and with deductibles which we believe are commercially reasonable. Certain of the properties in our portfolio are located in areas believed to be seismically active. Potential losses to our properties may not be covered by insurance or may exceed our policy coverage limits. See “Risk Factors - "Risk Factors—Risks Related to Our Business and Operations—Potential losses to our properties may not be covered by insurance or may exceed our policy coverage limits”limits" in Item 1A. of this Annual Report.

Employees

        

As of December 31, 2012,2015, we had 316391 full-time and part-time employees, of which 183202 employees are salaried with the remainder paid on an hourly basis. None of our employees areis a member of a labor union and we believe that our relations with employees are good.

Offices

        

Our corporate offices are located at 10501001 17th Street, Suite 800,500, Denver, CO 80265.80202.

How to Obtain Our SEC Filings

        

All reports we file with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials we file with the SEC at the SEC’sSEC's public reference room located at 100 F Street, N.E., Washington, D.C. 20549. We also provide copies of our Forms 8-K, 10-K, 10-Q, Proxy Statement, Annual Report and amendments to those documents at no charge to investors upon request and make electronic copies of such reports available through our website at www.coresite.com as soon as reasonably practicable after filing such material with the SEC. The information found on, or otherwise accessible through, our website is not incorporated by reference into, nor does it form a part of, this Annual Report on Form 10-K, or any other document that we file with the SEC.

Financial Information

        

We manage our business as one reportable segment consisting of investments in data centers located in the United States. For required financial information related to our operations and assets, please refer to our consolidated financial statements, including the notes thereto, included in Item 8 “Financial Statement8. "Financial Statements and Supplementary Data”Data" in this Annual Report.


17


Table of Contents

ITEM 1A.    RISK FACTORS

        

Any of the following risks could materially and adversely affect our business, results of operations or financial condition. The risks and uncertainties described below are those that we currently believe may materially affect our company.Company. Additional risks and uncertainties of which we are unaware or that we currently deem immaterial also may become important factors that affect our company.Company.


Risks Related to Our Business and Operations

Global economic conditions could adversely affect our liquidity and financial condition.

        

General economic conditions and the cost and availability of capital may be adversely affected in some or all of the markets in which we own properties and conduct our operations. Renewed or increased turbulenceInstability in the U.S., European and other international financial markets and economies may adversely affect our ability, and the ability of our tenants, to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity and capital expenditure requirements and may result in adverse effects on our, and our tenants’,tenants' financial condition and results of operations.

        

In addition, our access to funds under our revolving credit facility and other lines of credit we may enter into depend on the ability of the lenders that are parties to such facilities to meet their funding commitments to us. We cannot assure you that long-term disruptions in the global economy and the return of tighter credit conditions, among, and potential failures or nationalizations of, third party financial institutions as a result of such disruptions will not have an adverse effect on our lenders. If our lenders are not able to meet their funding commitments to us, our business, results of operation, cash flows and financial condition could be adversely affected.

        

If we do not have sufficient cash flow to continue operating our business and are unable to borrow additional funds, access our existing lines of credit or raise equity or debt capital, we may need to find alternative ways to increase our liquidity. Such alternatives may include, without limitation, curtailing development activity, disposing of one or more of our properties possibly on disadvantageous terms or entering into or renewing leases on less favorable terms than we otherwise would.

Our portfolio of properties consists primarily of data centers geographically concentrated in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets may negatively impact our operating results.

        

Our portfolio of properties consists primarily of data centers geographically concentrated in Los Angeles, the San Francisco Bay and Northern Virginia areas (including Washington D.C.), Chicago, Boston, Chicago,the New York City,area, Miami and Denver. These markets comprised 30.6%, 27.4%, 19.1%26.0%, 8.3%20.8%, 8.8%, 8.2%, 4.2%7.0%, 1.4%1.0%, and 0.8%, respectively, of our annualized data center rent as of December 31, 2012.2015. As such, we are susceptible to local economic conditions and the supply of and demand for data center space in these markets. If there is a downturn in the economy or an oversupply of or decrease in demand for data centers in these markets, our business could be materially adversely affected to a greater extent than if we owned a real estate portfolio that was more diversified in terms of both geography and industry focus.

The market price of our stock may continue to be subject to volatility,highly volatile, and the value of an investment in our common stock may decline.

        

Since January 3, 2012,During the year ended December 31, 2015, the closing sale price of our common stock on the New York Stock Exchange (“NYSE”("NYSE") has ranged from $17.96$40.31 to $28.00$60.10 per share. The market price of the shares of our common stock has been and may continue to be highly volatile. General economic and market conditions, and market conditions for telecommunications and real estate stocks in general, may affect the market price of our common stock.


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Announcements by us or others, or speculations about our future plans, may also have a significant impact on the market price of our common stock. These may relate to:

·          

    •
    our operating results or forecasts;

    ·          

    •
    new issuances of equity, debt or convertible debt by us;

    ·          

    •
    changes to our capital allocation or business strategy;

    ·          

    •
    developments in our relationships with corporateour customers;

    ·          

    •
    announcements by our customers or competitors;

    ·          

    •
    changes in regulatory policy or interpretation;

    ·          

    •
    governmental investigations;

    ·          

    •
    litigation;

    •
    changes in the ratings of our debt or stock by rating agencies or securities analysts;

    18


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·          

•
our purchase or development of real estate and/or additional data centers;

·

•
overall market demand for data center space and services;

•
changes in prices for utilities, connectivity and other services we provide;

•
personnel changes;

•
changes in customers' budgets for information technology services;

•
our acquisitions of complementary businesses;businesses or

· dispositions of properties; or

•
the operational performance of our data centers.

        

The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging telecommunications and real estate companies, and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock.

We face significant competition and may be unablevulnerable to lease vacant space, renew existing leases or release space as leases expire,security breaches and cyber-attacks which maycould disrupt our operations and have a material adverse effect on our businessfinancial performance and resultsoperating results.

        A party who is able to compromise the security measures on our networks or the security of our infrastructure could misappropriate our proprietary information and the personal information of our customers and employees and cause interruptions or malfunctions in our or our customers' operations.

We compete with numerous developers, ownersmay be required to expend significant financial resources to protect against such threats or to alleviate problems caused by security breaches. As techniques used to breach security are growing in frequency and operators of technology-related real estatesophistication and data centers, many of which own properties similar to ours in the same markets. In addition,are generally not recognized until launched against a target, we may face competition from new entrants into the data center market. Somenot be able to implement security measures in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to increased risk of our competitors have significant advantages over us, including greater name recognition, longer operating histories, lower operating costs, pre-existing relationships with current or potential customers, greater financial, marketing and other resources, access to better networks and access to less expensive power. These advantages could allow our competitors to respond more quickly or effectively to strategic opportunities or changes in our industries or markets. If our competitors offer data center space that ourlawsuits, loss of existing or potential future customers, perceiveharm to be superior to ours based on numerous factors, including power, security considerations, location or network connectivity, or if they offer rental rates below our current market rates, we may lose existing or potential customers, incur costs to improve our properties or be forced to reduce our rental rates. This risk is compounded by the fact that a significant percentage of our customer leases expire every year. For example, as of December 31, 2012, leases representing 24.5%, 24.6%reputation and 14.1% of our annualized rent will expire during 2013, 2014, and 2015, respectively. If the rental rates for our properties decrease, our existing customers do not renew their leases or we are unable to lease vacant data center space or re-lease data center space for which leases are scheduled to expire, our business and results of operations could be materially adversely affected.

We are continuing to investincreases in our expansion efforts, but we may not have sufficient customer demand in the future to realize expected returns on these investments.

As part of our growth strategy, we intend to commit substantial operational and financial resources to develop new data centers and expand existing ones. However, we typically do not require pre-leasing commitments from customers before we develop or expand a data center, and we may not have sufficient customer demand to support the new data center space when completed. Once development of a data center is complete, we incur a certain amount of operating expenses even if there are no tenants occupying the space. A lack of customer demand for data center space or excess capacity in the data center market could impair our ability to achieve our expected rate of return on our investment,security costs, which could have a material adverse effect on our financial condition,performance and operating results and the market price of our common stock.results.

Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.

We periodically review each of our properties for indicators that its carrying amount may not be recoverable. Examples of such indicators may include a significant decrease in the market price, a significant adverse change in the extent or manner in which the property is being used or expected to be used based on the underwriting at the time of acquisition, or a change in its physical condition, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development, or a history of operating or cash flow losses. When such impairment indictors exist, we review an estimate of the future cash flows (excluding interest charges) expected to result from the real estate investment’s use and eventual disposition and compare to the carrying value of the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our undiscounted net cash flow evaluation indicates that we are unable to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Recording an impairment loss would result in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our financial condition, results of operations.

Our properties depend upon the demand for technology-related real estate.

        

Our portfolio of properties consists primarily of technology-related real estate and data center real estatefacilities in particular. A decrease in the demand for data center space, Internet gateway facilities or other technology-related real estate would have a greater

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adverse effect on our business and financial


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condition than if we owned a portfolio with a more diversified tenant base or less specialized use. Our substantial redevelopmentdevelopment activities make us particularly susceptible to general economic slowdowns, including recessions, as well as adverse developments in the corporate data center, Internet and data communications and broader technology industries. Any such slowdown or adverse development could lead to reduced corporate IT spending or reduced demand for data center space. Reduced demand could also result from business relocations, including to markets that we do not currently serve. Changes in industry practice or in technology, such as virtualization technology, more efficient or miniaturization of computing or networking devices, or devices that require higher power densities than today’stoday's devices, could also reduce demand for the physical data center space and infrastructure we provide or make the tenant improvements in our facilities obsolete or in need of significant upgrades to remain viable. In addition, theThe development of new technologies, the adoption of new industry standards or other factors could render many of our tenants’customers' current products and services obsolete or unmarketable and contribute to a downturn in their businesses, thereby increasing the likelihood that they default under their leases, become insolvent or file for bankruptcy. In addition, existing initiatives relating to the formation of Internet exchange alternatives could have a negative effect on the demand for and pricing of the subset of our interconnection revenue relating to Internet exchanges.

Our products and services have a long sales cycle that may harm our revenues and operating results.

        

A customer’scustomer's decision to leaselicense space in one of our data centers and to purchase additional services typically involves a significant commitment of resources. In addition, some customers will be reluctant to commit to locating in our data centers until they are confident that the data center has adequate carrier connections. As a result, we have a long sales cycle. Furthermore, we may expend significant time and resources in pursuing a particular sale or customer that ultimately does not result in revenue. We have also expanded

        An economic downturn may further impact this long sales cycle by making it extremely difficult for customers to accurately forecast and plan future business activities. This could cause customers to slow spending or delay decision-making on our products and services, which would delay and lengthen our sales force and restructured our sales organization in the past year. It will take time for these new hires to become fully productive.cycle.

        

Delays due to the length of our sales cycle may materially and adversely affect our revenues and operating results, which could harm our ability to meet our financial forecasts for a given quarter and cause volatility in our stock price.

Our interconnection and value-add power services depend on establishing highly evolved customer ecosystems and we may not be able to establish those ecosystems within a particular market.

Any failure        One of our physical infrastructure orcorporate objectives is to increase the volume of higher margin interconnection services could leadand value-add power services, as well as to significant costsincrease rental rates, by developing highly evolved ecosystems comprised of cross-connected customers within each market. We have attained varying levels of success in developing these customer ecosystems across our markets. While we believe that we are able to attract network and disruptionscloud deployments and to grow the customer ecosystem to some degree in all markets, it may be difficult in some markets to develop ecosystems on the scale of our most highly evolved interconnected ecosystems due to the presence of incumbent interconnection and network-dense data centers in those markets. Our ability to establish highly interconnected data centers in certain markets may be further negatively impacted by industry consolidation. If we are unable to establish highly evolved customer ecosystems within a particular market, we may have difficulty increasing the volume of higher margin interconnection services and value-add power services within that could reducemarket to levels that are comparable to our revenues, harm our business reputation andmost highly evolved interconnected ecosystems, which may have a material adverse effect on our financial results.

Our business depends on providing customers with highly reliable service. We may fail to provide such service as a resultcondition and results of numerous factors, including:operations.

·           human error;

·           power loss;

·           improper building maintenance by our landlords in the buildings that we lease;

·           physical or electronic security breaches;

·           fire, earthquake, hurricane, flood and other natural disasters;

·           water damage;

·           war, terrorism and any related conflicts or similar events worldwide; and

·           sabotage and vandalism.

Problems at one or more of our data centers, whether or not within our control, could result in service interruptions or equipment damage. We provide service level commitments to substantially all of our customers. As a result, service interruptions or equipment damage in our data centers could result in credits to these customers. In addition, although we have given such credits to our customers in the past, there can be no assurance that our customers will accept these credits as compensation in the future. Service interruptions and equipment failures may also expose us to additional legal liability and damage our brand image and reputation. Significant or frequent service interruptions could cause our customers to terminate or not renew their leases. In addition, we may be unable to attract new customers if we have a reputation for significant or frequent service disruptions in our data centers.

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Even if we have additional space available for lease at any one of our data centers, our ability to lease this space to existing or new customers could be constrained by our access to sufficient electrical power.

Our properties have access to a finite amount of power, which limits the extent to which we can lease additional space for use at our data centers. As current and future customers increase their power footprint in our facilities over time, the remaining available power for future customers could limit our ability to increase occupancy rates or network density within our existing facilities.

Furthermore, at certain of our data centers, our aggregate maximum contractual obligation to provide power and cooling to our customers may exceed the physical capacity at such data centers if customers were to quickly increase their demand for power and cooling. If we are not able to increase the available power and/or cooling or move the customer to another location within our data centers with sufficient power and cooling to meet such demand, we could lose the customer as well as be exposed to liability under our leases. Any such material loss of customers or material liability could adversely affect our results of operations.

To fund our growth strategy and refinance our indebtedness, we depend on external sources of capital, which may not be available to us on commercially reasonable terms or at all.

In order to maintain our qualification as a REIT, we are required under the Internal Revenue Code (the “Code”) to distribute at least 90% of our net taxable income annually, determined without regard to the dividends paid deduction and excluding any net capital gains. We will also be subject to income tax at regular corporate rates to the extent that we distribute less than 100% of our net taxable income, including any net capital gains. These distribution requirements may limit our ability to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we intend to rely on third-party sources for debt or equity financing to fund our growth strategy. In addition, we may need external sources of capital to refinance our indebtedness at maturity. We may not be able to obtain such financing or refinancing on favorable terms or at all. Our access to third-party sources of capital depends, in part, on:

·           general market conditions;

·           the market’s perception of our growth potential;

·           our then current debt levels;

·           our historical and expected future earnings, cash flow and cash distributions; and

·           the market price per share of our common stock.

In addition, our ability to access additional capital may be limited by the terms of our existing indebtedness, which restricts our incurrence of additional debt. If we cannot obtain capital when needed, we may not be able to acquire or develop properties when strategic opportunities arise or refinance our debt at maturity, which could have a material adverse effect on our business.

We may be vulnerable to security breaches which could disrupt our operations and have a material adverse effect on our financial performance and operating results.

A party who is able to compromise the security measures on our networks or the security of our infrastructure could misappropriate our proprietary information and the personal information of our customers and cause interruptions or malfunctions in our or our customers’ operations. We may be required to expend significant financial resources to protect against such threats or to alleviate problems caused by security breaches. As techniques used to breach security change frequently and are generally not recognized until launched against a target, we may not be able to implement security measures in a timely manner or, if and when implemented, these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, loss of existing or potential future customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results.

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Our success depends on key personnel whose continued service is not guaranteed and we may not be able to retain or attract knowledgeable, experienced and qualified personnel.

We depend on the efforts of key personnel, particularly Mr. Thomas M. Ray, our President and Chief Executive Officer, Jeffrey Finnin, our Chief Financial Officer, Jarrett Appleby, our Chief Operating Officer, and Derek McCandless, our General Counsel. Our reputation and relationships with existing and potential future customers, industry personnel and key lenders are the direct result of a significant investment of time and effort by our key personnel to build credibility in a highly specialized industry. Many of our senior executives have extensive experience and strong reputations in the real estate and technology industries, which aid us in capitalizing on strategic opportunities and negotiating with customers. While we believe that we will be able to find suitable replacements for key personnel who may depart from time to time, the loss of their services could diminish our business and investment opportunities and our customer, industry and lender relationships, which could have a material adverse effect on our operations.

In addition, our success depends, to a significant degree, on being able to employ and retain personnel who have the expertise required to successfully acquire, develop and operate high-quality data centers. Personnel with these skill sets are in limited supply so the demand and competition for such expertise is intense. We cannot assure you that we will be able to hire and retain a sufficient number of qualified employees at reasonable compensation levels to support our growth and maintain the high level of quality service our customers expect, and any failure to do so could have a material adverse effect on our business.

Our expenses may not decrease if our revenue decreases.

Most of the expenses associated with our business, such as debt service payments, real estate, personal and ad valorem taxes, insurance, utilities, employee wages and benefits and corporate expenses are relatively inflexible and do not necessarily decrease in tandem with a reduction in revenue from our business. Our expenses will also be affected by inflationary increases and certain of our costs may exceed the rate of inflation in any given period. As a result, we may not be able to fully offset our costs by higher lease rates, which could have a material adverse effect on our results of operations.

We depend on third parties to provide network connectivity within and between certain of our data centers, and any delays or disruptions in this connectivity may adversely affect our operating results and cash flow.

We depend upon carriers and other network providers to deliver network connectivity to customers within our data centers as well as the fiber network interconnection between our data centers. Our hub-and-spoke approach makes us dependent on these third parties to provide these services between our data centers. We cannot assure you that any network provider will elect to offer its services within new data centers that we develop or that once a network provider decides to provide connectivity to or between our data centers, it will continue to do so for any period of time. A significant interruption in or loss of these services could impair our ability to attract and retain customers and have a material adverse effect on our business.

Enabling connectivity within and between our data centers requires construction and operation of a sophisticated redundant fiber network. The construction required to connect our data centers is complex and may involve factors outside of our control, including the availability of construction resources. If highly reliable connectivity within and between certain of our data centers is not established, is materially delayed, is discontinued or fails, our reputation could be harmed, which could have a material adverse effect on our ability to attract new customers or retain existing ones.

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Our data center infrastructure may become obsolete and we may not be able to upgrade our power and cooling systems cost-effectively or at all.

        

The markets for the data centers that we own and operate, as well as the industries in which our customers operate, are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and changing customer demands. Our ability to deliver technologically sophisticated power and cooling areis a significant factorsfactor in our customers’customers' decisions to rentlease space in our data centers. Our data center infrastructure may become obsolete due to the development of new systems tothat deliver power to, or eliminate heat from, the servers and other customer equipment that we house. Additionally, our data center infrastructure could become obsolete as a result of the development of new technology that requires levels of power and cooling that our facilities are not designed to provide. Our power and cooling systems are also difficult and expensive to upgrade. Accordingly, we may not be able to efficiently upgrade or change these systems to meet new demands without incurring significant costs that we may not be able to pass on to our customers. The obsolescence of our power and cooling systems would have a material adverse effect on our business. In addition, evolving customer demand could require services or infrastructure improvements that we do not provide or that would be difficult or expensive for us to provide in our current data centers, and we may be unable to adequately adapt our properties or acquire new properties that can compete successfully. We risk losing customers to our competitors if we are unable to adapt to this rapidly evolving marketplace.

        

Furthermore, potential future regulations that apply to industries we serve may require customers in those industries to seek specific requirements from their data centers that we are unable to provide. These may include physical security requirements applicable to the defense industry and government contractors and privacy and security regulations applicable to the financial services and health care industries. If such regulations were adopted, we could lose some customers or be unable to attract new customers in certain industries, which would have a material adverse effect on our results of operations.

Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our revenues, harm our business reputation and have a material adverse effect on our financial results.

        Our business depends on providing customers with highly reliable service. We may fail to provide such service as a result of numerous factors, including:

    •
    Potential losseshuman error;

    •
    power loss;

    •
    exposure to temperature, humidity, smoke and other environmental hazards;

    •
    improper building maintenance by our landlords in the buildings that we lease;

    •
    physical or electronic security breaches;

    •
    fire, earthquake, hurricane, flood and other natural disasters;

    •
    water damage;

    •
    war, terrorism and any related conflicts or similar events worldwide; and

    •
    sabotage and vandalism.

        Problems at one or more of our data centers, whether or not within our control, could result in service interruptions or equipment damage. We provide service level commitments to substantially all of our customers. As a result, service interruptions or equipment damage in our data centers could result in billing abatements to these customers. In addition, although we have given such abatements to our properties


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customers in the past, there can be no assurance that our customers will accept these abatements as compensation in the future. Service interruptions and equipment failures may also expose us to additional legal liability and damage our brand image and reputation. Significant or frequent service interruptions could cause our customers to terminate or not be covered by insurance or may exceed our policy coverage limits.

We do not carry insurance for generally uninsured losses, such as losses from riots, war, terrorist attacks or acts of God. The properties in our portfolio located in California are subject to higher risks from earthquakes and our East Coast properties, including Miami, are potentially subject to greater risks arising from tropical storms, hurricanes and floods. Together, these properties represented approximately 91.0% of total annualized rent as of December 31, 2012. While we do carry earthquake, hurricane and flood insurance on our properties, the amount of our insurance coverage may not be sufficient to fully cover such losses.renew their leases. In addition, we may discontinue earthquake, hurricanebe unable to attract new customers if we have a reputation for significant or flood insurancefrequent service disruptions in our data centers.

We depend on some or allthird parties to provide network connectivity within and between certain of our propertiesdata centers, and any delays or disruptions in the future if the cost of premiums for any of these policies exceeds, inthis connectivity may adversely affect our judgment, the value of the coverage relativeoperating results and cash flow.

        We depend upon carriers and other network providers to the risk of loss.

If we experience a loss which is uninsured or which exceedsdeliver network connectivity to customers within our policy coverage limits, we could lose the capital invested in the damaged propertiesdata centers as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subjectfiber network interconnection between our data centers. Our hub-and-spoke approach makes us dependent on these third parties to recourse indebtedness,provide these services between our data centers. We cannot assure you that any network provider will elect to offer its services within new data centers that we woulddevelop or that once a network provider decides to provide connectivity to or between our data centers, it will continue to be liabledo so for the indebtedness, even ifany period of time. A significant interruption in or loss of these properties were irreparably damaged.services could impair our ability to attract and retain customers and have a material adverse effect on our business.

        

In addition, even if damageEnabling connectivity within and between our data centers requires construction and operation of a sophisticated redundant fiber network. The construction required to connect our propertiesdata centers is covered by insurance, a disruptioncomplex and may involve factors outside of our business caused by a casualty event may result incontrol, including the lossavailability of businessconstruction resources. If highly reliable network connectivity within and between certain of our data centers is not established, is materially delayed, is discontinued or customers. We carry a limited amount of business interruption insurance, but such insurance may not fully compensate us for the loss of business or customers due to an interruption caused by a casualty event.

The recent disruption in the financial markets makes it more difficult to evaluate the stability and net assets or capitalization of insurance companies, and any insurer’s ability to meet its claim payment obligations. A failure of an insurance company to make payments to us upon an event of loss covered by an insurance policyfails, our reputation could be harmed, which could have a material adverse effect on our business and financial condition.

A small number of customers account for a significant portion of our revenues, and the loss of any of these customers could significantly harm our business, financial condition and results of operations.

We currently depend, and expectability to continue to depend, upon a relatively small number of customers for a significant percentage of our net revenue. Our top ten customers accounted for an aggregate of approximately 31.9% of our total annualized rent as of December 31, 2012. Some of our customers may experience a downturn in their businesses or other factors that may weaken their financial condition and result in them failing to make timely rental payments, defaulting on their leases, reducing the level of interconnection services they obtain or the amount of space they lease from us or terminating their relationship with us. The loss of one or more of our significantattract new customers or a customer exerting significant pricing pressure on us could also have a material adverse effect on our results of operations.

In addition, our largest customers may choose to develop new data centers or expandretain existing data centers of their own. In the event that any of our key customers were to do so, it could result in a loss of business to us or increase pricing pressure on us. If we lose a customer, there is no guarantee that we would be able to replace that customer at a comparative rental rate or at all.

ones.

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Some of our largest customers may also compete with one another in various aspects of their businesses. The competitive pressures on our customers may have a negative impact on our operations. For instance, one customer could determine that it is not in that customer’s interest to house mission-critical servers in a facility operated by the same company that relies on a key competitor for a significant part of its annual revenue. Our loss of a large customer for this or any other reason could have a material adverse effect on our results of operations.

We are dependent upon third-party suppliers for power and certain other services, and we are vulnerable to service failures of our third-party suppliers and to price increases by such suppliers.

        

We rely on third parties to provide power to our data centers, and we cannot ensure that these third parties will deliver such power in adequate quantities or on a consistent basis. If theSince our properties have access to a finite amount of power, available to us isit may be inadequate to support our customer requirements and we may be unable to satisfy our obligations to our customers. As current and future customers increase their power usage in our facilities over time, the remaining available power for future customers could limit our ability to grow our business and increase occupancy rates or network density within our existing facilities. At certain of our data centers, our aggregate maximum contractual obligation to provide power and cooling to our customers may exceed the physical capacity at such data centers if customers were to quickly increase their demand for power and cooling. If we are not able to increase the available power and/or cooling or move the customer to another location within our data centers with sufficient power and cooling to meet such demand, we could lose the customer as well as be exposed to liability under our leases. Any such material loss of customers or growmaterial liability could adversely affect our business.results of operations.

        In addition, our data centers are susceptible to power shortages and planned or unplanned power outages caused by these shortages. While we attempt to limit exposure to power shortages by using backup generators and batteries, power outages may last beyond our backup and alternative power arrangements, which would harm our customers and our business. In the past, a limited number of our customers have experienced temporary losses of power.power and/or cooling. Pursuant to the terms of some of our customer leases, continuous or chronic power or cooling outages may give certain of our tenants the right to terminate their leases or cause us to incur financial obligations in connection with a power or cooling loss. In addition, any loss of services or equipment damage could reduce the confidence of our customers in our services thereby impairing our ability to attract and retain customers, which would


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adversely affect both our ability to generate revenues and our operating results, and harm our reputation.

        

In addition,Furthermore, we may be subject to risks and unanticipated costs associated with obtaining power from various utility companies. Municipal utilities in areas experiencing financial distress may increase rates to compensate for financial shortfalls unrelated to either the cost of production or the demand for electricity. Other utilities that serve our data centers may be dependent on, and sensitive to price increases for a particular type of fuel, such as coal, oil or natural gas. In addition, the price of these fuels and the electricity generated from them could increase as a result of proposed legislative measures related to climate change orincluding efforts to regulate carbon emissions.emissions and increase supply from more expensive renewable energy sources. In any of these cases, increases in the cost of power at any of our data centers would put those locations at a competitive disadvantage relative to data centers served by utilities that can provide less expensive power.

We may be unable to identify and complete acquisitions and successfully operate acquired properties.

We continually evaluate the market for available properties and may acquire data centers or properties suited for data center development when opportunities exist. Our ability to acquire properties on favorable terms and successfully develop and operate them involves significant risks including, but not limited to:

·we may be unable to acquire a desired property because of competition from other data center companies orDeclining real estate investors with more capital;valuations and impairment charges could adversely affect our earnings and financial condition.

        

·even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price of such property;

·we may be unable to realize the intended benefits from acquisitions or achieve anticipated operating or financial results;

·we may be unable to finance the acquisition on favorable terms or at all;

·we may underestimate the costs to make necessary improvements to acquired properties;

·we may be unable to quickly and efficiently integrate new acquisitions into our existing operations resulting in disruptions to our operations or the diversionWe periodically review each of our management’s attention;

·acquired properties may be subject to tax reassessments, which may result in higher than expected tax payments;

·wefor indicators that its carrying amount may not be ablerecoverable. Examples of such indicators may include a significant decrease in the market prices of similar properties, a significant adverse change in the extent or manner in which the property is being used or expected to access sufficient powerbe used based on favorable termsthe underwriting at the time of acquisition, or at all;a change in its physical condition, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development, or a history of operating or cash flow losses. When such impairment indictors exist, we review an estimate of the future cash flows (excluding interest charges) expected to result from the real estate investment's use and

·market conditions may result in higher than expected vacancy rates eventual disposition and lower than expected rental rates.

Incompare to the past we have acquired propertiescarrying value of the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If our undiscounted net cash flow evaluation indicates that did not perform up to our expectations and there can be no assurance that this will not happen again. If we are unable to successfully acquire, developrecover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. Recording an impairment loss would result in an immediate negative adjustment to net income. The evaluation of estimated future cash flows is highly subjective and operate data center properties,is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. A worsening real estate market may cause us to reevaluate the assumptions used in our ability to growimpairment analysis. Impairment charges could adversely affect our business, competefinancial condition, results of operations and meetthe market expectations will be significantly impaired, which would have a material adverse effect on the price of our common stock.

Potential losses to our properties may not be covered by insurance or may exceed our policy coverage limits.

24        We do not carry insurance for generally uninsured losses, such as acts of war. Our properties in our portfolio are subject to risks from earthquakes, tropical storms, hurricanes and floods. While we do carry earthquake, hurricane and flood insurance on our properties, the amount of our insurance coverage may not be sufficient to fully cover such losses. In addition, we may discontinue earthquake, hurricane or flood insurance on some or all of our properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage relative to the risk of loss.

        If we experience a loss which is uninsured or which exceeds our policy coverage limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties.

        In addition, even if damage to our properties is covered by insurance, a disruption of our business caused by a casualty event may result in the loss of business or customers. We carry business interruption insurance, but such insurance may not fully compensate us for the loss of business or customers due to an interruption caused by a casualty event.



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        While we monitor the solvency of our insurance carriers, it can be difficult to evaluate the stability and net assets or capitalization of insurance companies, and any insurer's ability to meet its claim payment obligations. A failure of an insurance company to make payments to us upon an event of loss covered by an insurance policy could have a material adverse effect on our business and financial condition.

To fund our growth strategy and refinance our indebtedness, we depend on external sources of capital, which may not be available to us on commercially reasonable terms or at all.

        In order to maintain our qualification as a REIT, we are required under the Internal Revenue Code (the "Code") to distribute at least 90% of our net taxable income annually, determined without regard to the dividends paid deduction and excluding any net capital gains. We maywill also be subject to unknown or contingent liabilities relatedincome tax at regular corporate rates to properties or businessesthe extent that we acquiredistribute less than 100% of our net taxable income, including any net capital gains. These distribution requirements may limit our ability to fund future capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we intend to rely on third-party sources for whichdebt or equity financing to fund our growth strategy. In addition, we may have limited or no recourse against the sellers.

Assets and entities that we have acquired or may acquire in the future, including the properties contributed by the Funds or their affiliates, may be subjectneed external sources of capital to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might include liabilities for clean-up or remediation of environmental conditions, claims of customers, vendors or other persons dealing with the acquired entities, tax liabilities and other liabilities whether incurred in the ordinary course of business or otherwise. In the future we may enter into transactions with limited representations and warranties or with representations and warranties that do not survive the closing of the transactions, in which event we would have no or limited recourse against the sellers of such properties. While we usually require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification (including the indemnification by the Funds or their affiliates) is often limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses.

As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities associated with acquired properties and entities may exceedrefinance our expectations, which may adversely affect our operating results and financial condition. Finally, indemnification agreements between us and the sellers typically provide that the sellers will retain certain specified liabilities relating to the assets and entities acquired by us. While the sellers are generally contractually obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements will not require us to incur losses or other expenses as well.

Under the contribution agreement pursuant to which the Funds or their affiliates contributed the properties that comprise our portfolio to the Operating Partnership, each of the Funds or their affiliates made certain representations and warranties as to certain material matters related to the property being contributed by such fund or affiliate such as title to any owned property, compliance with laws (including environmental laws) and the enforceability of certain material customer contracts and leases. These representations and warranties made by the Funds or their affiliates have since expired without our becoming aware of any breach. Therefore, we have no further recourse against the contributors under the contribution agreement.

Our growth depends on the successful development of our properties and any delays or unexpected costs associated with such projects may harm our growth prospects, future operating results and financial condition.

As of December 31, 2012, with the exception of NY2, which was acquired February 7, 2013, we had the ability to expand our operating data center square footage by approximately 99.7%, or approximately 1.2 million NRSF, through the development of (1) 94,650 NRSF space under construction, (2) 216,250 NRSF planned to commence development during 2013indebtedness at NY2 and on land that we currently own at VA2 and our Santa Clara Campus, and 3) 894,286 NRSF at multiple facilities, as shown on the development table on page 9, that may be developed over time based on market supply, demand and our financing capabilities. Our growth depends upon the successful completion of the development of this space and similar projects in the future. Current and future development projects and expansion into new markets will involve substantial planning, allocation of significant company resources and certain risks, including risks related to financing, zoning, regulatory approvals, construction costs and delays. These projects will also require us to carefully select and rely on the experience of one or more general contractors and associated subcontractors during the construction process. Should a general contractor or significant subcontractor experience financial or other problems during the construction process, we could experience significant delays, increased costs to complete the project and other negative impacts to our expected returns. Site selection in current and expansion markets is also a critical factor in our expansion plans, and therematurity. We may not be suitable properties available in our marketsable to obtain such financing or refinancing on favorable terms or at a location that is attractive to our customers and has the necessary combination ofall. Our access to multiple network providers, a significant supplythird-party sources of electrical power, high ceilingscapital depends, in part, on:

    •
    general economic and financial market conditions;

    •
    limited subset of lenders that have historically committed debt capital to REITs that own technology based real estate;

    •
    the market's perception of our growth potential;

    •
    our then current debt levels;

    •
    our historical and expected future earnings, cash flow and cash distributions; and

    •
    the market price per share of our capital stock.

        In addition, our ability to sustain heavy floor loading. Furthermore, while we may prefer to locate new data centers adjacent to our existing data centers, weaccess additional capital may be limited by the size and locationterms of suitable properties.

In addition,our existing indebtedness, which restricts our incurrence of additional indebtedness. If we will be subject to risks and, potentially, unanticipated costs associated with obtaining access to a sufficient amount of power from local utilities, including the need, in some cases, to develop utility substations on our properties in order to accommodate our power needs, constraints on the amount of electricity that a particular locality’s power grid is capable of providing at any given time, and risks associated with the negotiation of long-term power contracts with utility providers. We cannot assure you thatobtain capital when needed, we willmay not be able to successfully negotiate such contracts on acceptable termsacquire or develop properties when strategic opportunities arise or refinance our debt at all. Any inability to negotiate utility contracts on a timely basis or on acceptable financial terms or in volumes sufficient to supply the requisite power for our development properties would have a material negative impact on our growth and future results of operations and financial condition.

These and other risks could result in delays or increased costs or prevent the completion of our development projects, any ofmaturity, which could have a material adverse effect on our financial condition, results of operations, cash flow, the trading price of our common stock and our ability to satisfy our debt service obligations or pay dividends.

business.

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We do not own all of the buildings in which our data centers are located. Instead, we lease certain of our data center space and the ability to renew these leases could be a significant risk to our ongoing operations.

We do not own the buildings for five of our data centers and our business could be harmed if we are unable to renew the leases for these data centers at favorable terms or at all. The following table summarizes the remaining primary term and renewal rights associated with each of our leased properties:

Property

NRSF

Current Lease Term Expiration

Renewal Rights

Base Rent Increases at Renewal

NY1

48,404

Apr. 2023

2 x 5 yrs

FMR(1)

LA1

157,778

July 2022

3 x 5 yrs

103% of previous monthly base rent(2)

DC1

22,137

May 2016

3 x 5 yrs

Greater of 103% of previous monthly base rent or 95% of FMR(1)

DE1

4,144

Sept. 2014

N/A

DE2

5,140

Dec. 2017

N/A

(1)FMR represents “fair market rent” as determined by mutual agreement between landlord and tenant, or in the case of a disagreement, mutual agreement by third party appraisers.

(2)On January 9, 2013, we extended our lease of LA1 from July 2017, to July 2022.

When the primary term of our leases expire, we have the right to extend the terms of our leases as indicated above. For two of these leases, the rent will be determined based on the fair market value of rental rates for the property and the then prevailing rental rates may be higher than rental rates under the applicable lease. To maintain the operating profitability associated with our present cost structure, we must increase revenues within existing data centers to offset any potential increase in lease payments at the end of the original and renewal terms. Failure to increase revenues to sufficiently offset these projected higher costs would adversely impact our operating income. At the end of our renewal options, we would have to renegotiate our lease terms with the landlord.

If we are not able to renew the lease at any of our data centers, the costs of relocating the equipment in such data centers and developing a new location into a high-quality data center could be prohibitive. In addition, we could lose customers due to the disruptions in their operations caused by the relocation. We could also lose those customers that choose our data centers based on their locations.

Our level of indebtedness and debt service obligations could have adverse effects on our business.

        

As of December 31, 2012,2015, we had a total principal indebtedness of approximately $59.8$392.3 million all of which was secured indebtedness. Subsequentand the ability to December 31, 2012, we entered into the Second Amendedborrow up to an additional $201.4 million under our revolving credit facility, subject to satisfying certain financial and Restated Credit Agreement and increased our borrowing capacity to $355.0 million.covenant tests. While there are limits in our revolving credit facility and our one mortgage loan agreementsenior unsecured term loans on the amount of debt that we may incur, and additional limits on our indebtedness may be imposed by future agreements or by a policy adopted by our Boardboard of Directors,directors, we have the ability to increase our indebtedness over current levels. A substantial increase in our indebtedness may have adverse consequences for our business, results of operations and financial condition because it could, among other things:

·

    •
    require us to dedicate a substantial portion of our cash flow from operations to make principal and interest payments on our indebtedness, thereby reducing our cash flow available to fund working capital, capital expenditures and other general corporate purposes, including to pay dividends on our common and preferred stock as currently contemplated or necessary to maintain our qualification as a REIT;

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·

    •
    make it more difficult for us to satisfy our financial obligations, including borrowings under our new revolving credit facility;

    ·

    •
    increase our vulnerability to general adverse economic and industry conditions;

    ·

    •
    expose us to increases in interest rates for our variable rate debt;

    ·

    •
    limit our ability to borrow additional funds on favorable terms or at all to expand our business or ease liquidity constraints;

    ·

    •
    limit our ability to refinance all or a portion of our indebtedness on or before maturity on the same or more favorable terms or at all;

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·

•
limit our flexibility in planning for, or reacting to, changes in our business and our industry;

·

•
place us at a competitive disadvantage relative to competitors that have less indebtedness; and

·

•
require us to dispose of one or more of our properties at disadvantageous prices or raise equity that may dilute the value of our common stock in order to service our indebtedness or to raise funds to pay such indebtedness at maturity.

The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks.

        

The agreements governing our indebtedness contain covenants that place restrictions on us and our subsidiaries. These covenants may restrict, among other things, our and our subsidiaries’subsidiaries' ability to:

·

    •
    merge, consolidate or transfer all or substantially all of our or our subsidiaries’subsidiaries' assets;

    ·

    •
    incur additional debt or issue additional preferred stock, including use of our existing capacity under our revolving credit facility;

    ·

    •
    make certain investments or acquisitions;

    ·

    •
    create liens on our or our subsidiaries’subsidiaries' assets;

    ·

    •
    sell assets;

    ·

    •
    make capital expenditures;

    ·

    •
    pay dividends on or repurchase our capital stock;

    ·

    •
    enter into transactions with affiliates;

    ·

    •
    issue or sell stock of our subsidiaries; and

    ·

    •
    change the nature of our business.

        

These covenants could impair our ability to grow our business, take advantage of attractive business opportunities or successfully compete. In addition, our revolving credit facility requires us to maintain specified financial ratios and satisfy financial condition tests. Our ability to comply with these ratios or tests may be affected by events beyond our control, including prevailing economic, financial and industry conditions. A breach of any of these covenants or covenants under any other agreements governing our indebtedness could result in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt agreements, the lenders could elect to declare all outstanding debt under such agreements to be immediately due and payable. If we were unable to repay or refinance the accelerated debt, the lenders could proceed against any assets pledged to secure that debt, including foreclosing on or requiring the sale of our data centers, and our assets may not be sufficient to repay such debt in full.


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Fluctuations in interest rates could materially affect our financial resultsresults.

        

Because alla significant portion of our debt bears interest at variable rates, increases in interest rates could materially increase our interest expense. Based on our debt outstanding as of December 31, 2015, if interest rates were to increase by 1%, the corresponding increase in interest expense on our variable rate debt would decrease future earnings and cash flows by approximately $2.2 million per year. If the United States Federal Reserve increases short-term interest rates, this would have a significant upward impact on shorter-term interest rates, including the interest rates upon whichthat our variable rate debt is based upon. Potential future increases in interest rates and credit spreads may increase our interest expense and therebytherefore negatively affect our financial condition and results of operations, and reduce our access to the debt or equity capital markets.

Any hedging transactions involve costs and may limit our gains or result in material losses.

        Hedging agreements enable us to convert floating rate liabilities to fixed rate liabilities or fixed rate liabilities to floating rate liabilities. We may use derivatives to hedge our liabilities from time to time. Any hedging transactions into which we enter could expose us to certain risks, including:

    •
    losses on a hedge position reducing the cash available for distribution to stockholders and such losses exceeding the amount invested in such instruments;

    •
    counterparties to a hedging arrangement defaulting on their obligations;

    •
    paying certain fees, such as transaction or brokerage fees; and

    •
    incurring costs if we elect to terminate a hedging agreement early.

        As of December 31, 2015, we are a party to a five-year interest rate swap agreement that effectively fixes the interest rate on $100 million of outstanding debt at approximately 3.23% per annum through February 3, 2019, and a five-year interest rate swap agreement that effectively fixes the interest rate on $75 million of outstanding debt at approximately 2.93% per annum through May 5, 2020.

27Our growth depends on the successful development of our properties and any delays or unexpected costs associated with such projects may harm our growth prospects, future operating results and financial condition.

        As of December 31, 2015, we had the ability to expand our operating data center square footage by approximately 869,000 NRSF, or 52%, as set forth in our development table in Item 1. Our growth depends upon the successful completion of the development of this space and similar projects in the future. Current and future development projects and expansion into new markets will involve substantial planning, allocation of significant company resources and certain risks, including risks related to financing, zoning, regulatory approvals, construction costs and delays. These projects will also require us to carefully select and rely on the experience of one or more general contractors and associated subcontractors during the construction process. Should a general contractor or significant subcontractor experience financial or other problems during the construction process, we could experience significant delays, increased costs to complete the project and other negative impacts to our expected financial returns. Site selection in current and expansion markets is also a critical factor in our expansion plans, and there may not be suitable properties available in our markets at a location that is attractive to our customers and has the necessary combination of access to multiple network providers, a significant supply of electrical power, high ceilings and the ability to sustain heavy floor loading. Furthermore, while we may prefer to locate new data centers adjacent to or in close proximity to our existing data centers, we may be limited by the size and location of suitable properties.

        In addition, we will be subject to risks and, potentially, unanticipated costs associated with obtaining access to a sufficient amount of power from local utilities, including the need, in some cases,



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to develop utility substations on our properties in order to accommodate our power needs, constraints on the amount of electricity that a particular locality's power grid is capable of providing at any given time, and risks associated with the negotiation of long-term power contracts with utility providers. We cannot assure you that we will be able to successfully negotiate such contracts on acceptable terms or at all. Any inability to negotiate utility contracts on a timely basis or on acceptable financial terms or in volumes sufficient to supply the requisite power for our development properties would have a material negative impact on our growth and future results of operations and financial condition.

Mortgage        These and other risks could result in delays or increased costs or prevent the completion of our development projects, any of which could have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our common stock and our ability to satisfy our debt service obligations exposeor pay dividends.

We may be unable to identify and complete acquisitions and successfully operate acquired properties.

        We continually evaluate the market for available properties and may acquire data centers or properties suited for data center development when opportunities exist. Our ability to acquire properties on favorable terms and successfully develop and operate them involves significant risks including, but not limited to:

    •
    we may be unable to acquire a desired property because of competition from other data center companies or real estate investors with more capital;

    •
    even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase the purchase price of such property;

    •
    we may be unable to realize the intended benefits from acquisitions or achieve anticipated operating or financial results;

    •
    we may be unable to finance the acquisition on favorable terms or at all;

    •
    we may underestimate the costs to make necessary improvements to acquired properties;

    •
    we may be unable to quickly and efficiently integrate new acquisitions into our existing operations resulting in disruptions to our operations or diversion of our management's attention from our core business activities;

    •
    acquired properties may be subject to tax reassessments, which may result in higher than expected real estate tax payments;

    •
    we may not be able to access sufficient power on favorable terms or at all; and

    •
    market conditions may result in higher than expected vacancy rates and lower than expected rental rates.

        In the past we have acquired properties that did not perform to our expectations and there can be no assurance that this will not happen again. If we are unable to successfully acquire, develop and operate data center properties, our ability to grow our business, compete and meet market expectations will be significantly impaired, which would have a material adverse effect on the price of our common stock.

We may be subject to unknown or contingent liabilities related to properties or businesses that we acquire for which we may have limited or no recourse against the sellers.

        Assets and entities that we have acquired or may acquire in the future, including the properties contributed by the Funds or their affiliates, may be subject to unknown or contingent liabilities for which we may have limited or no recourse against the sellers. Unknown or contingent liabilities might


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include liabilities for clean-up or remediation of environmental conditions, claims of customers, vendors or other persons dealing with the acquired entities, tax liabilities and other liabilities whether incurred in the ordinary course of business or otherwise. In the future we may enter into transactions with limited representations and warranties or with representations and warranties that do not survive the closing of the transactions, in which event we would have no or limited recourse against the sellers of such properties. While we usually require the sellers to indemnify us with respect to breaches of representations and warranties that survive, such indemnification (including the indemnification by the Funds or their affiliates) is often limited and subject to various materiality thresholds, a significant deductible or an aggregate cap on losses.

        As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities associated with acquired properties and entities may exceed our expectations, which may adversely affect our operating results and financial condition. Finally, indemnification agreements between us and the sellers typically provide that the sellers will retain certain specified liabilities relating to the assets and entities acquired by us. While the sellers are generally contractually obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements will not require us to incur losses or other expenses as well.

        Under the possibilitycontribution agreement pursuant to which the Funds or their affiliates contributed the properties that comprise our portfolio to the Operating Partnership, each of foreclosure,the Funds or their affiliates made certain representations and warranties as to certain material matters related to the property being contributed by such fund or affiliate such as title to any owned property, compliance with laws (including environmental laws) and the enforceability of certain material customer contracts and leases. These representations and warranties made by the Funds or their affiliates have since expired without our becoming aware of any breach. Therefore, we have no further recourse against the contributors under the contribution agreement.

Our properties are not suitable for use other than as data centers, which could make it difficult to sell or reposition them if we are not able to lease available space and could materially adversely affect our business, results of operations and financial condition.

        Our data centers are designed solely to house and run computer servers and related information technology equipment and, therefore, contain extensive electrical and mechanical systems and infrastructure. As a result, they are not suited for use by customers as anything other than as data centers and major renovations and expenditures would be required in order for us to re-lease vacant space for more traditional uses, or for us to sell a property to a buyer for use other than as a data center.

We are currently making significant investments in our back office information technology systems. Any difficulties or disruptions to these efforts may interrupt our normal operations, resulting in an adverse effect to our business, results of operations, financial condition or cash flows.

        Beginning in 2012 and continuing beyond 2015, we have invested in a significant project to overhaul our back office information technology systems that support the customer experience from initial quote to customer billing through to accounting and financial reporting. Difficulties with our systems may adversely affect our business, results of operations, financial condition or cash flows and interrupt our ability to accept and deliver customer orders and impact our overall financial operations, including our accounts payable, accounts receivable, general ledger, financial close processes, internal financial controls, and our ability to otherwise account for, report and monitor our business. We may need to expend significant attention, time and resources to correct problems or find alternative sources for performing these functions. Such significant investments in our back office systems may take longer


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to complete and cost more than originally planned. In addition, we may not realize the full benefits we hoped to achieve and we may recognize additional impairment charges if we decide that portions of these information technology system projects will not ultimately benefit the Company or are de-scoped. During the years ended December 31, 2015, and 2014, we recognized a $0.3 million and $2.0 million impairment charge, respectively, as a result of internal-use software previously under development that was discontinued and will no longer be placed into service.

We are continuing to invest in our expansion efforts, but we may not have sufficient customer demand in the future to realize expected returns on these investments.

        As part of our growth strategy, we intend to commit substantial operational and financial resources to develop new data centers and expand existing ones. However, we typically do not require pre-leasing commitments from customers before we develop or expand a data center, and we may not have sufficient customer demand to lease the new data center space when completed. Once development of a data center is complete, we incur a certain amount of operating expenses even if there are no tenants occupying the space. A lack of customer demand for data center space or excess capacity in the data center market could impair our ability to achieve our expected rate of return on our investment, which could have a material adverse effect on our financial condition, operating results and the market price of our common stock.

We face significant competition and may be unable to lease vacant space, renew existing leases or release space as leases expire, which may have a material adverse effect on our business and results of operations.

        We compete with numerous developers, owners and operators of technology-related real estate and data centers, many of which own properties similar to ours in the same markets. In addition, we may face competition from new entrants into the data center market. Some of our competitors have significant advantages over us, including greater name recognition, longer operating histories, lower operating costs, pre-existing relationships with current or potential customers, greater financial, marketing and other resources, access to better networks and access to less expensive power. These advantages could allow our competitors to respond more quickly or effectively to strategic opportunities or changes in our industries or markets. If our competitors offer data center space that our existing or potential customers perceive to be superior to ours based on numerous factors, including cost and availability of power, security considerations, location or network connectivity, or if they offer rental rates below our current market rates, we may lose existing or potential customers, incur costs to improve our properties or be forced to reduce our rental rates. This risk is compounded by the fact that a significant percentage of our customer leases expire every year. For example, as of December 31, 2015, data center leases representing 23.8%, 26.3% and 21.0% of our total portfolio annualized rent will expire during 2016, 2017, and 2018, respectively. If the rental rates for our properties decrease, our existing customers do not renew their leases or we are unable to lease vacant data center space or re-lease data center space for which leases are scheduled to expire at or above current lease rates, our business and results of operations could be materially adversely affected.

Future consolidation in the technology industry could have a material adverse effect on our financial performance and operating results.

        Mergers or consolidations of technology companies in the future could reduce the number of our customers and potential customers. In addition, our competitors may consolidate to improve their portfolios and products offered. Any of these developments could cause our customers to discontinue or reduce the use of our data centers in the future and could have a material adverse effect on our revenues and results of operations.


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We have government customers, which subjects us to risks including early termination, audits, investigations, sanctions and penalties.

        We derive some revenues from contracts with the U.S. government, state and local governments and their respective agencies. Some of these customers may terminate all or part of their contracts at any time, without cause.

        There is increased pressure for governments and their agencies to reduce spending. Some of our federal government contracts are subject to the approval of appropriations being made by the U.S. Congress to fund the expenditures under these contracts. Similarly, some of our contracts at the state and local levels are subject to government funding authorizations.

        Additionally, government contracts are generally subject to audits and investigations which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business.

A small number of customers account for a significant portion of our revenues, and the loss of any of these customers could significantly harm our investment in any property subject to mortgage debt.business, financial condition and results of operations.

        

AsWe currently depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage of our operating revenue. Our top ten customers accounted for an aggregate of approximately 29.0% of our total portfolio annualized rent as of December 31, 2012,2015. Some of our SV1 property was subject tocustomers may experience a $59.8 million mortgage loan. Incurring mortgagedownturn in their businesses or other factors that may weaken their financial condition and other secured debt obligations increases our risk of property losses because defaults on secured indebtedness may result in foreclosure actions initiated by lenders and ultimately ourthem failing to make timely rental payments, defaulting on their leases, reducing the level of interconnection services they obtain or the amount of space they lease from us or terminating their relationship with us. The loss of one or more of our significant customers or a significant customer exerting significant pricing pressure on us could also have a material adverse effect on our results of operations.

        In addition, our largest customers may choose to develop new data centers or expand existing data centers of their own. In the property securing any loans for which we are in default. For tax purposes, a foreclosure ofevent that any of our propertieskey customers were to do so, it could result in a loss of business to us or increase pricing pressure on us. If we lose a customer, there is no guarantee that we would be treated asable to replace that customer at a salecomparative rental rate or at all.

        Some of our largest customers may also compete with one another in various aspects of their businesses. The competitive pressures on our customers may have a negative impact on our operations. For instance, one customer could determine that it is not in that customer's interest to house mission-critical servers or other telecommunications or information technology equipment in a facility operated by the propertysame company that relies on a key competitor for a purchase price equal to the outstanding balancesignificant part of the debt secured by the mortgage. If the outstanding balanceits annual revenue. Our loss of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but would not receivea large customer for this or any cash proceeds, whichother reason could hinder our ability to meet the REIT distribution requirements imposed by the Code. As we execute our business plan, we may assume or incur new mortgage indebtednesshave a material adverse effect on our existing properties or properties that we acquire in the future. Any default under a mortgage debt obligation may increase the riskresults of our default on our other indebtedness.operations.

Because we depend on the development and growth of a balanced customer base, including key customers, failure to attract, grow and retain this base of customers could harm our business and operating results.

        

Our ability to maximize operating revenues depends on our ability to develop and grow a balanced customer base, consisting of a variety of companies, including enterprises, cloud and IT service providers, digital content and multimedia providers, systems integrators and managed services providers and networks and mobility.networks. We consider certain of these customers to be key in that they drawattract and assist in retaining other customers. The more balanced the customer base within each data center, the better we will be able to generate significant interconnection revenues, which in turn increases our overall operating revenues. Our ability to attract customers to our data centers will depend on a variety of factors, including the presence of multiple network carriers and cloud operators, the mix of products


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and services offered by us, the overall mix of customers, the presence of key customers attracting business through vertical market ecosystems, the data center’scenter's operating reliability and security and our ability to effectively market and sell our services. However, some of our customers may face competitive pressures and may ultimately not be successful or may be consolidated through merger or acquisition. If these customers do not continue to use our data centers it may be disruptive to our business. Finally, the uncertain economic climate may harm our ability to attract and retain customers if customers slow spending, or delay decision-making, on our products and services, or if customers begin to have difficulty paying us and we experience increased churn in our customer base. Any of these factors may hinder the development, growth and retention of a balanced customer base and adversely affect our business, financial condition and results of operations.

Certain of the properties in our portfolio have been owned or operated for a limited period of time, and we may not be aware of characteristics or deficiencies involving any one or all of them.

As of December 31, 2012, our portfolio of properties consisted of 14 operating data center facilities and multiple development projects. Eleven of our properties were acquired or developed by the Funds or their affiliates less than four years prior to the date of our IPO and we recently completed the initial development of one of these properties. Because these properties have been in operation for a relatively short period of time, we may be unaware of characteristics of or deficiencies in such properties that could adversely affect their valuation or revenue potential and such properties may not ultimately perform up to our expectations.

Our tax protection agreements could limit our ability to sell or otherwise dispose of certain properties.

We have agreed with each of the Funds or their affiliates that have directly or indirectly contributed their interests in the properties in our portfolio to our operating partnership that if we directly or indirectly sell, convey, transfer or otherwise dispose of all or any portion of these interests in a taxable transaction, we will make an interest-free loan to the contributors in an amount equal to the contributor’s tax liabilities, based on an assumed tax rate. Any such loan would be repayable out of the after tax-proceeds (based on an assumed tax rate) of any distribution from the operating partnership to, or any sale of operating partnership units (or common stock issued by us in exchange for such units) by, the recipient of such loan, and would be non-recourse to the borrower other than with respect to such proceeds. These tax protection provisions apply for a period expiring on the earliest of (i) the seventh anniversary of the completion of our IPO and (ii) the date on which these contributors (or certain transferees) dispose in certain taxable transactions of 90% of the operating partnership units that were issued to them in connection with the contribution of these properties.

Increases in our property and other state and local taxes could adversely affect our ability to make distributions to our stockholders if they cannot be passed on to our customers.

We are subject to a variety of state and local taxes, including real and personal property taxes and sales and use taxes that may increase materially due to factors outside our control. In particular, taxes on our properties may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. We expect to be notified by local taxing authorities that the assessed values of certain of our properties have increased. We plan to appeal these increased assessments, but we may not be successful in our efforts. Furthermore, some of our properties may be reassessed retroactively to the date we or the Funds acquired the property, which could require us to make cumulative payments for multiple years. Our leases with our customers generally do not allow us to increase

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their rent as a result of an increase in property or other taxes. If property or other taxes increase and we cannot pass these increases on to our customers through increased rent for new leases or upon lease renewals, our result of operations, cash flow and ability to make distributions to our stockholders would be adversely affected.

The bankruptcy or insolvency of a major tenant may adversely affect the income produced by our properties.

        

If any tenant becomes a debtor in a case under the federal Bankruptcy Code, we cannot evict the tenant solely because of the bankruptcy. In addition, the bankruptcy court might authorize the tenant to reject and terminate its lease with us. Our claim against the tenant for unpaid, future rent would be subject to a statutory cap that might be substantially less than the remaining rent actually owed under the lease. In either case, our claim for unpaid rent would likely not be paid in full. As of December 31, 2012,2015, we had no material tenants in bankruptcy. Our revenuerevenues and cash available for distribution could be materially adversely affected if any of our significant tenants were to become bankrupt or insolvent, or suffer a downturn in itstheir business, or fail to renew itstheir lease or renew on terms less favorable to us than itstheir current terms.

If we are unable to recruit or retain qualified personnel, our business could be harmed.

        We must continue to identify, hire, train, and retain IT professionals, technical engineers, operations employees, and sales, marketing, finance and senior management personnel who maintain relationships with our customers and who can provide the technical, strategic and marketing skills required for our Company to grow. There is a shortage of qualified personnel in these fields, and we compete with other companies for the limited pool of talent. The failure to recruit and retain personnel, including, but not limited to, members of our executive team, could harm our business and our ability to grow our Company.

We do not own all of the buildings in which our data centers are located. Instead, we lease certain of our data center space and the ability to renew these leases could be a significant risk to our ongoing operations.

        We do not own the buildings for five of our data centers and our business could be harmed if we are unable to renew the leases for these data centers at favorable terms or at all. The following table summarizes the remaining primary term and renewal rights associated with each of our leased properties:

Property
NRSFCurrent Lease
Term Expiration		Renewal RightsBase Rent Increases at Renewal

NY1

48,613Apr. 20232 × 5 yearsFMR(1)

LA1

143,426July 20223 × 5 years103% of previous monthly base rent

DC1

22,137May 20212 × 5 yearsGreater of 103% of previous monthly base rent or 95% of FMR(1)

DE1

5,878Oct. 20191 × 5 years103% of previous monthly base rent

DE2

5,140Dec. 2024N/A
(1)
FMR represents "fair market rent" as determined by mutual agreement between landlord and tenant, or in the case of a disagreement, mutual agreement by third party appraisers.

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        When the primary terms of our leases expire, we generally have the right to extend the terms of our leases as indicated above. For two of these leases, the rent will be determined based on the fair market value of rental rates for the property and the then prevailing rental rates may be higher than rental rates under the applicable lease. To maintain the operating profitability associated with our present cost structure, we must increase operating revenues within existing data centers to offset any potential increase in lease payments at the end of the original and renewal terms. Failure to increase operating revenues to sufficiently offset these projected higher lease costs would adversely impact our operating income.

        If we are not able to renew the lease at any of our data centers, the costs of relocating the equipment in such data centers and developing a new location into a high-quality data center could be prohibitive. In addition, we could lose customers due to the disruptions in their operations caused by the relocation. We could also lose those customers that choose our data centers based primarily on their locations.

Our tax protection agreements could limit our ability to sell or otherwise dispose of certain properties.

        We have agreed with each of the Funds or their affiliates that have directly or indirectly contributed their interests in the properties in our portfolio to our Operating Partnership that if we directly or indirectly sell, convey, transfer or otherwise dispose of all or any portion of these interests in a taxable transaction, we will make an interest-free loan to the contributors in an amount equal to the contributor's tax liabilities, based on an assumed tax rate, with respect to built-in gains generated from the initial contribution. Any such loan would be repayable out of the after tax-proceeds (based on an assumed tax rate) of any distribution from the Operating Partnership to, or any sale of common Operating Partnership units (or common stock issued by us in exchange for such units) by, the recipient of such loan, and would be non-recourse to the borrower other than with respect to such proceeds. These tax protection provisions apply for a period expiring on the earliest of (i) the seventh anniversary of the completion of our IPO, or September 2017, and (ii) the date on which these contributors (or certain transferees) dispose in certain taxable transactions of 90% of the Operating Partnership units that were issued to them in connection with the contribution of these properties.

Increases in our property and other state and local taxes could adversely affect our ability to make distributions to our stockholders if they cannot be passed on to our customers.

        We are subject to a variety of state and local taxes, including real and personal property taxes and sales and use taxes that may increase materially due to factors outside our control. In particular, real estate taxes on our properties may increase as tax rates change and as the properties are assessed or reassessed by taxing authorities. For example, in the State of California various groups have proposed repealing Proposition 13, which limits annual real estate tax increases to 2% of assessed value per annum. Such initiatives, if successful, would increase the assessed value and/or tax rates applicable to commercial property in California, including our data center properties. We expect to be notified by local taxing authorities that the assessed values of certain of our properties have increased. We plan to appeal these increased assessments, but we may not be successful in our efforts. Our leases with our customers generally do not allow us to increase their rent as a result of an increase in real estate or other taxes. If real estate or other taxes increase and we cannot pass these increases on to our customers through increased rent for new leases or upon lease renewals, our result of operations, cash flow and ability to make distributions to our stockholders would be adversely affected.


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We are exposed to potential risks from errors in our financial reporting systems and controls, including the potential for material misstatements in our consolidated financial statements.

        

Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to evaluate their internal control over financial reporting. We received an unqualified opinion regarding the effectivenessperformed our evaluation as of December 31, 2015, and concluded internal control over financial reporting is operating effectively. Although we believe our internal control over financial reporting asis operating effectively, in the course of December 31, 2012.our internal audit program we have identified certain areas for ongoing improvement and we are in the process of evaluating and designing enhanced business processes and internal controls to address such areas, none of which we believe constitutes a material change. However, we cannot be certain that our efforts will be effective or sufficient for us, or our independent registered public accounting firm, willto issue unqualified audit reports in the future.future, especially as our business continues to grow and evolve and if we acquire other businesses.

        

Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement improvements to our internal reporting systems and controls in an efficient and timely manner.manner and have in the past, and may in the future, discover deficiencies in existing systems and controls. In addition, internal reporting systems and controls are subject to human error.

Any such deficiencies could result in material misstatements in our consolidated financial statements, which might involve restating previously issued financial statements. Additionally, as we expand, we will need to implement new systems to support our financial reporting business processes and controls. We may not be able to implement these systems such that errors would be identified in a timely manner, which could result in material misstatements in our consolidated financial statements.

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Table of ContentsOur expenses may not decrease if our revenue decreases.

        

Risks Related toMost of the Real Estate Industry

Illiquidity ofexpenses associated with our business, such as debt service payments, real estate, investments, particularlypersonal property and ad valorem taxes, insurance, utilities, employee wages and benefits and corporate expenses are relatively inflexible and do not necessarily decrease in tandem with a reduction in revenue from our data centers, could significantly impede our ability to respond to adverse changes in the performancebusiness. Our expenses also will be affected by inflationary increases and certain of our properties, which could harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more propertiescosts may exceed the rate of inflation in our portfolio in response to adverse changes in the real estate market or in the performance of such properties may be limited, thus harming our financial condition. The real estate market is affected by many factors that are beyond our control, including:

·adverse changes in national and local economic and market conditions;

·changes in interest rates and in the availability, cost and terms of debt financing;

·changes in governmental laws and regulations, fiscal policies and zoning ordinances and costs of compliance therewith;

·the ongoing cost of capital improvements that are not passed onto our customers, particularly in older structures;

·changes in operating expenses; and

·civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes and floods, which may result in uninsured and underinsured losses.

The risks associated with the illiquidity of real estate investments are even greater for our data center properties. Our data centers are highly specialized real estate assets containing extensive electrical and mechanical systems that are uniquely designed to house and maintain our customers’ equipment and, as such, have little, if any traditional office space.given period. As a result, most ofwe may not be able to fully offset our data centers are not suited for usecosts by customers as anything other than as data centershigher lease rates, which could have a material adverse effect on our operations and major renovations and expenditures would be required in order for us to re-lease data center space for more traditional commercial or industrial uses, or for us to sell a property to a buyer for use other than as a data center.financial performance.

Environmental problems are possible and can be costly.

        

Environmental liabilities could arise and have a material adverse effect on our financial condition and performance. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and remediate hazardous or toxic substances or petroleum product releases at or from the property. In addition, we could incur costs to comply with such laws and regulations, the violation of which could lead to substantial fines and penalties.

        

We may have to pay governmental entities or third parties for property damage and for investigation and remediation costs that they incurred in connection with any contamination at our current and former properties without regard to whether we knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by these environmental laws may be held responsible for all of the clean-up costs incurred.

        

Some of our properties contain or may contain asbestos-containing building materials. Environmental laws may impose fines and penalties on building owners or operators who fail to properly manage and maintain these materials, notify and train persons who may come into contact


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with asbestos and undertake special precautions, and third parties could potentially seek recovery from owners or operators for any personal injury associated with exposure to asbestos-containing building materials.

        

Some of our properties may also contain or develop harmful mold or suffer from other air quality issues. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability from our customers, employees of our customers and others if property damage or health concerns arise.

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Table of ContentsWe may be adversely affected by regulations related to climate change.

        Climate change regulation is a rapidly developing area. New laws relating to climate change, including potential cap-and-trade systems, carbon taxes and other requirements relating to reduction of carbon footprints and/or greenhouse gas emissions all could negatively affect our business operations, results of operations and cash flow. Other countries have enacted climate change laws and regulations and the United States has been involved in discussions regarding international climate change treaties. The U.S. Environmental Protection Agency, or EPA, and some of the states and localities in which we operate, have also enacted certain climate change laws and regulations and/or have begun regulating carbon footprints and greenhouse gas emissions. Our data centers consume significant amounts of power. These laws and regulations could limit our ability to develop new facilities or result in substantial compliance costs, retrofit costs and construction costs, including capital expenditures for environmental control facilities and other new equipment. We could also face a negative impact on our reputation with the public if we violate climate change laws or regulations.

We may incur significant costs complying with the Americans with Disabilities Act, or ADA, and similar laws, which could materially adversely affect our financial condition and operating results.

        

Under the ADA, all places of public accommodation must meet federal requirements related to access and use by disabled persons. A number of additional federal, state and local laws may also require modifications to our properties. We have not conducted an audit or investigation of all of our properties to determine our compliance with the ADA. If one of our properties is not in compliance with the ADA, we would be required to incur additional costs to bring the property into compliance. Additional federal, state and local laws may require modifications to our properties, or restrict our ability to renovate our properties. We cannot predict the ultimate amount of the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA and any other similar legislation, our financial condition and results of operations could be materially adversely affected.

We may incur significant costs complying with other regulations.

        Our properties are subject to various federal, state and local regulations, such as state and local fire and life safety regulations. If one of our properties is not in compliance with these various regulations, we may be required to pay fines or private damage awards. We do not know whether existing regulations will change or whether future regulations will require us to make significant unanticipated expenditures that will materially adversely impact our financial condition, results of operations, cash flow and ability to make distributions to our stockholders.


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We may be adversely affected by regulations relatedsubject to climate change.securities class action and other litigation, which may harm our business and operating results.

        We may be subject to securities class action or other litigation from time to time. Companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and/or damages, and divert management's attention from other business concerns, which could seriously harm our business, results of operations, financial condition or cash flows.

Climate change regulation is a rapidly developing area. Congress is currently considering new laws        We may also be called on to defend ourselves against lawsuits relating to climate change, including potential cap-and-trade systems, carbon taxes and other requirements relatingour business operations. Some of these claims may seek significant damage amounts due to reductionthe nature of carbon footprints and/our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such current or greenhouse gas emissions. Other countriesfuture proceedings. A future unfavorable outcome in a legal proceeding could have enacted climate change laws and regulations and the United States has been involved in discussions regarding international climate change treaties. The U.S. Environmental Protection Agency, or EPA, and some of the states and localities in which we operate, have also enacted certain climate change laws and regulations and/or have begun regulating carbon footprints and greenhouse gas emissions. Although these laws and regulations have not had an adverse effectimpact on our business, to date, theyfinancial condition and results of operations. In addition, current and future litigation, regardless of its merits, could limit our ability to develop new facilities or result in substantial compliance costs, retrofitlegal fees, settlement or judgment costs and construction costs, including capital expenditures for environmental control facilitiesa diversion of management's attention and other new equipment. We could also face a negative impact onresources that are needed to successfully run our reputation with the public if we violate climate change laws or regulations.business.


Risks Related to Our Organizational Structure

Our Board of Directors may change our major corporate, investment and financing policies without stockholder approval and those changes may adversely affect our business.

        

Our Board of Directors will determine our major corporate policies, including our acquisition, investment, financing, growth, operations levelsand level of indebtedness and distribution policies and whether to maintain our status as a REIT. Our Board of Directors may alter or eliminate our current corporate policies, including our policy on borrowing at any time without stockholder approval. Accordingly, while our stockholders have the power to elect or remove directors, our stockholders will have limited direct control over changes in our policies and those changes could adversely affect our business, financial condition, results of operations, the market price of our common and preferred stock and our ability to make distributions to our stockholders.

While the Funds and their affiliates do not control our company,Company, they own a majorityapproximately 35.9% of our Operating Partnership as of December 31, 2015, and have the right initially to nominate two directors,one director for so long as they hold at least 10% of our outstanding common stock or common stock equivalents, and their interests may differ from or conflict with the interests of our stockholders.

        

As of December 31, 2012,2015, the Funds or their affiliates had an aggregate beneficial common ownership interest in our Operating Partnership of approximately 55.2%35.9% which, if exchanged for our common stock, would represent approximately 54.4%35.5% of our outstanding common stock. In addition, the operating agreement for our Operating Partnership grants the Funds and their affiliates the right to initially nominate twoone of the seven directors to our Board of Directors.Directors for so long as the Funds hold at least 10% of our outstanding common stock or common stock equivalents. As a result, the Funds and their affiliates have the ability to exercise substantial influence over our company,Company, including with respect to decisions relating to our capital structure, issuing additional shares of our common stock or other equity securities, paying dividends, incurring additional debt, making acquisitions, selling properties or other assets, merging with other companies and undertaking other extraordinary transactions. In any of these matters, the interests of the Funds and their affiliates may differ from or conflict with the interests of our other stockholders. In addition, the Funds and their affiliates are in the business of making investments in companies and may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. The Funds and their affiliates may acquire or seek to acquire assets that we seek


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to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue.

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Our charter and bylaws contain provisions that may delay, defer or prevent an acquisition of our common stock or a change in control, which may not be in the best interests of our stockholders.

        

Our charter and bylaws contain a number of provisions, the exercise or existence of which could delay, defer or prevent a transaction or a change in control that might involve a premium price for our stockholders or otherwise be in their best interests, including the following:

    •
    ·Our Charter Contains Restrictions on the Ownership and Transfer of Our StockStock..  In order to assist us in complying with the limitations on the concentration of ownership of REIT stock imposed by the Code on REITs, our charter generally prohibits any person or entity (other than a person who or entity that has been granted an exception as described below) from actually or constructively owning more than 9.8% (by value or by number of shares, whichever is more restrictive) of our common stock, 9.8% (by value or by number of shares, whichever is more restrictive) of our outstanding shares of any series of preferred stock, or more than 9.8% (by value) of our capital stock. The value and number of the outstanding shares of common stock and preferred stock, and the value of the outstanding shares of capital stock shall be determined by the Board of Directors in good faith, which shall be conclusive for all purposes. We refer to these restrictions as the ownership limits. Our charter permits our Board of Directors to make, and our Board of Directors has made, certain exceptions to these ownership limits, where our Board of Directors has determined that such exceptions would not cause us to fail to qualify as a REIT. Our Board of Directors has granted exemptions from the ownership limits to the Funds and their affiliates, as well as to onetwo registered broker-dealerbroker-dealers who holdshold shares of our common stock for the benefit of multiple shareholders and one registered broker-dealer with respect solely to shares of our preferred stock for the benefit of multiple shareholders, none of whom individually holds more than 9.8% of our capital stock, and one registered broker-dealer with respect solely to shares of our preferred stock. Any attempt to own or transfer shares of our capital stock in excess of the ownership limits without the consent of our Board of Directors will result in the automatic transfer of the shares (and all dividends thereon) to a charitable trust. These ownership limitations may prevent a third party from acquiring control of us if our Board of Directors does not grant an exemption from the ownership limitations, even if our stockholders believe the change in control is in their best interests.

    ·

    •
    Our Charter Grants Our Board of Directors the Right to Classify or Reclassify Any Unissued Shares of Capital Stock, Increase or Decrease the Authorized Number of Shares and Establish the Preference and Rights of Any Preferred Stock without Stockholder ApprovalApproval..  Our charter provides that the total number of shares of stock of all classes that we currently have authority to issue is 120,000,000, initially consisting of 100,000,000 shares of common stock and 20,000,000 shares of preferred stock. Our Board of Directors has the authority, without a stockholders’stockholders' vote, to classify or reclassify any unissued shares of stock, including common stock, into preferred stock or vice versa, to increase or decrease the authorized number of shares of common stock and preferred stock and to establish the preferences and rights of any preferred stock or other class or series of shares to be issued. Because our Board of Directors has the power to establish the preferences and rights of additional classes or series of stock without a stockholders’stockholders' vote, our Board of Directors may give the holders of any class or series of stock preferences, powers and rights, including voting rights, senior to the rights of holders of existing stock.

Certain provisions of Maryland law may limit the ability of a third party to acquire control of us.

        

Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under


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circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:

    •
    ·“"business combination”combination" provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder”"interested stockholder" (defined generally as any person who beneficially owns 10% or more of the voting power of our outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding stock of the corporation) or an affiliate of any interested stockholder for five years after the most recent date on which the stockholder becomes an interested stockholder and thereafter imposes two super-majority stockholder voting requirements on these combinations; and

    ·

    •
    “"control share”share" provisions that provide that “control shares”"control shares" of our companyCompany (defined as voting shares of stock which, when aggregated with all other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control"control share acquisition”acquisition" (defined as the direct or indirect acquisition of ownership or control of “control shares”"control shares") have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares.

        

We have opted out of these provisions of the MGCL, in the case of the business combination provisions of the MGCL, by

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resolution of our Board of Directors and, in the case of the control share provisions of the MGCL, by a provision in our bylaws. However, our Board of Directors may elect to opt into these provisions, if approved by our stockholders by the affirmative vote of a majority of votes cast and with the consent of the Funds or their affiliates, provided that the consent of the Funds will not be required unless, in the case of the control share provisions, such provisions would apply to the Funds and their affiliates or in either case at such time they own less than 10% of our outstanding common stock (assuming all operating partnershipcommon Operating Partnership units are exchanged into common stock).

        

Additionally, Title 3, Subtitle 8 of the MGCL permits our Board of Directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which we do not yet have.

The Company's rights and the rights of its stockholders to take action against its directors and officers are limited.

        According to Maryland law, our Board of Directors have no liability in their capacities as directors if they perform their duties in good faith, in a manner they reasonably believe to be in the Company's best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. As permitted by the MGCL, the Company's charter limits the liability of its directors and officers to the Company and its stockholders for money damages, except for liability resulting from:

    •
    actual receipt of an improper benefit or profit in money, property or services; or

    •
    a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

        Additionally, the charter authorizes the Company to obligate itself, and the bylaws require it, to indemnify the Company's directors and officers for actions taken by them in those capacities and to pay or reimburse their reasonable expenses in advance of final disposition of a proceeding to the maximum extent permitted by Maryland law and we have entered into indemnification agreements with the Company's officers and directors. As a result, the Company and its stockholders may have more limited rights against its directors and officers than might otherwise exist under common law. Accordingly, in


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the event that actions taken in good faith by any of the Company's directors or officers impede the performance of the Company, a stockholders' ability to recover damages from that director or officer will be limited.

Preferred stock is senior to our common stock upon liquidation and for the purpose of distributions and may cause the market price of our common stock to decline.

        

In December 2012, we sold 4.6 million shares of 7.25% Series A Cumulative Redeemable Preferred Stock in an underwritten public offering. Upon liquidation, holders of our shares of preferred stock will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. As data center acquisition or development opportunities arise from time to time, we may issue additional shares of common stock or preferred stock to raise the capital necessary to finance these acquisitions or developments or may issue common stock or preferred stock or OPcommon Operating Partnership units, which are redeemable for, at our option, cash or our common stock on a one-to-one basis, to acquire such assets.properties. Such issuances could result in dilution of stockholders’stockholders' equity. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their interest.

Risks RelatedThe conversion rights of preferred stock holders may be detrimental to Our Status as a REITholders of our common stock.

        The holders of our preferred stock may convert their shares into a defined number of the Company's common stock upon the occurrence of specified changes in control. The conversion of series A preferred stock for our common stock would dilute stockholder and unitholder ownership, and could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities.

The number of shares available for future sale could adversely affect the market price of our common stock.

        We cannot predict whether future issuances of shares of our common stock or the availability of shares of our common stock for resale in the open market will decrease the market price per share of our common stock. Sales of a substantial number of shares of our common stock in the public market, either by us or by holders of Operating Partnership units upon exchange of such Operating Partnership units for our common stock, or the perception that such sales might occur, could adversely affect the market price of the shares of our common stock. The Funds, as holders of the Operating Partnership units issued in the formation transactions, have the right to require us to register with the SEC the resale of the common stock issuable, if we so elect, upon redemption of these Operating Partnership units. In addition, we registered shares of common stock that we have reserved for issuance under our Long Term Incentive Plan, and they generally can be freely sold in the public market, assuming any applicable restrictions and vesting requirements are satisfied. If any or all of these holders, including the Funds, cause a large number of their shares to be sold in the public market, the sales could reduce the trading price of our common stock and could impede our ability to raise future capital. During the year ended December 31, 2015, 8,500,000 common Operating Partnership units held by the Funds were redeemed for shares of our common stock in connection with the offer and sale of 8,500,000 shares of our common stock by the Funds. Refer to Item 8—Note 11 Noncontrolling Interests—Operating Partnership in "Financial Statements and Supplementary Data" included in this Annual Report.

Failure to qualify as a REIT would have material adverse consequences to us and the value of our stock.

        

We have elected to be taxed and to operate in a manner that will allow us to qualify as a REIT for federal income tax purposes under the Code. However, we cannot assure you that we will remain qualified as a REIT. If, in any taxable year, we lose our REIT status, we will face serious tax


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consequences that would substantially reduce our cash available for distribution to youour stockholders for each of the years involved because:

·

    •
    we would not be allowed a deduction for distributions to stockholders in computing our taxable income and we would be subject to federal income tax, including any alternative minimum tax, at regular corporate rates;

    ·

    •
    we could be subject to possibly increased state and local taxes; and

    ·

    •
    unless we are entitled to relief under applicable statutory provisions, we could not elect to be taxed as a REIT for four taxable years following the year during which we were disqualified.

        

Our failure to qualify as a REIT could also impair our ability to expand our business and raise capital, and would materially adversely affect the value of our common stock and preferred stock.

We have limited operating history as a REIT and a public company, which could hinder our ability to successfully manage our business.

We have limited operating history as a REIT and a public company. Although certain of our executive officers and directors have experience in the real estate industry, and Mr. Ray, our President and Chief Executive Officer, Mr. Finnin, our Chief Financial Officer, and Derek McCandless, our General Counsel have considerable experience with publicly traded REITs, there is no assurance that our past experience will be sufficient to operate a business in accordance with the Code requirements for REIT qualification or in accordance with the requirements of the SEC and the NYSE for public companies. We are required to develop and implement substantial control systems and procedures in order to qualify and maintain our qualification as a REIT, satisfy our periodic and current reporting requirements under applicable SEC regulations and comply with NYSE listing standards. As a result, we incur significant legal, accounting and other expenses that we did not incur as a private company and our management and other personnel need to devote a substantial amount of time to comply with these rules and regulations and establish the corporate infrastructure and controls demanded of a publicly traded REIT. If our finance and accounting organization is unable for any reason to respond adequately to the demands of being a publicly held company, the quality and timeliness of our financial reporting may suffer and we could experience significant deficiencies or material weaknesses in our disclosure controls and procedures or in our internal control over financial reporting. An inability to establish and maintain effective disclosure controls and procedures and internal control over

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financial reporting could cause us to fail to meet our reporting obligations under the Exchange Act on a timely basis or result in material misstatements or omissions in our Exchange Act reports.

Failure to qualify as a domestically controlled REIT could subject our non-U.S. stockholders to adverse federal income tax consequences.

        

We will remain a domestically controlled REIT if, at all times during a specified testing period, less than 50% in value of our shares is held directly or indirectly by non-U.S. stockholders. However, because our shares are publicly traded, we cannot guarantee that we will maintain the qualifications to be a domestically-controlled REIT. If we fail to qualify as a domestically-controlled REIT, our non-U.S. stockholders that otherwise would not be subject to federal income tax on the gain attributable to a sale of our shares of common stock would be subject to taxation upon such a sale if either (1) the shares of common stock were not considered to be regularly traded under applicable Treasury Regulations on an established securities market, such as the NYSE, or (2) the selling non-U.S. stockholder owned, actually or constructively, more than 5% in value of the outstanding shares of common stock being sold during specified testing periods. If gain on the sale or exchange of our shares of common stock was subject to taxation for these reasons, the non-U.S. stockholder would be subject to regular U.S. income tax with respect to any gain on a net basis in a manner similar to the taxation of a taxable U.S. stockholder, subject to any applicable alternative minimum tax and special alternative minimum tax in the case of nonresident alien individuals, and corporate non-U.S. stockholders may be subject to an additional branch profits tax.

Our cash available for distribution to stockholders may not be sufficient to pay distributions at expected levels or at all, and we may be required to borrow funds on a short-term basis during unfavorable market conditions.

        

In order to maintain our qualification as a REIT, we are required under the Code to distribute at least 90% of our net taxable income annually to our stockholders. In any period our net taxable income may be greater than our cash flow from operations, requiring us to fund such distributions from other sources, including borrowed funds, even if the market conditions are not favorable for these borrowings. In addition, we may become party to debt agreements that include cash management or similar provisions, pursuant to which revenues generated by properties subject to such indebtedness are immediately, or upon the occurrence of certain events, swept into an account for the benefit of the lenders under such debt agreements, which revenues would typically only become available to us after the funding of reserve accounts for, among other things, debt service, taxes, insurance and leasing commissions. In any event, if our properties do not generate sufficient distributable cash flow to satisfy our REIT distribution obligations, we may be required to fund distributions from working capital, borrowings under our revolving credit facility, the sale of assets or debt or equity financing, some or all of which may not be available or may not be available on favorable market conditions. As a result, any failure to generate cash greater than our REIT distribution obligation could have a material adverse effect on the price of our common stock.


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Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

        For taxable years beginning on or after January 1, 2013, the maximum tax rate applicable to "qualified dividends" paid to U.S. shareholders that are individuals, trusts and estates is 23.8% (taking into account the 3.8% Medicare tax applicable to net investment income). Dividends payable by REITs, however, generally are not eligible for the reduced rates and will continue to be subject to tax at rates applicable to ordinary income, which will be as high as 43.4% (taking into account the 3.8% Medicare tax applicable to net investment income). The more favorable tax rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the shares of non-REIT corporations that pay dividends, which could adversely affect the value of the shares of REITs, including our common shares.

Legislative or other actions affecting REITs could have a negative effect on us.

        The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Department of the Treasury. Changes to the tax laws, with or without retroactive application, could materially and adversely affect CoreSite Realty Corporation's stockholders, Operating Partnership unit holders and/or us. We cannot predict how changes in the tax laws might affect our investors and/or us. New legislation, Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to qualify as a REIT or the federal income tax consequences of such qualification.

Applicable REIT laws may restrict certain business activities.

        

As a REIT we are subject to various restrictions on our income, assets and activities. These include restrictions on our ability to pursue certain strategic acquisitions or business combinations and our ability to enter into other lines of business. Due to these restrictions, we anticipate that we will conduct certain business activities such as interconnection services, in one or more taxable REIT subsidiaries. Our taxable REIT subsidiaries are taxable as regular C corporations and are subject to federal, state, local and, if applicable, foreign taxation on their taxable income at applicable corporate income tax rates. However, we may still be limited in the business activities we can pursue.

Despite our REIT status, we remain subject to various taxes.

        

Notwithstanding our status as a REIT, we will be subject to certain federal, state and local taxes on our income and property. For example, we will pay tax on certain types of income that we do not distribute and we will incur a 100% excise tax on transactions with our TRStaxable REIT subsidiary ("TRS") entities that are not conducted on an arm’sarm's length basis. Moreover, our TRS entities are taxable as a regular C corporation and will pay federal, state and local income tax on itstheir net taxable income at the applicable corporate rates.

We could become subject to the imposition of prohibited transactions tax.

34        In the event a determination were made that we executed a prohibited transaction, defined as a sale or disposition of property held for sale in the ordinary course of business other than foreclosed property, a federal tax would be imposed on 100% of the net income derived from such a transaction. Safe-harbor rules exist to avoid the prohibited transaction test. Otherwise, facts and circumstances would govern application of the tax to a particular transaction.



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If the structural components of our properties were not treated as real property for purposes of the REIT qualification requirements, we would fail to qualify as a REIT.

        

A significant portion of the value of our properties is attributable to structural components related to the provision of electricity, heating, ventilation and air conditioning, humidification regulation, security and fire protection, and telecommunication services. We have received a private letter ruling from the Internal Revenue Service (the “IRS”"IRS"), holding, among other things, that our buildings, including the structural components, constitute real property for purposes of the REIT qualification requirements. We are entitled to rely upon that private letter ruling only to the extent that we did not misstate or omit a material fact in the ruling request we submitted to the IRS and that we operate in the future in accordance with the material facts described in that request. Moreover, the IRS, in its sole discretion, may revoke the private letter ruling. If our structural components are subsequently determined not to constitute real property for purposes of the REIT qualification requirements, including as a result of our being unable to rely upon the private letter ruling or the IRS revoking that ruling, we would fail to qualify as a REIT, which could have a material adverse effect on the value of our common stock.

If interconnection services were not treated as qualifying income for purposes of the REIT qualification requirements, we may fail to qualify as a REIT.

        Interconnection services are a fundamental and growing part of our business. Based on representations we have made to the IRS that this activity is ordinary, necessary, usual, and customary in connection with the operation of our data center properties and those properties with similar character to ours, we have received a private letter ruling, holding, among other things, that amounts received from our customers for interconnection services will not be treated as other than "rents from real property" under the Code. We are entitled to rely upon that private letter ruling only to the extent that we did not misstate or omit a material fact in the ruling request we submitted to the IRS and that we operate in the future in accordance with the material facts described in that request. Moreover, the IRS, in its sole discretion, may revoke the private letter ruling. If the revenue associated with our interconnection activity was determined to be non-qualifying REIT income, including as a result of our being unable to rely upon the private letter ruling or the IRS revoking that ruling, there would be significant risk to our ability to qualify as a REIT, which could have a material adverse effect on the value of our common stock.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.

        To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our capital stock. If we fail to comply with one or more of the asset tests at the end of any calendar quarter, we must correct the failure within 30 days after the end of such calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. In order to meet these tests, we may be required to forego investments we might otherwise make or to liquidate otherwise attractive investments. Thus, compliance with the REIT requirements may hinder our performance and reduce amounts available for distribution to our stockholders.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.


None.Table of Contents

ITEM 2.    PROPERTIES

        

The information set forth under the caption “Our Portfolio”"Our Portfolio" in Item 1 of this Annual Report is incorporated by reference herein.

ITEM 3.    LEGAL PROCEEDINGS

        

From time to time, we are party to a variety of legal proceedings arising inIn the ordinary course of business. We believe that, with respectour business, we are subject to claims and administrative proceedings. Except as described below, we are not presently party to any such matters thatproceeding which we are currently a partybelieve to the ultimate disposition of any such matter will not result in abe material adverse effect on us.

As previously disclosed,or which we were involved in litigationwould expect to have, individually or in the Colorado District Court in Denver, Colorado with Ari Brumer, the former general counsel of our affiliate, CoreSite, LLC, arising out of the termination of Mr. Brumer’s employment. The allegations made by Mr. Brumer in his complaint against us, certain of our affiliates, and certain affiliates of The Carlyle Group also have been previously reported, as have been the counterclaims asserted against Mr. Brumer by us and certain of our affiliates. On December 6, 2012, the parties reached binding settlement with Mr. Brumer pursuant to which, following full documentation of the binding settlement terms on January 10, 2013, we paid Mr. Brumer a cash payment in an amount that we do not consider to be material. We do not consider this settlement as havingaggregate, a material adverse effect on our business, financial position, liquiditycondition, cash flows or results of operations. We recorded

        On February 4, 2014, U.S. Colo, LLC ("U.S. Colo"), a current customer, filed a complaint against us in the settlement expense in general and administrative expenseUnited States District Court for the year endedCentral District of California. In the complaint, U.S. Colo alleged that it should not have been charged for the use of various CoreSite interconnection services under the terms of an existing agreement between the parties.

        On July 23, 2015, after amendments to the complaint, dismissal of several of U.S. Colo's claims, and a remand of the case to the Superior Court of the State of California, County of Los Angeles (the "Superior Court"), U.S. Colo filed an amended complaint alleging breach of contract and breach of the covenant of good faith and fair dealing. The amended complaint seeks $802,564 in damages for charges paid to us for interconnection services; $70,080,000 in damages for alleged losses of revenue and profits; attorney's fees, interest, and costs of the suit; and declaratory and injunctive relief.

        On February 4, 2016, the Superior Court granted our motion for summary adjudication, finding that U.S. Colo had contractually waived all claims for lost revenue or profits or other consequential damages. Discovery is underway and a trial is currently set for April 11, 2016.

        On July 9, 2015, a purported class action lawsuit was filed in the Superior Court of the State of California, County of Los Angeles, against us, alleging various employment law violations related to overtime, meal and break periods, minimum wage, timely payment of wages, wage statements, payroll records and business expenses. The lawsuit is in the early stages and we have filed a responsive pleading generally denying the allegations.

        We intend to vigorously defend both of these legal proceedings. While it is not feasible to predict or determine the outcome of these legal proceedings, as of December 31, 2012.2015, we estimate that the ultimate resolution of these litigation matters and other disputes could result in a loss that is reasonably possible between $0.0 million and $3.0 million in the aggregate.

ITEM 4.    MINE SAFETY DISCLOSURES

        

Not applicable.


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PART II

ITEM 5.    MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holders

        

Our common stock has been listed and is traded on the New York Stock Exchange (“NYSE”("NYSE") under the symbol “COR”"COR" since September 23, 2010. As of February 22, 2013,11, 2016, we had eightfive holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name. The following table sets forth, for the periods indicated, the high and low sale prices in dollars on the NYSE for our common stock and the dividends we declared with respect to the periods indicated.

 

 

Price Range

 

Dividends

 

 

 

High

 

Low

 

Declared

 

2012:

 

 

 

 

 

 

 

Fourth Quarter

 

$

27.99

 

$

20.50

 

$

0.27

 

Third Quarter

 

$

28.00

 

$

25.36

 

$

0.18

 

Second Quarter

 

$

26.10

 

$

22.53

 

$

0.18

 

First Quarter

 

$

24.74

 

$

17.96

 

$

0.18

 

2011:

 

 

 

 

 

 

 

Fourth Quarter

 

$

18.38

 

$

12.34

 

$

0.18

 

Third Quarter

 

$

17.96

 

$

13.63

 

$

0.13

 

Second Quarter

 

$

17.76

 

$

14.88

 

$

0.13

 

First Quarter

 

$

16.18

 

$

13.27

 

$

0.13

 

 
 Price Range  
 
 
 Dividends
Declared		 
 
 High Low 

2015:

          

Fourth Quarter

 $60.10 $50.60 $0.53 

Third Quarter

 $52.63 $45.44 $0.42 

Second Quarter

 $51.04 $44.51 $0.42 

First Quarter

 $51.32 $39.28 $0.42 

2014:

          

Fourth Quarter

 $39.98 $32.24 $0.42 

Third Quarter

 $36.47 $32.03 $0.35 

Second Quarter

 $34.08 $29.75 $0.35 

First Quarter

 $33.74 $29.26 $0.35 

Distributions and Dividends

        

In order to comply with the REIT requirements of the Code, we generally are required to make annual distributions to our shareholders of at least 90% of our net taxable net income. Our common sharestock distribution policy is to distribute as dividends a percentage of our cash flow that ensures that we will meet the distribution requirements of the Code and that allows us to maximize the cash retained for meeting other cash needs, such as capital improvements and other investment activities.

        

We have made distributions in the form of dividends in every quarter since the completion of our IPO. While we plan to continue to make quarterly distributions, no assurances can be made as to the frequency or amounts of any future distributions. The payment of common share distributions is dependent upon our financial condition, operating results and REIT distribution requirements and may be adjusted at the discretion of our Board of Directors during the year. Dividends declared in the past two fiscal years are noted in the chart above.

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Performance Graph

        

The following line graph sets forth, for the period from September 23,December 31, 2010, through December 31, 2012,2015, a comparison of the percentage change in the cumulative total stockholder return on our common stock compared to the cumulative total return of the S&P 500 Market Index and the MSCI US REIT Index (“RMS”("RMS"). The graph assumes that $100 was invested on September 23,December 31, 2010, in shares of our common stock and each of the aforementioned indices and that all dividends were reinvested without the payment of any commissions. There can be no assurance that the performance of our shares will continue in line with the same or similar trends depicted in the graph below.

Pricing Date
 COR S&P 500 MSCI
US REIT		 

December 31, 2010

 $100 $100 $100 

December 31, 2011

 $135 $102 $109 

December 31, 2012

 $217 $118 $128 

December 31, 2013

 $261 $157 $131 

December 31, 2014

 $331 $178 $171 

December 31, 2015

 $498 $181 $175 

Sales of Unregistered Equity Securities

        

Pricing Date

 

COR

 

S&P 500

 

MSCI US REIT

 

September 23, 2010

 

$

100.0

 

$

100.0

 

$

100.0

 

September 30, 2010

 

$

102.4

 

$

101.5

 

$

101.7

 

December 31, 2010

 

$

86.0

 

$

112.4

 

$

109.2

 

March 31, 2011

 

$

100.7

 

$

119.1

 

$

116.3

 

June 30, 2011

 

$

105.1

 

$

119.2

 

$

120.5

 

September 30, 2011

 

$

92.8

 

$

102.6

 

$

103.0

 

December 31, 2011

 

$

116.4

 

$

114.8

 

$

118.7

 

March 31, 2012

 

$

155.2

 

$

129.2

 

$

131.5

 

June 30, 2012

 

$

171.1

 

$

125.7

 

$

136.4

 

September 30, 2012

 

$

179.8

 

$

133.7

 

$

136.4

 

December 31, 2012

 

$

186.4

 

$

133.2

 

$

140.0

 

None.

SALES OF UNREGISTERED EQUITY SECURITIESRepurchases of Equity Securities

        

None.

REPURCHASES OF EQUITY SECURITIES

None.


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ITEM 6.    SELECTED FINANCIAL DATA

        

On September 28, 2010, we closedThe following table sets forth selected consolidated financial and operating data on an historical basis for CoreSite Realty Corporation. The following selected financial data should be read in conjunction with our IPO and completed the acquisition of our Predecessor and the CoreSite Acquired Properties. As such, the financial condition and results of operations for the entities acquired by our Predecessor in connection with the IPO and related formation transactions are only included in the condensed consolidated financial statements, sinceincluding the datenotes thereto, included in Item 8. "Financial Statements and Supplementary Data" in this Annual Report and Item 7. "Management's Discussion and Analysis of the transactions. Prior to September 28, 2010, the dateFinancial Condition and Results of these transactions, the condensed consolidated financial statements include only the activities and capital structure of our Predecessor.

 

 

The Company

 

Historical Predecessor

 

 

 

Year ended
December 31,

 

Year ended
December 31,

 

For the period
September 28, 2010,
through December

 

For the period
January 1, 2010,
through September

 

Year ended December 31,

 

(in thousands except per share data)

 

2012

 

2011

 

31, 2010

 

27, 2010

 

2009

 

2008

 

Statement of Operations Data

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating revenues

 

$

206,934

 

$

172,846

 

$

38,352

 

$

35,557

 

$

28,831

 

$

15,581

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating and maintenance

 

61,235

 

55,049

 

12,107

 

14,272

 

13,954

 

11,258

 

Real estate taxes and insurance

 

8,765

 

9,119

 

1,642

 

1,262

 

1,787

 

2,125

 

Management fees to related party

 

—

 

—

 

—

 

3,582

 

2,244

 

1,523

 

Depreciation and amortization

 

64,327

 

68,967

 

19,146

 

11,848

 

11,193

 

7,966

 

Sales and marketing

 

10,330

 

5,744

 

1,341

 

125

 

135

 

170

 

General and administrative

 

25,910

 

21,846

 

4,987

 

2,258

 

1,401

 

1,325

 

Rent

 

18,711

 

18,336

 

4,551

 

2,177

 

2,816

 

2,624

 

Transaction costs

 

613

 

875

 

3,275

 

—

 

—

 

—

 

Total operating expenses

 

189,891

 

179,936

 

47,049

 

35,524

 

33,530

 

26,991

 

Operating income (loss)

 

17,043

 

(7,090

)

(8,697

)

33

 

(4,699

)

(11,410

)

Gain on early extinguishment of debt

 

—

 

939

 

—

 

—

 

—

 

—

 

Interest income

 

13

 

117

 

77

 

2

 

3

 

17

 

Interest expense

 

(5,236

)

(5,275

)

(2,325

)

(1,590

)

(2,343

)

(2,495

)

Income (loss) before income taxes

 

11,820

 

(11,309

)

(10,945

)

(1,555

)

(7,039

)

(13,888

)

Income tax (expense) benefit

 

(1,104

)

530

 

223

 

—

 

—

 

—

 

Net income (loss)

 

10,716

 

(10,779

)

(10,722

)

(1,555

)

(7,039

)

(13,888

)

Net income (loss) attributable to noncontrolling interests

 

5,668

 

(6,168

)

(7,371

)

—

 

—

 

—

 

Net income (loss) attributable to CoreSite Realty Corporation

 

$

5,048

 

$

(4,611

)

$

(3,351

)

$

(1,555

)

$

(7,039

)

$

(13,888

)

Earnings Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to common shares

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

(0.24

)

$

(0.17

)

 

 

 

 

 

 

Diluted

 

0.22

 

(0.24

)

(0.17

)

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

20,537,946

 

19,609,375

 

19,458,605

 

 

 

 

 

 

 

Diluted

 

20,992,290

 

19,609,375

 

19,458,605

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.81

 

$

0.57

 

$

0.13

 

 

 

 

 

 

 

 

 

The Company

 

Historical Predecessor

 

 

 

 

 

December 31,

 

Balance Sheet Data

 

December 31, 2012

 

December 31, 2011

 

December 31, 2010

 

2009

 

2008

 

Net investments in real estate

 

$

721,633

 

$

674,168

 

$

589,679

 

$

218,055

 

$

197,493

 

Total Assets

 

845,332

 

808,226

 

833,026

 

239,420

 

213,846

 

Revolving credit facility

 

—

 

5,000

 

—

 

—

 

—

 

Mortgages and notes payable

 

59,750

 

116,864

 

124,873

 

62,387

 

52,530

 

Noncontrolling interests in operating partnership

 

372,544

 

387,379

 

422,226

 

—

 

—

 

Stockholders’ equity / members’ equity

 

710,773

 

232,808

 

232,239

 

162,338

 

149,103

 

38Operations" in this Annual Report.


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The Company

 

Historical Predecessor

 

 

 

 

 

 

 

For the period

 

 

 

 

 

 

 

 

 

Year ended

 

Year ended

 

September 28, 2010

 

For the period January

 

 

 

 

 

December 31,

 

December 31,

 

through December

 

1, 2010 through

 

Year ended December 31,

 

(in thousands)

 

2012

 

 2011

 

31, 2010

 

September 27, 2010

 

2009

 

2008

 

Net income (loss)

 

$

10,716

 

$

(10,779

)

$

(10,722

)

$

(1,555

)

$

(7,039

)

$

(13,888

)

Real estate depreciation and amortization

 

61,700

 

67,673

 

18,936

 

11,748

 

11,193

 

7,966

 

Preferred Stock Dividends

 

(440

)

—

 

—

 

—

 

—

 

—

 

FFO attributable to common shares and units

 

$

71,976

 

$

56,894

 

$

8,214

 

$

10,193

 

$

4,154

 

$

(5,922

)

 
 Year Ended December 31, 
(in thousands except share and per share data)
 2015 2014 2013 2012 2011 

Statement of Operations Data

                

Operating revenues

 $333,292 $272,420 $234,833 $206,934 $172,846 

Operating expenses

  269,208  228,233  200,163  189,891  179,936 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Operating income (loss)

  64,084  44,187  34,670  17,043  (7,090)

Gain on land disposal

  36  1,208  —  —  — 

Interest expense

  (7,104) (5,311) (2,689) (5,236) (5,275)

Net income (loss)

  56,859  40,052  31,612  10,716  (10,779)

Net income (loss) attributable to noncontrolling interests

  22,153  17,287  12,771  5,668  (6,168)
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

Net income (loss) attributable to CoreSite Realty Corporation

  34,706  22,765  18,841  5,048  (4,611)

Preferred stock dividends

  (8,338) (8,338) (8,338) (440) — 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​

Net income (loss) attributable to common shares

 $26,368 $14,427 $10,503 $4,608 $(4,611)
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​​​​
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Earnings Per Share

                

Net income (loss) per share attributable to common shares

                

Basic

 $1.05 $0.68 $0.50 $0.22 $(0.24)

Diluted

  1.03  0.66  0.49  0.22  (0.24)

Dividends declared per common share

  1.79  1.47  1.16  0.81  0.57 

Balance Sheet Data

                

Gross investments in real estate

 $1,295,135 $1,146,548 $1,048,525 $829,508 $741,981 

Total assets

  1,162,543  1,074,604  1,016,346  844,992  807,662 

Debt, net

  391,007  317,679  232,352  59,410  121,300 

Funds from Operations ("FFO")

                

Net income (loss)

 $56,859 $40,052 $31,612 $10,716 $(10,779)

Real estate depreciation and amortization

  87,287  73,955  62,040  61,700  67,673 

Gain on land disposal

  (36) (1,208) —  —  — 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

FFO

  144,110  112,799  93,652  72,416  56,894 

Preferred stock dividends

  (8,338) (8,338) (8,338) (440) — 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​

FFO attributable to common shares and units

 $135,772 $104,461 $85,314 $71,976 $56,894 
​​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​ ​

FFO per common share and OP unit—diluted

 $2.86 $2.22 $1.82 $1.55 $1.24 

(1)        We consider funds from operations (“FFO”("FFO"), a non-GAAPnon-generally accepted accounting principles ("GAAP") measure, to be a supplemental measure of our performance which should be considered along with, but not as an alternative to, net income and cash provided by operating activities as a measure of operating performance and liquidity. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”("NAREIT"). FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of


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property and undepreciated land and impairment write-downs of depreciable real estate, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures. FFO attributable to common shares and units represents FFO less preferred stock dividends declared during the period.

        

Our management uses FFO as a supplemental performance measure because, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs.

        

We offer this measure because we recognize that FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO excludes real estate related depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited. FFO is a non-GAAP measure and should not be considered a measure of liquidity, an alternative to net income, cash provided by operating activities or any other performance measure determined in accordance with GAAP, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. In addition, our calculations of FFO are not necessarily comparable to FFO as calculated by other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us. Investors in our securities should not rely on these measures as a substitute for any GAAP measure, including net income.


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ITEM 7.MANAGEMENT’S    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 annual report. Some of the information contained in this discussion and analysis or set forth elsewhere in this annual 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"Cautionary Note Regarding Forward-Looking Statements.”" You should also review the “Risk Factors”"Risk Factors" in Item IA.1A. of this reportAnnual 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

        

Overview

We are an owner, developerengaged in the business of ownership, acquisition, construction and operatoroperation of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including Los Angeles, the Northern Virginia (including Washington D.C.), New York and San Francisco Bay and Northern Virginia areas, Chicago, Los Angeles, 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 are able to satisfy the full spectrum of our customers’deliver secure, reliable, high-performance data center requirements by providingand interconnection solutions to a growing customer ecosystem across eight key North American markets. We connect, protect and deliver a reliable performance environment and continued operation of mission-critical data and information technology infrastructure for more than 900 of the world's leading enterprises, network operators, cloud providers, and supporting service providers.

        Our focus is to bring together a network and cloud community to support the needs of enterprises, and create a diverse customer ecosystem. Our growth strategy includes (i) increasing cash flow from in-place data center space, 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(ii) capitalizing on customer demand, regional economies and property characteristics.

As of December 31, 2012, with the exception of NY2, which was acquired February 7, 2013, our property portfolio included 14 operating data center facilities and multiple development projects, which collectively comprise over 2.7 million NRSF, of which approximately 1.2 million NRSF isembedded expansion opportunities within existing data center space. These properties include 358,929 NRSF of space readily available for lease, of which 278,120 NRSF is available for lease as data center space. Including the space currently under construction orcenters, (iii) selectively pursuing acquisition and development opportunities in preconstruction at December 31, 2012, vacant spaceexisting and land targeted for future developmentnew markets, (iv) expanding existing customer relationships, and NY2, we own land and buildings sufficient to develop over 1.2 million NRSF of data center space, comprised of (1) 94,650 NRSF space under construction as of December 31, 2012, (2) 216,250 NRSF planned to commence development during 2013 at NY2 and on land that we currently own at VA2 and our Santa Clara Campus, and (3) 894,286 NRSF at multiple facilities, as shown on the development table on page 9, that may be developed over time based on market supply, demand and our financing capabilities.(v) attracting new customers.

Results of Operations

Prior to the closing of our IPO on September 28, 2010, we had no corporate activity other than the issuance of shares of common stock in connection with the initial capitalization of our company. The results of operations for the year ended December 31, 2010, reflect the financial condition and results of operations of our Predecessor, together with the CoreSite Acquired Properties, from September 28, 2010, the date of acquisition. The contribution or acquisition of interests in the CoreSite Acquired Properties was accounted for as an acquisition by our Predecessor under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of the contribution. Our results of operations may therefore not be indicative of our future results of operations.

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 and globally. 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 and the rest of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition.

Operating Revenue.revenue.    Our ability to increase operatingThe amount of revenue generated by the properties in our portfolio including rental, interconnection and power revenue, depends principally on several factors, including our ability (i) to maintain or improve the historical occupancy rates of currently leased space (ii)and to lease currently available space. In addition, the loss of one or more significant customers could have a material adverse effect on our results of operations. During the year ended December 31, 2015, we renewed an average of 49,000 NRSF per quarter at a rental growth rate of 9.1%. Excluding space and space that becomes available from leases that expire or are terminated at or in excess of current rental rates and (iii) to increase the number of interconnections provided to current customers. Asheld for development, as of December 31, 2012, our operating2015, the occupancy rate of data center facilities are 77.0% leased. Negative trendsproperties in one or moreour portfolio, stabilized and pre-stabilized, was 89.7% 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 abilityNRSF compared to renew or re-lease space and the ability of our customers to fulfill their lease commitments,82.6% as in the case of customer bankruptcies, could adversely affect our ability to maintain or increase operating revenue at our properties.

As of December 31, 2012, we had 1,3152014. During the year ended December 31, 2015, new and expansion leases totaling approximately


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304,000 NRSF commenced. The following table summarizes our leasing activity during the year ended December 31, 2015:

 
 Three Months Ended Number of
Leases(1)		 GAAP
Annualized
Rent		 Total
Leased
NRSF(2)		 Rental
Rates(3)		 Rent
Growth(4)		 

New/expansion leases commenced

 December 31, 2015  142 $9,335  54,329 $172    

 September 30, 2015  150  9,250  66,330  139    

 June 30, 2015  107  15,117  122,872  123    

 March 31, 2015  110  9,224  60,797  152    

New/expansion leases signed

 

December 31, 2015

  
155		 
$
8,901		  
42,089		 
$
211		    

 September 30, 2015  149  8,825  64,087  138    

 June 30, 2015  122  19,624  243,477  81    

 March 31, 2015  100  8,861  54,385  163    

Renewal leases signed

 

December 31, 2015

  
211		 
$
10,089		  
49,561		 
$
204		  
6.7
%

 September 30, 2015  165  10,460  72,031  145  9.7%

 June 30, 2015  135  6,517  35,272  185  9.1%

 March 31, 2015  122  7,222  40,446  179  11.4%
(1)
Number of leases represents each lease agreement with over 750 customers, the majority of our leases contained annual base rent escalations that were either fixed (generally ranging from 2% to 4%) or indexeda customer; a lease agreement could include multiple spaces and a customer could have multiple leases.

(2)
Total leased NRSF is determined based on a consumer price index or other similar inflation related index.

contractually leased square feet, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.

(3)
Rental rates represent annual contractual rent per NRSF adjusted for straight-line rents in accordance with GAAP.

(4)
Rent growth represents the increase in rental rates on renewed leases commencing during the period, as compared with the previous period's rental rates for the same space.

Operating expensesexpenses..    Our operating expenses primarily consist of utilities,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 are 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 our customers. 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)

40


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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.utility cost. Under the breakered-amp model, a customer pays a fixed monthly fee per committed available


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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 and related infrastructure purchased.

Scheduled Lease Expirations.    Our ability to re-lease expiring space at rental rates equal to or in excess of current rental rates materially affectswill impact our results of operations. As of December 31, 2012,In addition to approximately 358,929267,000 NRSF of space currently unoccupied in our total portfolio, represented currently available space. Leases741 and 537 data center leases representing approximately 16.1%16.0% and 19.0%14.0% of the NRSF acrossin our operating data center portfolio with current average annualized rental rates of $136 per NRSF and $164 per NRSF are scheduled to expire during the years ending December 31, 2013,2016, and 2014,2017, respectively. The leases scheduled to expire in 2013 and 2014 also represent approximately 24.5% and 24.6%, respectively, of our annualized rent as of December 31, 2012.

We continue to see strong demand in our markets for data center space and expect the rental rates we are likely to achieve on any new or renewed leases for 2013 and 2014 expirations will generally be higher than the rates currently being paid for the same space. For the year ended December 31, 2012, rents on re-leased/renewed space increased by an average of 12.1% 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 and may fluctuate from one period to another due to a number of factors, including local real estate conditions, local supply and demand for data centerdatacenter space, competition from other datacenter developers or operators, the condition of thea particular property and whether thea property, or space within thea property, has been developed.

Acquisitions, Development and Financing.    Our ability to grow rental incomeand operating revenue depends on our ability to acquire, develop and lease data center space at favorable rental rates. As of December 31, 2012,2015, we had approximately 1.2 million869,000 NRSF of space available for future development and space currently under development, space or approximately 43.2%30% of the total space in our portfolio. We may encounter development delays, excess development costs, or delays in leasing developed space to customers. We generally fund the cost of data center development from additional capital, which, for future developments, we would expect to obtain primarily through our revolving credit facility and then other unsecured and secured borrowings, construction financings and the issuance of additional equity and debt securities if needed and when market conditions permit. If we cannot obtainWe will require additional capital when needed or on favorable terms, weto finance future development activities, which capital may not be ableavailable or may not be available on terms acceptable to acquire or develop properties when strategic opportunities arise.us.

Conditions in Significant Markets.    Our operating properties are locatedPositive or negative changes in Los Angeles, the San Francisco Bayconditions including supply and Northern Virginia areas, Boston, Chicago, New York City, Miamidemand, rental rates, utility costs, and Denver. These markets comprised 30.6%, 27.4%, 19.1%, 8.3%, 8.2%, 4.2%, 1.4%, and 0.8%,general economic conditions in any of our markets could impact our overall performance. The following table provides an overview of our property portfolio as a percentage of total data center annualized rent as of December 31, 2012. Positive or negative changes in conditions in these markets will impact our overall performance.2015:

Metropolitan Market
Percentage of
Total Data Center
Annualized Rent

Los Angeles

27.4%

San Francisco Bay

26.0

Northern Virginia

20.8

Chicago

8.8

Boston

8.2

New York

7.0

Miami

1.0

Denver

0.8
​​​ ​ ​

Total

100.0%
​​​ ​ ​
​​​​​
​​​ ​ ​

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Results of Operations

Year Ended December 31, 2012,2015, Compared to Year Ended December 31, 20112014

        The discussion below relates to our financial condition and results of operations for the years ended December 31, 2015, and 2014. A summary of our operating results for the years ended December 31, 2015, and 2014, is as follows (in thousands).

 
 Year Ended December 31,  
  
 
 
 2015 2014 $ Change % Change 

Operating revenue

 $333,292 $272,420 $60,872  22.3%

Operating expense

  269,208  228,233  40,975  18.0%

Operating income

  64,084  44,187  19,897  45.0%

Interest expense

  7,104  5,311  1,793  33.8%

Net income

  56,859  40,052  16,807  42.0%

 

 

Year ended��
December 31,
 2012

 

Year ended 
December 31, 
2011

 

$ Change

 

% Change

 

 

 

 

 

(in thousands)

 

 

 

 

 

Operating Revenue

 

$

206,934

 

$

172,846

 

$

34,088

 

19.7

%

Operating Expense

 

189,891

 

179,936

 

9,955

 

5.5

%

Interest Expense

 

5,236

 

5,275

 

(39

)

-0.7

%

Net income (loss)

 

10,716

 

(10,779

)

21,495

 

199.4

%

Operating Revenue.

        Operating revenue forduring the years ended December 31, 2015, and 2014, was as follows (in thousands):

 
 Year Ended
December 31,		  
  
 
 
 2015 2014 $ Change % Change 

Data center revenue:

             

Rental revenue

 $183,300 $149,294 $34,006  22.8%

Power revenue

  89,495  71,227  18,268  25.6%

Interconnection revenue

  44,234  35,355  8,879  25.1%

Tenant reimbursement and other

  8,295  8,702  (407) –4.7%
​​​ ​ ​​ ​​​ ​ ​​ ​​

Total data center revenue

  325,324  264,578  60,746  23.0%

Office, light industrial and other revenue

  7,968  7,842  126  1.6%
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Total operating revenues

 $333,292 $272,420 $60,872  22.3%
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​ ​ ​

        A majority of the increase in operating revenues was due to a $52.3 million increase in data center rental and power revenue during the year ended December 31, 2012, was $206.9 million. This includes2015, compared to the 2014 period. The increase in data center rental revenue of $123.4 million,and power revenue is due primarily to the net commencement of $53.6 million, interconnection of $20.9 millionnew and tenant reimbursement and other revenue of $9.1 million. This compares to operating revenue of $172.8 million forexpansion leases during the year ended December 31, 2011. The increase2015, which increased occupied data center NRSF from 1,217,248 NRSF as of $34.1 million, or 19.7%, was partially dueDecember 31, 2014, to 1,489,611 NRSF as of December 31, 2015. Leases that contributed to the placement into serviceincrease in data center rental and power revenue include new leases representing 42,318 NRSF at the recently developed first and second phases of three computer roomsNY2 and new leases representing 87,538 NRSF at the recently developed first and second phases of VA2. Also, at our newestSanta Clara campus, we restructured a 50,000 NRSF lease agreement involving a customer that has vacated its leased space and is paying discounted rent payments that may be applied to new lease arrangements elsewhere in our portfolio until its original lease terms expire. The amounts payable pursuant to this agreement are scheduled to expire as follows: $1.9 million in the second quarter of 2016 and $4.2 million in the second quarter of 2017. In addition to these reservation payments, we have successfully secured new leases for the vacated 50,000 NRSF to new customers as of December 31, 2015. These new leases increased data center SV4rental and power revenue by $18.3 million during 2012the year ended December 31, 2015, compared to the 2014 period, which represented 35% of the total increase in data center rental and power revenue. The remainder of the completion and subsequent leasing of expansion space at VA1 and CH1. Approximately 109,000 NRSF of new and expansion leases commenced during 2012 and we achieved 12.1% rent growth on lease renewals. Also, we grew our interconnection services and increased interconnection prices during 2012.increase in data center revenue

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Operating Expenses. Operating expenses for the year ended December 31, 2012, were $189.9 million compared to $179.9 million for the year ended December 31, 2011. The increase of $10.0 million, or 5.5%, was primarily due to additional property operating and maintenance expense associated with the placement into service of three computer rooms at our newest data center, SV4, during 2012, the completion of expansion space at VA1 and CH1 and an increase in sales and marketing expense and general and administrative expense due to increased employee head count. Additionally, general and administrative expense increased by $1.8 million due to the settlement of two outstanding litigation matters.  The increases were partially offset by a decrease in depreciation and amortization expense due to the short-term useful life of the lease intangibles acquired in connection with our IPO.

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 primarilyis due to an increase in capitalized interest due to the numberadditional 174,472 NRSF of ongoing development projects partially offset by a higher average debt balancecustomer leases that commenced during the year ended December 31, 2012.

Net Income (Loss). Net income for the year ended December 31, 2012, was $10.7 million compared to a net loss of $10.8 million for the year ended December 31, 2011. The increase of $21.5 million was primarily due to the increased operating revenue from the placement into service of additional space at several data centers, the increase in the prices and volume of interconnection services and the decrease in depreciation and amortization expense due to the short-term useful life of the lease intangibles acquired in connection with our IPO. These increases were2015, partially offset by the $10expiring leases that were not renewed.

        In addition, interconnection revenue increased $8.9 million increase in operating expenses and a $0.9 million gain on early extinguishment of debt which occurred during the year ended December 31, 2011.2015, compared to the 2014 period, primarily as a result of an increase in the volume of cross connects from new and existing customers. During the twelve months ended December 31, 2015, customers added 2,226 net cross connections.

Operating Expenses

        

Year EndedOperating expenses during the years ended December 31, 2011, Compared2015, and 2014, were as follows (in thousands):

 
 Year Ended December 31,  
  
 
 
 2015 2014 $ Change % Change 

Property operating and maintenance

 $89,805 $75,119 $14,686  19.6%

Real estate taxes and insurance

  12,144  7,578  4,566  60.3%

Depreciation and amortization

  95,702  80,722  14,980  18.6%

Sales and marketing

  15,930  14,554  1,376  9.5%

General and administrative

  34,179  27,842  6,337  22.8%

Rent

  21,075  20,397  678  3.3%

Impairment of internal-use software

  322  1,959  (1,637) –83.6%

Transaction costs

  51  62  (11) –17.7%
​​​ ​ ​​ ​​​ ​ ​​ ​​

Total operating expenses

 $269,208 $228,233 $40,975  18.0%
​​​ ​ ​​​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​ ​ ​

        Property operating and maintenance expense increased $14.7 million as a result of an increase in power expense due to Year Ended December 31, 2010

 

 

The Company

 

The Predecessor

 

Total Company and 
Predecessor

 

 

 

 

 

 

 

Year ended 
December 31,
 2011

 

For the period September 
28, 2010 through December 
31, 2010

 

For the period January 1,
 2010 through September
 27, 2010

 

Year ended 
December 31, 2010

 

$ 
Change

 

% 
Change

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

Operating Revenue

 

$

172,846

 

$

38,352

 

$

35,557

 

$

73,909

 

$

98,937

 

133.9

%

Operating Expense

 

179,936

 

47,049

 

35,524

 

82,573

 

97,363

 

117.9

%

Interest Expense

 

5,275

 

2,325

 

1,590

 

3,915

 

1,360

 

34.7

%

Net loss

 

(10,779

)

(10,722

)

(1,555

)

(12,277

)

1,498

 

-12.2

%

Operating Revenue. Operating revenue forthe commencement of new and expansion leases during the year ended December 31, 2011, was $172.8 million. This includes rental revenue2015, that resulted in a 22% increase in occupied data center NRSF from 1,217,248 NRSF as of $108.6December 31, 2014, to 1,489,611 NRSF as of December 31, 2015. In addition, payroll and benefits expense increased due to an increase in facilities and operations headcount associated with increased occupied data center NRSF.

        Real estate taxes and insurance increased $4.6 million power revenue of $43.4 million, interconnection revenue of $12.2 million and tenant reimbursement and other revenue of $8.7 million. This compares to revenue of $73.9 million forduring the year ended December 31, 2010. The increase of $98.9 million, or 133.9%, was due primarily2015, compared to the acquisition2014 period, primarily as a result of a true-up in 2014 of accrued real estate tax liabilities associated with estimated amounts from 2010 due to the CoreSite Acquired Properties on September 28, 2010.

Operating Expenses. Operating expenseschange in ownership of our acquired properties at our IPO. The final tax assessments for two properties acquired at our IPO became known in the second quarter of 2014 and, therefore, the estimated real estate tax liabilities were reconciled to the actual tax liabilities, resulting in a $3.7 million reduction in the 2014 expense. In addition, real estate taxes and insurance increased $1.2 million during the year ended December 31, 2011, were $179.9 million2015, compared to $82.6 million for the year ended December 31, 2010. The increase2014 period, as a result of $97.4 million, or 117.9%, was primarily due to the acquisition of the CoreSite Acquired Propertiesan increased tax assessment at our CH1 property and the resulting internalization of the management function through the acquisition of CoreSite, LLC, our management company. These costs were partially offset by a decrease in transaction costs for potential acquisition deals that did not occur.

Interest Expense. Interest expense, including amortization of deferred financing costs, for the year ended December 31, 2011, was $5.3 million compared to interest expense of $3.9 million for the year ended December 31, 2010. The increase in interest expense wascapitalized real estate taxes and insurance due to less construction activity at NY2 and VA2 during the year.

        Depreciation and amortization expense increased debt balances from the acquisition$15.0 million as a result of the CoreSite Acquired Properties. The increase in interest expense was partially offset by an increase in capitalized interest due to the increase in properties under development.

Net Loss. Net loss for the year ended December 31, 2011, was $10.8 million compared to a net lossdepreciation expense from approximately 174,000 NRSF of $12.3 million for the year ended December 31, 2010. The decreased net loss of $1.5 million was primarily due to increased operating revenue from the acquisition of the CoreSite Acquired Properties and a reduction in transaction costs associated with our acquisition of the CoreSite Acquired Properties. These increases were partially offset by the acquisition of the CoreSite Acquired Properties and the resulting internalization of the management function through the acquisition of CoreSite, LLC, our management company, and increased interest expense.

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Liquidity and Capital Resources

Discussion of Cash Flows

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

Net cash provided by operating activities was $68.6 million for the year ended December 31, 2012, compared to $61.2 million for the year ended December 31, 2011. The increased cash provided by operating activities of $7.4 million was primarily due to the placement into service and subsequent leasing ofnew data center space and an increase in the price and volume of interconnection services year-over-year.

Net cash used in investing activities decreased by $28.8 million to $83.8 million for the year ended December 31, 2012, compared to $112.6 million for the year ended December 31, 2011. This decrease was primarily due to a decrease in cash used for capital expenditures related to development of data center space. During the years ended December 31, 2012, and 2011, we placed into service 139,671 NRSF and 65,006 NRSF, respectively.  Of the 139,671 NRSFprojects placed into service during the year ended December 31, 2012,2015, with a largecost basis of approximately $115.6 million. Also, we recognized a $4.2 million increase in amortization expense from deferred leasing commissions related to new leases signed and lease renewals.

        General and administrative expense increased $6.3 million primarily as a result of $2.4 million in litigation accruals, an increase in payroll, benefits and bonus expense due to an increase in headcount and fees associated with the redemption by the Funds of 8,500,000 Operating Partnership units. See additional discussion of the litigation accruals in Item 8—Note 15 Commitments and Contingencies in "Financial Statements and Supplementary Data."


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        During the years ended December 31, 2015, and 2014, we recognized a $0.3 million and $2.0 million impairment charge, respectively, as a result of writing off the costs incurred for internal-use software previously under development that was discontinued and will no longer be placed into service.

Interest Expense

        Interest expense increased during the year ended December 31, 2015, compared to the 2014 period, as a result of the increase in overall debt outstanding and a decrease in capitalized interest due to construction projects at NY2 and VA2 being placed into service during the year. Overall debt outstanding increased $73.3 million during the year ended December 31, 2015. A summary of interest expense for the years ended December 31, 2015, and 2014, is as follows (in thousands):

 
 Year Ended
December 31,		  
  
 
 
 2015 2014 $ Change % Change 

Interest expense and fees

 $9,556 $8,047 $1,509  18.8%

Amortization of deferred financing costs

  1,246  1,897  (651) –34.3%

Capitalized interest

  (3,698) (4,633) 935  20.2%
​​​ ​ ​​ ​​​ ​ ​​ ​​

Total interest expense

  7,104  5,311  1,793  33.8%
​​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​ ​ ​

Percent capitalized

  34.2% 46.6%      

Year Ended December 31, 2014, Compared to Year Ended December 31, 2013

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

 
 Year Ended
December 31,		  
  
 
 
 2014 2013 $ Change % Change 

Operating revenue

 $272,420 $234,833 $37,587  16.0%

Operating expense

  228,233  200,163  28,070  14.0%

Operating income

  44,187  34,670  9,517  27.5%

Interest expense

  5,311  2,689  2,622  97.5%

Net income

  40,052  31,612  8,440  26.7%

Operating Revenue

        Operating revenue during the years ended December 31, 2014, and 2013, was as follows (in thousands):

 
 Year Ended
December 31,		  
  
 
 
 2014 2013 $ Change % Change 

Data center revenue:

             

Rental revenue

 $149,294 $131,080 $18,214  13.9%

Power revenue

  71,227  59,663  11,564  19.4%

Interconnection revenue

  35,355  28,932  6,423  22.2%

Tenant reimbursement and other

  8,702  7,317  1,385  18.9%
​​​ ​ ​​ ​​​ ​ ​​ ​​

Total data center revenue

  264,578  226,992  37,586  16.6%

Office, light-industrial and other revenue

  7,842  7,841  1  0.0%
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Total operating revenues

 $272,420 $234,833 $37,587  16.0%
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​ ​ ​

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        A majority of the increase in total operating revenues was due primarily to a $29.8 million increase in data center rental and power revenue during the year ended December 31, 2014, compared to the 2013 period. The increase in data center rental and power revenue was due primarily to the net commencement of new and expansion leases during the year ended December 31, 2014, which increased occupied data center NRSF from 1,105,451 NRSF as of December 31, 2013, to 1,217,248 NRSF as of December 31, 2014. Leases that contributed to the increase in data center rental and power revenue include a 101,721 NRSF built-to-suit lease at SV5, which commenced in November 2013, a 7,711 NRSF lease at SV4, which commenced in September 2013, a 23,663 NRSF lease at BO1, which commenced in April 2013, a 5,694 NRSF lease at CH1, which commenced in April 2014, a 12,600 NRSF lease at SV3, which commenced in May 2014, and 27,347 NRSF of multiple leases at our newly developed NY2 data center which commenced throughout the year ended December 31, 2014. These five leases and the NY2 leases increased data center rental and power revenue by $15.3 million during the year ended December 31, 2014, compared to the 2013 period, which represented 51% of the total increase in data center rental and power revenue. The remainder of the increase in data center revenue was due to an additional 122,094 NRSF that commenced during the year ended December 31, 2014, partially offset by expiring leases that were not renewed.

        In addition, interconnection revenue increased $6.4 million during the year ended December 31, 2014, compared to the 2013 period, as a result of an increase in the volume of cross connects from new and existing customers.

Operating Expenses

        Operating expenses during the years ended December 31, 2014, and 2013, were as follows (in thousands):

 
 Year Ended
December 31,		  
  
 
 
 2014 2013 $ Change % Change 

Property operating and maintenance

 $75,119 $64,260 $10,859  16.9%

Real estate taxes and insurance

  7,578  8,458  (880) –10.4%

Depreciation and amortization

  80,722  65,785  14,937  22.7%

Sales and marketing

  14,554  14,405  149  1.0%

General and adminstrative

  27,842  27,317  525  1.9%

Rent

  20,397  19,659  738  3.8%

Impairment of internal-use software

  1,959  —  1,959  — 

Transaction costs

  62  279  (217) –77.8%
​​​ ​ ​​ ​​​ ​ ​​ ​​

Total operating expenses

 $228,233 $200,163 $28,070  14.0%
​​​ ​ ​​​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​ ​ ​

        Property operating and maintenance expense increased $10.9 million as a result of an increase in power expense due to the commencement of new and expansion leases during the year ended December 31, 2014, and a 10% increase in occupied data center NRSF from 1,105,451 NRSF as of December 31, 2013, to 1,217,248 NRSF as of December 31, 2014. In addition, payroll and benefits expense increased due to an increase in facilities and operations headcount associated with increased occupied data center NRSF.

        Real estate taxes and insurance decreased $0.9 million during the year ended December 31, 2014, compared to the 2013 period, as a result of a true-up of accrued real estate tax liabilities associated with estimated amounts from 2010 due to the change in ownership of our acquired properties at IPO located in California. The final tax assessments for two properties acquired at IPO became known in the second quarter of 2014 and, therefore, the estimated real estate tax accruals were reconciled to the actual tax liabilities, resulting in a $3.7 million reduction in expense. This decrease was partially offset by an increase in real estate taxes and insurance due to increases in assessed property values and taxes


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on newly developed data centers at NY2 and SV5. Insurance premiums increased as a result of the completion of newly developed data centers, including NY2 and SV5, and a corresponding increase in the insured values of these properties. We capitalize a portion of real estate taxes and insurance costs that are identifiable to data center projects under construction.

        Depreciation and amortization expense increased $14.9 million as a result of the placement into service of approximately 68,300 NRSF of new operating space during the year ended December 31, 2014.

        During the year ended December 31, 2014, we recognized a $2.0 million impairment charge as a result of internal-use software previously under development costs werethat was discontinued during the period and will not be placed into service.

Interest Expense

        The $2.6 million increase in total interest expense was primarily a result of additional outstanding debt of $317.7 million as of December 31, 2014, compared to $232.4 million of outstanding debt as of December 31, 2013. A summary of interest expense for the year ended December 31, 2014, and 2013, is as follows (in thousands):

 
 Year Ended
December 31,		  
  
 
 
 2014 2013 $ Change % Change 

Interest expense and fees

 $8,047 $5,312 $2,735  51.5%

Amortization of deferred financing costs

  1,897  1,739  158  9.1%

Capitalized interest

  (4,633) (4,362) (271) –6.2%
​​​ ​ ​​ ​​​ ​ ​​ ​​

Total interest expense

  5,311  2,689  2,622  97.5%
​​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​ ​ ​

Percent capitalized

  46.6% 61.9%      

        The Company recognized a $1.2 million gain on land disposal in the consolidated statements of operations as a result of the Massachusetts Bay Transportation Authority acquiring 52,248 square feet of land at BO1 pursuant to an order of taking.

Liquidity and Capital Resources

Discussion of Cash Flows

Year Ended December 31, 2015, Compared to Year Ended December 31, 2014

        Net cash provided by operating activities was $142.6 million for the year ended December 31, 2015, compared to $99.5 million for the year ended December 31, 2014. The increase in cash provided by operating activities of $43.1 million, or 43%, was due primarily to growth in data center rental, power and interconnection revenue from existing customers and completion and subsequent leasing of new data center space at several properties. Also, we paid $3.8 million more of leasing commissions during the year ended December 31, 2014, compared to the 2015 period.

        Net cash used in investing activities increased by $21.3 million, or 20%, to $127.5 million for the year ended December 31, 2015, compared to $106.2 million for the year ended December 31, 2014. This increase was due primarily to construction commencing on our SV6 and SV7 buildings at our Santa Clara campus. The increase was partially offset by the receipt of $2.4 million of cash proceeds during the year ended December 31, 2015, from a real estate disposal related to the Massachusetts Bay Transportation Authority acquiring 52,248 square feet of land at BO1 pursuant to an order of taking during the year ended December 31, 2014.


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        Net cash used in financing activities was $18.8 million for the year ended December 31, 2015, compared to $12.0 million provided by financing activities for the year ended December 31, 2014. The $30.8 million change in financing activities was primarily a result of net cash proceeds from debt instruments of $73.8 million during the year ended December 31, 2015, compared to net cash proceeds of $86.0 million during the year ended December 31, 2014. The remaining change was due to an increase of $13.6 million in dividends and distributions paid on our common stock and Operating Partnership units during the year ended December 31, 2015, as a result of an increase in the quarterly dividend from $0.35 per share or unit paid during the year ended December 31, 2011.2014, to $0.42 per share or unit paid during the year ended December 31, 2015.

Year Ended December 31, 2014, Compared to Year Ended December 31, 2013

        Net cash provided by operating activities was $99.5 million for the year ended December 31, 2014, compared to $97.7 million for the year ended December 31, 2013. The increase in cash provided by operating activities of $1.8 million was due primarily to growth in data center rental, power and interconnection revenue from existing customers and completion and subsequent leasing of new data center space at several properties and an increase in prepaid rent and other liabilities. The increase was partially offset by a $14.5 million increase in deferred leasing costs paid during the year ended December 31, 2014, compared to 2013.

        Net cash used in investing activities decreased to $106.2 million for the year ended December 31, 2014, compared to $214.5 million for the year ended December 31, 2013. This decrease was primarily a result of the acquisition during 2013 of NY2 for $21.9 million and a decrease in cash expended on real estate improvements of $85.2 million, primarily related to construction of our SV5 and NY2 properties during the 2013 period.

Net cash provided by financing activities was $16.7$12.0 million for the year ended December 31, 2012,2014, compared to net cash used in financing activities of $28.3$113.9 million for the year ended December 31, 2011.2013. The increasedecrease of $101.9 million in cash provided by financing activities of $45.0 million was primarily a result of $86.8 million less net cash proceeds from debt instruments during the year ended December 31, 2014, as the acquisition of NY2 and development activities during the year ended December 31, 2013, resulted in higher financing requirements during the 2013 period. The remaining change was due to an increase of $16.7 million in dividends and distributions paid on our common stock and common Operating Partnership units during the $110.8 million proceedsyear ended December 31, 2014, as a result of an increase in the quarterly dividend from the sale of our 7.25% Series A Cumulative Redeemable Preferred Stock in December 2012. We used these proceeds to repay outstanding mortgage loans and borrowings under our revolving credit facility during 2012. Also, we increase our dividends$0.27 per share or unit paid during 2012.the year ended December 31, 2013, to $0.35 per share or unit paid during the year ended December 31, 2014.

Analysis of Liquidity and Capital Resources

        

As of December 31, 2012, we had $8.1 million of cash and equivalents, excluding $0.5 million of restricted cash. Restricted cash primarily consists of interest bearing cash deposits required by the terms of our loans and cash impound accounts for real estate taxes and insurance as required by our mortgage loans. During the year ended December 31, 2012, restricted cash decreased by $8.8 million primarily due to the release of lender held escrows for the SV1 mortgage loan. The loan agreement required us to fund a specified amount of capital improvements at SV1 which were completed during 2012, and the lender released the escrows.

We have an effective shelf registration statement filed on September 28, 2011, that allows us to registeroffer for sale various unspecified various classes of equity and debt securities. On December 12, 2012,As circumstances warrant, we issued 4.6 million shares of 7.25% Series A Cumulative Redeemable Preferred Stock for total net proceeds, after underwriting discountsmay issue debt and/or equity securities from time to time on an opportunistic basis, dependent upon market conditions and offering expenses, of $110.6 million, including the proceeds from the exercise of the full underwriters’ over-allotment option. The net proceeds received were used to repay $77.8 million of borrowing under our revolving credit facility, the full amount of the mortgage loan payable of $31.6 million encumbering our VA1 propertyavailable pricing. We make no assurance that we can issue and for general corporate purposes, including development opportunities.sell such securities on acceptable terms or at all.

        

Our short-term liquidity requirements primarily consist of funds needed for future distributions to common and preferred stockholders and holders of our operating partnership units, interest expense, operating costs including utilities, site maintenance costs, real estate and personal property taxes, insurance, rental expenses and selling, general and administrative expenses, and certain capital expenditures, including for the development of data center space and future distributions to common and preferred stockholders and holders of our common Operating Partnership units during the next 12twelve months. As of December 31, 2015, we had $6.9 million of cash and cash equivalents. Subject to our ability to obtain capital withupon favorable terms, we estimate our anticipated development activity over the next 12twelve months will require approximately $200$210 million to $225$240 million of capital investment to expand


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our operating data center portfolio. The table below summarizes our current projects under construction as of December 31, 2015, and the remaining estimated capital required:

 
  
  
  
 Costs 
Projects/Facilities
 Metropolitan Market Estimated
Completion		 NRSF Incurred
to-date		 Estimated
Total		 Per NRSF 

TKD(1)

                 

VA2 Phase 3(2)

 Northern Virginia Q1 2016  48,137 $17,408 $24,500 $509 

VA2 Phase 4(2)

 Northern Virginia Q1 2016  48,137  4,630  8,000  166 

BO1

 Boston Q1 2016  14,031  9,363  11,000  784 

SV7 Phase 1

 San Francisco Bay Q2 2016  80,000  23,794  110,000  1,375 

LA2

 Los Angeles Q1 - Q2 2016  43,345  7,563  18,000  415 

Powered shell

 

 

 

 

  
 		  
 		  
 		  
 		 

SV6(3)

 San Francisco Bay Q1 - Q2 2016  136,580 $18,083 $30,000 $220 
​​​​​​​ ​ ​​ ​​​ ​ ​​​​

Total TKD and powered shell

      370,230 $80,841 $201,500    
​​​​​​​ ​ ​​ ​​​ ​ ​​​​

Deferred Expansion Capital

                 

CH1

 Chicago Q1 2016  — $1,042 $2,600    

LA1

 Los Angeles Q1 2016  —  1,273  1,300    

LA2

 Los Angeles Q1 2016  —  925  1,100    

NY2

 New York Q1 2016  —  1,400  3,500    

SV4

 San Francisco Bay Q1 2016  —  740  1,000    
​​​​​​​ ​ ​​ ​ ​​ ​ ​​​​

Total Deferred Expansion Capital

      — $5,380 $9,500    
​​​​​​​ ​ ​​ ​ ​​ ​ ​​​​

Total

      370,230 $86,221 $211,000    
​​​​​​​ ​​​ ​ ​​ ​​​​​
​​​​​​​​​​​​​​​​​​
​​​​​​​ ​ ​​ ​ ​​​ ​​​​
(1)
Turn-Key Data Center ("TKD") estimated development costs includes two components: 1) general construction to ready the NRSF as data center space and 2) power, cooling and other infrastructure to provide the designed amount of power capacity for the project. Following development completion, incremental capital, referred to as Deferred Expansion Capital, may be invested to support existing or anticipated future customer utilization of NRSF within our operating data centers.

(2)
The estimated total costs for VA2 phases 3 and 4 is $338 per NRSF.

(3)
Represents 136,580 NRSF of build-to-suit space that was 100% pre-leased in April 2015 and has an expected lease commencement date in the first half of 2016.

We expect to meet our short and long-termshort-term liquidity requirements, including our anticipated development activity over the next twelve months, through net cash provided by operations and by incurring additional indebtedness, including by drawing on our revolving credit facility. Subsequent to December 31, 2012, wefacility or other debt instruments. On June 24, 2015, our Operating Partnership and certain subsidiaries entered into a Second Amendedthird amended and Restated Credit Agreement,restated revolving credit facility (as amended, the "Credit Agreement"), which increased our borrowing capacitythe total commitment from $405.0 million to $355.0 million. At December 31, 2012, we had no outstanding balance on the$500.0 million, providing for a $350.0 million revolving credit facility.

Our ability to borrowfacility and a $150 million term loan. See discussion below regarding the 2020 Term Loan. The total amount available for borrowing under the Second Amended and Restated Agreementour revolving credit facility is subject to ongoing compliance with a numberthe lesser of financial covenants and other customary restrictive covenants.$350.0 million or the availability calculated on our unencumbered asset pool. As of December 31, 2012,2015, $142.3 million of borrowings were outstanding and up to $201.4 million of borrowing capacity remained available under our revolving credit facility. The revolving credit facility matures on June 24, 2019, with a one-year extension option subject to the payment of an extension fee equal to 10 basis points of the total commitment under the Credit Agreement at initial maturity and certain other customary


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conditions. As of December 31, 2015, we were in compliance with all of the covenants under our Second Amended and Restatedthe Credit Agreement. See discussion of our Credit Agreement accordion feature in connection with our new $100.0 million senior unsecured term loan below.

        On June 24, 2015, in connection with the Credit Agreement, our Operating Partnership and certain subsidiaries entered into a $150.0 million senior unsecured term loan (the "2020 Term Loan"). The 2020 Term Loan has a five-year term maturing on June 24, 2020.

        On January 31, 2014, our Operating Partnership and certain subsidiaries entered into a $100.0 million senior unsecured term loan (the "2019 Term Loan"). The 2019 Term Loan has a five-year term and contains an accordion feature, which allows our Operating Partnership to increase the total commitments by $100.0 million, to $200.0 million under specified circumstances, including securing capital from new or existing lenders. The 2019 Term Loan matures on January 31, 2019.

        In order to increase our liquidity requirements and access to capital and meet the needs of our development plans, our Operating Partnership and certain subsidiaries partially exercised the accordion feature under the Credit Agreement and entered into a $100.0 million senior unsecured term loan (the "2021 Term Loan") on February 2, 2016, increasing our total commitment from $500.0 million to $600.0 million. The 2021 Term Loan has a five-year term maturing on February 2, 2021. The borrowings under the 2021 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 150 basis points to 220 basis points, or (ii) a base rate plus 50 basis points to 120 basis points, each depending on our Operating Partnership's leverage ratio. Following the 2021 Term Loan, the Credit Agreement accordion feature increased by $100.0 million, which allows our Operating Partnership to increase the total commitment from $600.0 million to $800.0 million under specified circumstances, including securing capital from new or existing lenders.

Our long-term liquidity requirements primarily consist of the costs to fund theadditional phases of our current projects under development, ofincluding SV6 and SV7 at the Santa Clara Campus,campus, the One Wilshire Campus,campus, BO1, CH1, NY2 and VA2, NY2, future development of other space in our portfolio not currently scheduled, property acquisitions, future distributions to common and preferred stockholders and holders of our operating partnershipcommon Operating Partnership units, scheduled debt maturities, and other capital improvements.expenditures. We expect to meet our long-term liquidity requirements primarilythrough net cash provided by operations, after payment of dividends, and by incurring long-term indebtedness, such as property mortgage loans, and drawing on our revolving credit facility.facility, exercising our senior unsecured term loan accordion features or entering into new debt agreements with our bank group. We also may raise capital in the future through the issuance of additional equity or debt securities, subject to prevailing market conditions, and/or through the issuance of operating partnershipcommon Operating Partnership units. However, there is no assurance that we will be able to successfully raise additional capital on acceptable terms or at all.

Inflation

        Substantially all of our leases contain annual rent increases and our leases have an average lease term of three to four years. As a result, we believe that we are largely insulated from the effects of inflation. However, any increases in the costs of development of our data center properties will generally result in increased cash requirements to develop our data center properties and increased depreciation expense in future periods, and, in some circumstances, we may not be able to directly pass along the increase in these development costs to our customers in the form of higher rents.


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InflationIndebtedness

        

Many of our leases provide for separate real estate tax and operating expense escalations. In addition, many of the leases provide for fixed base rent increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above.

Indebtedness

A summary of outstanding indebtedness as of December 31, 20122015, and 20112014, is as follows (in thousands):

 
 Interest Rate Maturity
Date		 December 31,
2015		 December 31,
2014		 

Revolving credit facility

 1.98% and 2.17% at December 31, 2015, and December 31, 2014, respectively June 24, 2019 $142,250 $218,500 

2019 Senior unsecured term loan

 3.23% at December 31, 2015, and at December 31, 2014 January 31, 2019  100,000  100,000 

2020 Senior unsecured term loan

 2.43% at December 31, 2015 June 24, 2020  150,000  — 
​​​​​​​ ​ ​​ ​ ​

Total principal outstanding

      392,250  318,500 

Unamortized deferred financing costs

      (1,243) (821)
​​​​​​​ ​ ​​ ​ ​

Total debt

     $391,007 $317,679 
​​​​​​​ ​ ​​ ​ ​
​​​​​​​​​​​​
​​​​​​​​ ​​ ​ ​

        

 

 

Interest Rate

 

Maturity 
Date

 

December 31, 
2012

 

December 31, 
2011

 

SV1 - Mortgage loan

 

3.71% and 3.75% at December 31, 2012, and 2011, respectively

 

October 9, 2014

 

$

59,750

 

$

60,000

 

Revolving credit facility

 

2.46% and 2.54% at December 31, 2012, and 2011, respectively

 

January 3, 2017

 

—

 

5,000

 

CH1 - Senior mortgage loan

 

Repaid in March 2012

 

N/A

 

—

 

25,000

 

VA1 - Mortgage loan

 

Repaid in December 2012

 

N/A

 

—

 

31,864

 

 Total principal outstanding

 

 

 

 

 

$

59,750

 

$

121,864

 

As of December 31, 2012,2015, we were in compliance with the covenants under our revolving credit facility and the SV1 mortgage loan.senior unsecured term loans. For additional information with respect to our outstanding indebtedness as of December 31, 2012,2015, and December 31, 2011,2014, as well as the available credit under our existing revolving credit facility, debt covenant requirements, and future debt maturities, refer to Item 8—Note 8 “Debt”8—Debt in “Financial"Financial Statements and Supplementary Data”Data" included in thethis Annual Report.

Contractual Obligations and Off-Balance Sheet Arrangements

        

The following table summarizes our contractual obligations and off-balance sheet arrangements as of December 31, 2012,2015, including the maturities and scheduled principal repayments of indebtedness (in thousands):

Obligation

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Operating leases

 

$

18,149

 

$

18,336

 

$

18,014

 

$

17,752

 

$

16,287

 

$

72,518

 

$

161,056

 

Mortgages payable (1)

 

3,700

 

59,850

 

—

 

—

 

—

 

—

 

63,550

 

Construction Contracts (2)

 

35,034

 

—

 

—

 

—

 

—

 

—

 

35,034

 

Other (3)

 

6,667

 

1,125

 

989

 

527

 

142

 

745

 

 

10,195

 

Total

 

$

63,550

 

$

79,311

 

$

19,003

 

$

18,279

 

$

16,429

 

$

73,263

 

$

269,835

 

Obligation
 2016 2017 2018 2019 2020 Thereafter Total 

Operating leases

 $19,899 $19,678 $19,284 $19,827 $20,181 $36,578 $135,447 

Revolving credit facility(1)

  2,816  2,816  2,816  143,611  —  —  152,059 

Senior unsecured term loans(2)

  6,875  6,875  6,875  103,914  151,762  —  276,301 

Construction contracts(3)

  77,240  —  —  —  —  —  77,240 

Other(4)

  5,913  2,166  1,627  515  416  5,712  16,349 
​​​ ​​​ ​ ​​ ​​​ ​ ​​ ​​​ ​ ​​ ​​

Total

 $112,743 $31,535 $30,602 $267,867 $172,359 $42,290 $657,396 
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

(1)
Includes $59.8$142.3 million of mortgage principal paymentsoutstanding and estimated annual interest payments until debtassuming no draws or payments on the revolving credit facility through the maturity date of $2.2 million in 2013 and $1.6 million in 2014.June 24, 2019. The mortgage payablerevolving credit facility is subject to variable rates and werates. We estimated interest payments on the revolving credit facility based on the interest rate as of December 31, 2012.2015.

(2)
Includes $100.0 million outstanding and estimated annual interest payments through the maturity date of January 31, 2019. We estimated interest payments based on our $100 million interest rate swap agreement, which effectively fixes the interest rate at 3.23%. Also includes $150 million

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    (2) Obligationsoutstanding and estimated annual interest payments through the maturity date of June 24, 2020. We estimated interest payments based on our $75 million interest rate swap agreement, which effectively fixes the interest rate at 2.93%. The remaining $75 million is subject to variable rates, which we estimated based on the interest rate as of December 31, 2015.

(3)
Consists of obligations for construction contracts for properties under construction, tenant related capital expenditures, and other capital improvements.

(3) Obligations

(4)
Consists of obligations for tenant improvement work at SV1, power contracts, telecommunications leases, and telecommunications leases.

contracts for company-wide improvements that are ancillary to revenue generation.

Other Off-Balance Sheet Arrangements

        

As of December 31, 2012, other than our operating leases, construction contracts and other items disclosed above, we2015, the Company did not have any other off-balance sheet arrangements.

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Critical Accounting Policies

        

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).GAAP. The preparation of these consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. Our actual results may differ from these estimates. We have provided a summary of our significant accounting policies in Note 2 “Summary"Summary of Significant Accounting PoliciesPolicies" in “FinancialItem 8 "Financial Statements and Supplementary Data” included inData" of this Annual Report. We describe below those accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations. Our management evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions management believes are reasonable as of the date hereof.

Acquisition of Investment in Real EstateEstate..    We apply purchase accounting to the assets and liabilities related to all of our real estate investments acquired. Accordingly, we are required to make subjective assessments to allocate the purchase price paid to the acquired tangible assets, consisting primarily of land, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and lease origination costs. These allocation assessments involve significant judgment and complex calculations and have a direct impact on our results of operations.

Capitalization of CostsCosts..    Capitalized lease commissions consist of commissions paid to third party leasing agents and internal sales commissions paid to employees for the successful execution of lease agreements. We also capitalize a portion of internal sales employees' compensation and payroll-related fringe benefits that directly relate to time spent executing successful lease agreements. During the years ended December 31, 2012, 2011, for the period from September 28, 2010 to December 31, 2010,2015, 2014, and for the period from January 1, 2010 to September 27, 2010,2013, we capitalized $2.7$11.9 million, $2.3, million, $0.3$10.3, million, and $3.9 million, respectively, of internal sales commissions.commissions, salaries, and payroll-related fringe benefits.

        

Direct and indirect costs that are clearly associated with the development of properties are capitalized as incurred. During the land development and construction periods, we capitalize construction costs, legal fees, financing costs (including interest), real estate taxes and insurance and internal costs of personnel performing development, if such costs are incremental and identifiable to a specific development project. We cease cost capitalization on development space once the space is ready for its intended use and held available for occupancy. Indirect costs that do not clearly relate to


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the projects under development are not capitalized and are charged to expense as incurred. Indirect costs capitalized for the years ended December 31, 2012,2015, 2014, and 2011, for the period from September 28, 2010 to December 31, 2010, and for the period from January 1, 2010 to September 27, 20102013, are as follows (in thousands):

 

 

The Company

 

The Predecessor

 

 

 

Year Ended
 December 31, 2012

 

Year Ended 
December 31, 2011

 

For the period September 
28, 2010 through
 December 31, 2010

 

For the period January
 1, 2010 through
 September 27, 2010

 

Interest

 

$

1,837

 

$

1,591

 

$

26

 

$

557

 

Real estate taxes and insurance

 

732

 

432

 

68

 

424

 

Employee salaries

 

957

 

741

 

94

 

—

 

Capitalized development costs

 

$

3,526

 

$

2,764

 

$

188

 

$

981

 

 
 Year Ended December 31, 
 
 2015 2014 2013 

Interest

 $3,698 $4,633 $4,362 

Real estate taxes and insurance

  1,166  1,117  1,473 

Employee salaries and benefits

  1,458  2,375  2,447 
​​​ ​ ​​ ​ ​​ ​ ​

Capitalized indirect development costs

 $6,322 $8,125 $8,282 
​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​

Useful Lives of Assets.    We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income. Buildings are depreciated on a straight-line basis over 27 to 40 years. Additionally we depreciate building improvements over ten years for owned properties and the remaining term of the original lease for leased properties. Leasehold improvements are depreciated over the shorter of the lease term or useful life of the asset.

Recoverability of Long-Lived Assets.    We review the carrying value of our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) from an asset are less than the carrying amount of the asset. The estimation of expected future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economic and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into an impairment review analysis, these changes could result in an adjustment to the carrying amount of our long-lived assets. To the extent that impairment has occurred, the excess of the carrying amount of the property over its estimated fair value would be charged against net income. No such impairment losses have been recognized to date.

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Goodwill. The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Our goodwill has an indeterminate life and is not amortized, but is evaluated for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We utilized the qualitative assessment for our 2012 annual impairment test.

Revenue Recognition.    Rental incomerevenue is recognized on a straight-line basis over the non-cancellable term of customer leases.customer's lease term. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are recorded as deferred rent receivable on our consolidated balance sheets. ManySome of our leases contain provisions under which our customers reimburse us for a portion of direct operating expenses, including power, as well as real estate taxes and insurance. Such reimbursements are recognized in the period that the expenses are recognized. We recognize the amortization of the acquired above-market and below-market customer leases as decreases and increases, respectively, to rental revenue over the remaining non-cancellablenoncancelable term of the underlying leases. If the value of below-market leases includes renewal option periods, we include such renewal periods in the amortization period utilized.

        

Interconnection, utility services, and utilityadditional space services are considered separate earnings processes that are typically provided and completed on a month-to-month basis and revenue is recognized in the period that the services are performed. Set-upNon-recurring customer set-up charges and utility installation fees are initially deferred and recognized over the lease term or the expected period of performance unless management determines a separate earnings process exists related to an installation charge. We recognized revenue on a gross basis when we act as the primary obligor and principal to the transaction, thereby taking on the risks and rewards associated with the delivery of services and products.

        

We must make subjective estimates as to when our revenue is earned and the collectability of our accounts receivable related to rent, deferred rent, expense reimbursements and other income.revenue. We analyze individual accounts receivable and historical bad debts, customer concentrations, customer


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creditworthiness and current economic trends when evaluating the adequacy of the allowance for bad debts. These estimates have a direct impact on our net income because a higher bad debt allowance for a particular period would result in lower net income in that period and recognizing rental revenue as earned in one period versus another would result in higher or lower net income for a particulardifferent period.

Share-Based Awards.Awards.    We generally recognize compensation expense related to share-based awards on a straight-line basis over the vesting period of the award. The calculation of the fair value of share-based awards is subjective and requires several assumptions over such items as expected stock volatility, dividend payments and interest rates. These assumptions have a direct impact on our net income because a higher share-based awards amountfair value would result in higher compensation expense and lower net income for a particular period.

Recent Accounting Pronouncements

We adopted ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs and ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income as of January 1, 2012. For additional information with respect to the recent accounting pronouncements refer to Note 2 “Summary of Significant Accounting Policies” in “Financial Statements and Supplementary Data” included in this Annual Report.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        

Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The primary market risk to which we believe we are exposed is interest rate risk. Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk.

        

As of December 31, 2012,2015, we had $59.8$392.3 million of consolidated indebtednessprincipal debt outstanding that bore variable interest atbased on one month LIBOR. As of December 31, 2015, we have two interest rate swap agreements in place to fix the interest rate on $175.0 million of our one month LIBOR variable rates.rate debt. Our interest rate risk not covered by an interest rate swap agreement is $217.3 million of variable rate debt outstanding as of December 31, 2015.

        We monitor our market interest rate risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market interest rate risk sensitive instruments assuming a hypothetical 1% change in year-end interest rates.rates on our $217.3 million unhedged variable rate debt. If interest rates were to increase or decrease by 1%, the corresponding increase or decrease, as applicable, in interest expense on our variable rate debt would increase or decrease, as applicable, future earnings and cash flows by less than $0.6approximately $2.2 million annually. If interest rates were to decrease 1%, the decrease in interest expense on the variable rate debt would be less than $0.6 million annually.per year.

        

These analyses do not consider the effect of any change in overall economic activity that could impact interest rates. Further, in the event of a changean increase in interest rates of thatsignificant magnitude, we may take actions to further mitigate our exposure to interest rates.the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure. Also, our revolving credit facility had a zero balance as of December 31, 2012, and therefore was not include in theses analyses.


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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements of CoreSite Realty Corporation


Page No.

Report of Independent Registered Public Accounting Firm

48

63

Consolidated Balance Sheets as of December 31, 20122015, and 20112014

49


65

Consolidated Statements of Operations for the years ended December 31, 20122015, 2014, and 2011, the period from September 28, 2010 through December 31, 2010, and the period from January 1, 2010 through September 27, 20102013

50


66

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 20122015, 2014, and 2011, the period from September 28, 2010 through December 31, 2010, and the period from January 1, 2010 through September 27, 20102013

51


67

Consolidated Statements of Equity for the years ended December 31, 2012, 20112015, 2014, and 20102013

52


68

Consolidated Statements of Cash Flows for the years ended December 31, 20122015, 2014, and 2011, the period from September 28, 2010 through December 31, 2010, and the period from January 1, 2010 through September 27, 20102013

53


69

Notes to Consolidated Financial Statements

54


70

Supplemental Schedule—Schedule III—Real Estate and Accumulated Depreciation

72


97


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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders


CoreSite Realty Corporation:

We have audited the accompanying consolidated balance sheets of CoreSite Realty Corporation and subsidiaries (the Company) as of December 31, 2012,2015 and 2011,2014, and the related consolidated statements of operations, comprehensive income, (loss),equity, and cash flows for the years ended December 31, 2012, and 2011, and the period from September 28, 2010 through December 31, 2010, the period from January 1, 2010 through September 27, 2010, and the consolidated statements of equity for each of the years in the three-year period ended December 31, 2012.2015. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule, Schedule III III—Real Estate and Accumulated Depreciation. We also have audited the Company’sCoreSite Realty Corporation's internal control over financial reporting as of December 31, 2012,2015, based on criteria established inInternal Control — Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’sCoreSite Realty Corporation's management is responsible for these consolidated financial statements and the financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’sManagement's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule and an opinion on the Company’sCoreSite Realty Corporation's internal control over financial reporting based on our audits.

        

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

        

A company’scompany's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.

        

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CoreSite Realty Corporation and subsidiaries as of December 31, 20122015 and 2011,2014, and the results of itstheir operations and itstheir cash flows for each of the


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years in the yearsthree-year period ended December 31, 2012, and 2011, and the period from September 28, 2010 through December 31, 2010, the period from January 1, 2010 through September 27, 2010,2015, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, Schedule III III—Real Estate and Accumulated Depreciation, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Also in our opinion, CoreSite Realty Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2015, based on criteria established inInternal Control — Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (COSO).

                        /s/ KPMG LLP

                        Denver, Colorado

                        February 25, 2013

                        /s/ KPMG LLP

Denver, Colorado
February 12, 2016


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 CORESITE
CORESITE REALTY CORPORATION



CONSOLIDATED BALANCE SHEETS



(in thousands except share data)

 

 

December 31,

 

December 31,

 

 

 

2012

 

2011

 

ASSETS

 

 

 

 

 

Investments in real estate:

 

 

 

 

 

Land

 

$

85,868

 

$

84,738

 

Building and building improvements

 

593,020

 

499,717

 

Leasehold improvements

 

85,907

 

81,057

 

 

 

764,795

 

665,512

 

Less: Accumulated depreciation and amortization

 

(104,490

)

(64,428

)

Net investment in operating properties

 

660,305

 

601,084

 

Construction in progress

 

61,328

 

73,084

 

Net investments in real estate

 

721,633

 

674,168

 

Cash and cash equivalents

 

8,130

 

6,628

 

Restricted cash

 

468

 

9,291

 

Accounts and other receivables, net of allowance for doubtful accounts of $625 and $465 as of December 31, 2012 and 2011, respectively

 

9,901

 

6,562

 

Lease intangibles, net of accumulated amortization of $33,050 and $33,711 as of December 31, 2012 and 2011, respectively

 

19,453

 

36,643

 

Goodwill

 

41,191

 

41,191

 

Other assets

 

44,556

 

33,743

 

Total assets

 

$

845,332

 

$

808,226

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Liabilities:

 

 

 

 

 

Revolving credit facility

 

$

—

 

$

5,000

 

Mortgage loans payable

 

59,750

 

116,864

 

Accounts payable and accrued expenses

 

50,624

 

38,822

 

Deferred rent payable

 

4,329

 

3,535

 

Acquired below-market lease contracts, net of accumulated amortization of $10,062 and $9,267 as of December 31, 2012 and 2011, respectively

 

8,539

 

11,872

 

Prepaid rent and other liabilities

 

11,317

 

11,946

 

Total liabilities

 

134,559

 

188,039

 

Stockholders’ equity:

 

 

 

 

 

Series A Cumulative Preferred Stock 7.25%, $115,000 and $0 liquidation preference, respectively ($25.00 per share, $0.01 par value), 4,600,000 and 0 shares issued and oustanding as of December 31, 2012 and 2011, respectively

 

115,000

 

—

 

Common Stock, par value $0.01, 100,000,000 shares authorized and 21,202,673 and 20,747,794 shares issued and outstanding at December 31, 2012 and 2011, respectively

 

207

 

204

 

Additional paid-in capital

 

259,009

 

256,183

 

Accumulated other comprehensive income (loss)

 

—

 

(34

)

Accumulated deficit

 

(35,987

)

(23,545

)

Total stockholders’ equity

 

338,229

 

232,808

 

Noncontrolling interests

 

372,544

 

387,379

 

Total equity

 

710,773

 

620,187

 

Total liabilities and equity

 

$

845,332

 

$

808,226

 

 
 December 31,
2015		 December 31,
2014		 

ASSETS

       

Investments in real estate:

       

Land

 $74,819 $78,983 

Buildings and improvements

  1,037,127  888,966 
​​​ ​ ​​ ​​

  1,111,946  967,949 

Less: Accumulated depreciation and amortization

  (284,219) (215,978)
​​​ ​ ​​​ ​

Net investment in operating properties

  827,727  751,971 

Construction in progress

  183,189  178,599 
​​​ ​​​ ​ ​

Net investments in real estate

  1,010,916  930,570 

Cash and cash equivalents

  6,854  10,662 

Accounts and other receivables, net of allowance for doubtful accounts of $56 and $112 as of December 31, 2015, and December 31, 2014, respectively

  12,235  10,290 

Lease intangibles, net of accumulated amortization of $11,437 and $14,477 as of December 31, 2015, and December 31, 2014, respectively

  4,714  7,112 

Goodwill

  41,191  41,191 

Other assets, net

  86,633  74,779 
​​​ ​​​ ​ ​

Total assets

 $1,162,543 $1,074,604 
​​​ ​ ​​ ​​
​​​​​​​​
​​​ ​ ​​ ​ ​

LIABILITIES AND EQUITY

       

Liabilities:

       

Debt, net of unamortized deferred financing costs of $1,243 and $821 as of December 31, 2015, and December 31, 2014, respectively

 $391,007 $317,679 

Accounts payable and accrued expenses

  75,783  42,463 

Accrued dividends and distributions

  28,104  22,355 

Deferred rent payable

  7,934  8,985 

Acquired below-market lease contracts, net of accumulated amortization of $5,279 and $4,688 as of December 31, 2015, and December 31, 2014, respectively

  4,693  5,576 

Unearned revenue, prepaid rent and other liabilities

  28,717  19,205 
​​​ ​ ​​​ ​

Total liabilities

  536,238  416,263 

Stockholders' equity:

       

Series A Cumulative Preferred Stock 7.25%, $115,000 liquidation preference ($25.00 per share, $0.01 par value), 4,600,000 shares issued and outstanding as of December 31, 2015, and December 31, 2014

  115,000  115,000 

Common Stock, par value $0.01, 100,000,000 shares authorized and 30,650,703 and 21,757,366 shares issued and outstanding at December 31, 2015, and December 31, 2014, respectively

  301  212 

Additional paid-in capital

  390,200  275,038 

Accumulated other comprehensive loss

  (493) (125)

Distributions in excess of net income

  (88,891) (67,538)
​​​ ​​​ ​ ​

Total stockholders' equity

  416,117  322,587 

Noncontrolling interests

  210,188  335,754 
​​​ ​​​ ​ ​

Total equity

  626,305  658,341 
​​​ ​ ​​ ​​

Total liabilities and equity

 $1,162,543 $1,074,604 
​​​ ​​​ ​ ​
​​​​​​​​
​​​ ​ ​​​ ​

   

See accompanying notes to consolidated financial statements.


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CORESITE REALTY CORPORATION



CONSOLIDATED STATEMENTS OF OPERATIONS



(in thousands except share and per share data)

 

 

The Company

 

The Predecessor

 

 

 

Year Ended
December 31, 2012

 

Year Ended
December 31, 2011

 

For the period September 28, 2010
through December 31, 2010

 

For the period January 1, 2010
through September 27, 2010

 

 

 

 

 

 

 

 

 

 

 

Operating revenues:

 

 

 

 

 

 

 

 

 

Rental revenue

 

$

123,397

 

$

108,597

 

$

24,428

 

$

24,377

 

Power revenue

 

53,563

 

43,402

 

9,403

 

8,520

 

Interconnection revenue

 

20,887

 

12,161

 

2,553

 

803

 

Tenant reimbursement and other

 

9,087

 

8,686

 

1,968

 

1,857

 

Total operating revenues

 

206,934

 

172,846

 

38,352

 

35,557

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Property operating and maintenance

 

61,235

 

55,049

 

12,107

 

14,272

 

Real estate taxes and insurance

 

8,765

 

9,119

 

1,642

 

1,262

 

Management fees to related party

 

—

 

—

 

—

 

3,582

 

Depreciation and amortization

 

64,327

 

68,967

 

19,146

 

11,848

 

Sales and marketing

 

10,330

 

5,744

 

1,341

 

125

 

General and administrative

 

25,910

 

21,846

 

4,987

 

2,258

 

Rent

 

18,711

 

18,336

 

4,551

 

2,177

 

Transaction costs

 

613

 

875

 

3,275

 

—

 

Total operating expenses

 

189,891

 

179,936

 

47,049

 

35,524

 

Operating income (loss)

 

17,043

 

(7,090

)

(8,697

)

33

 

Gain on early extinguishment of debt

 

—

 

939

 

—

 

—

 

Interest income

 

13

 

117

 

77

 

2

 

Interest expense

 

(5,236

)

(5,275

)

(2,325

)

(1,590

)

Income (loss) before income taxes

 

11,820

 

(11,309

)

(10,945

)

(1,555

)

Income tax (expense) benefit

 

(1,104

)

530

 

223

 

—

 

Net income (loss)

 

 

10,716

 

 

(10,779

)

 

(10,722

)

 

(1,555

)

Net income (loss) attributable to noncontrolling interests

 

5,668

 

(6,168

)

(7,371

)

—

 

Net income (loss) attributable to CoreSite Realty Corporation

 

 

5,048

 

 

(4,611

)

 

(3,351

)

 

(1,555

)

Preferred stock dividends

 

(440

)

 

—

 

 

—

 

 

—

 

Net income(loss) attributable to common shares

 

$

4,608

 

$

(4,611

)

$

(3,351

)

$

(1,555

)

Net income (loss) per share attributable to common shares:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

(0.24

)

$

(0.17

)

N/A

 

Diluted

 

$

0.22

 

$

(0.24

)

$

(0.17

)

N/A

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

20,537,946

 

19,609,375

 

19,458,605

 

N/A

 

Diluted

 

20,992,290

 

19,609,375

 

19,458,605

 

N/A

 

 
 Year Ended December 31, 
 
 2015 2014 2013 

Operating revenues:

          

Data center revenue:

          

Rental revenue

 $183,300 $149,294 $131,080 

Power revenue

  89,495  71,227  59,663 

Interconnection revenue

  44,234  35,355  28,932 

Tenant reimbursement and other

  8,295  8,702  7,317 

Office, light-industrial and other revenue

  7,968  7,842  7,841 
​​​ ​ ​​ ​​​ ​ ​

Total operating revenues

  333,292  272,420  234,833 

Operating expenses:

          

Property operating and maintenance

  89,805  75,119  64,260 

Real estate taxes and insurance

  12,144  7,578  8,458 

Depreciation and amortization

  95,702  80,722  65,785 

Sales and marketing

  15,930  14,554  14,405 

General and administrative

  34,179  27,842  27,317 

Rent

  21,075  20,397  19,659 

Impairment of internal-use software

  322  1,959  — 

Transaction costs

  51  62  279 
​​​ ​ ​​ ​​​ ​ ​

Total operating expenses

  269,208  228,233  200,163 
​​​ ​ ​​ ​​​ ​ ​

Operating income

  64,084  44,187  34,670 

Gain on real estate disposal

  36  1,208  — 

Interest income

  6  6  32 

Interest expense

  (7,104) (5,311) (2,689)
​​​ ​ ​​ ​​​ ​ ​

Income before income taxes

  57,022  40,090  32,013 

Income tax expense

  (163) (38) (401)
​​​ ​ ​​ ​​​ ​ ​

Net income

 $56,859 $40,052 $31,612 

Net income attributable to noncontrolling interests

  22,153  17,287  12,771 
​​​ ​ ​​ ​ ​​ ​ ​

Net income attributable to CoreSite Realty Corporation

 $34,706 $22,765 $18,841 

Preferred stock dividends

  (8,338) (8,338) (8,338)
​​​ ​ ​​ ​ ​​ ​ ​

Net income attributable to common shares

 $26,368 $14,427 $10,503 
​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​

Net income per share attributable to common shares:

          

Basic

 $1.05 $0.68 $0.50 

Diluted

 $1.03 $0.66 $0.49 
​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​

Weighted average common shares outstanding

          

Basic

  25,218,500  21,161,614  20,826,622 

Diluted

  25,706,568  21,740,707  21,503,212 

   

See accompanying notes to consolidated financial statements.


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CORESITE REALTY CORPORATION



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)



(in thousands)

 

 

The Company

 

The Predecessor

 

 

 

Year Ended
December 31, 2012

 

Year Ended
December 31, 2011

 

For the period September 28, 2010
through December 31, 2010

 

For the period January 1, 2010
through September 27, 2010

 

Net income (loss)

 

$

10,716

 

$

(10,779

)

$

(10,722

)

$

(1,555

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative contracts

 

(72

)

(366

)

121

 

—

 

Reclassification of other comprehensive income (loss) to interest expense

 

145

 

173

 

—

 

—

 

Comprehensive income (loss)

 

10,789

 

(10,972

)

(10,601

)

(1,555

)

Comprehensive income (loss) attributable to noncontrolling interests

 

5,951

 

(6,275

)

(7,302

)

—

 

Comprehensive income (loss) attributable to common shares

 

$

4,838

 

$

(4,697

)

$

(3,299

)

$

(1,555

)

 
 Year Ended December 31, 
 
 2015 2014 2013 

Net income

 $56,859 $40,052 $31,612 

Other comprehensive income (loss):

          

Unrealized gain (loss) on derivative contracts

  (2,426) (1,409) — 

Reclassification of other comprehensive income to interest expense

  1,930  1,134  — 
​​​ ​ ​​ ​ ​​ ​ ​

Comprehensive income

  56,363  39,777  31,612 

Comprehensive income attributable to noncontrolling interests

  21,724  17,137  17,323 
​​​ ​ ​​ ​ ​​ ​ ​

Comprehensive income attributable to CoreSite Realty Corporation

 $34,639 $22,640 $14,289 
​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​

   

See accompanying notes to consolidated financial statements.


51


Table of Contents


CORESITE REALTY CORPORATION

CONSOLIDATED STATEMENTS OF EQUITY



(in thousands except share data)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Total

 

 

 

 

 

Redeemable

 

 

 

Preferred

 

Common Shares

 

Paid-in

 

Accumulated

 

Comprehensive

 

Member’s

 

Stockholders’

 

Noncontrolling

 

Total

 

Noncontrolling

 

 

 

Stock

 

Number

 

Amount

 

Capital

 

Deficit

 

Income (Loss)

 

Equity

 

Equity

 

Interests

 

Equity

 

Interests

 

Balance at January 1, 2010

 

$

—

 

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

162,338

 

$

162,338

 

$

—

 

$

162,338

 

$

—

 

Contributions

 

—

 

—

 

—

 

—

 

—

 

—

 

33,399

 

33,399

 

—

 

33,399

 

—

 

Distributions

 

—

 

—

 

—

 

—

 

—

 

—

 

(2,000

)

(2,000

)

—

 

(2,000

)

—

 

Initial capitalization of CoreSite Realty Corporation

 

—

 

1,000

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Issuance of common stock

 

—

 

19,435,000

 

194

 

310,766

 

—

 

—

 

—

 

310,960

 

—

 

310,960

 

—

 

Issuance of Operating Partnership units in exchange for 100% of the interests in our predecessor

 

—

 

—

 

—

 

—

 

—

 

—

 

(236,764

)

(236,764

)

—

 

(236,764

)

236,764

 

Issuance of Operating Partnership units in exchange for 100% of the interests in the CoreSite Acquired Properties

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

316,836

 

Redemption of Operating Partnership units for cash

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

(125,513

)

Offering costs

 

—

 

—

 

—

 

(25,306

)

—

 

—

 

—

 

(25,306

)

—

 

(25,306

)

—

 

Reclassify member’s equity to additional paid in capital

 

—

 

—

 

—

 

(43,027

)

—

 

—

 

43,027

 

—

 

—

 

—

 

—

 

Issuance of stock awards

 

—

 

208,042

 

—

 

361

 

—

 

—

 

—

 

361

 

—

 

361

 

—

 

Issuance of equity incentive Operating Partnership units

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

975

 

Amortization of deferred compensation

 

—

 

—

 

—

 

538

 

—

 

—

 

—

 

538

 

—

 

538

 

—

 

Dividends and distributions

 

—

 

—

 

—

 

—

 

(2,554

)

—

 

—

 

(2,554

)

(3,413

)

(5,967

)

—

 

Adjustment to reflect redeemable noncontrolling interest at redemption value

 

—

 

—

 

—

 

(3,879

)

—

 

—

 

—

 

(3,879

)

—

 

(3,879

)

3,879

 

Net loss

 

—

 

—

 

—

 

—

 

(4,906

)

—

 

—

 

(4,906

)

(4,275

)

(9,181

)

(3,096

)

Unrealized gain on derivative contracts

 

—

 

—

 

—

 

—

 

—

 

52

 

—

 

52

 

69

 

121

 

—

 

Reclassify redeemable noncontrolling interests to permanent equity

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

429,845

 

429,845

 

(429,845

)

Balance at December 31, 2010

 

—

 

19,644,042

 

194

 

239,453

 

(7,460

)

52

 

—

 

232,239

 

422,226

 

654,465

 

—

 

Offering costs

 

—

 

—

 

—

 

(17

)

—

 

—

 

 

 

(17

)

—

 

(17

)

—

 

Redemption of noncontrolling interests

 

—

 

889,610

 

9

 

13,759

 

—

 

—

 

—

 

13,768

 

(13,768

)

—

 

—

 

Issuance of restricted stock awards, net of forfeitures

 

—

 

212,180

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Exercise of stock options

 

—

 

1,962

 

—

 

31

 

—

 

—

 

—

 

31

 

—

 

31

 

—

 

Amortization of deferred compensation

 

—

 

—

 

1

 

2,957

 

—

 

—

 

—

 

2,958

 

—

 

2,958

 

—

 

Dividends and distributions

 

—

 

—

 

—

 

—

 

(11,474

)

—

 

—

 

(11,474

)

(14,804

)

(26,278

)

—

 

Net loss

 

—

 

—

 

—

 

—

 

(4,611

)

—

 

—

 

(4,611

)

(6,168

)

(10,779

)

—

 

Change in fair value on derivative contracts

 

—

 

—

 

—

 

—

 

—

 

(163

)

—

 

(163

)

(203

)

(366

)

—

 

Reclassification of other comprehensive loss to interest expense

 

—

 

—

 

—

 

—

 

—

 

77

 

—

 

77

 

96

 

173

 

—

 

Balance at December 31, 2011

 

—

 

20,747,794

 

204

 

256,183

 

(23,545

)

(34

)

—

 

232,808

 

387,379

 

620,187

 

—

 

Issuance of restricted stock awards, net of forfeitures

 

—

 

357,009

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

—

 

Exercise of stock options

 

—

 

97,870

 

1

 

1,563

 

—

 

—

 

—

 

1,564

 

—

 

1,564

 

—

 

Issuance of Series A Preferred Stock

 

115,000

 

—

 

—

 

(4,385

)

—

 

—

 

—

 

110,615

 

—

 

110,615

 

—

 

Amortization of deferred compensation

 

—

 

—

 

2

 

5,648

 

—

 

—

 

—

 

5,650

 

—

 

5,650

 

—

 

Dividends accumulated on preferred stock

 

—

 

—

 

—

 

—

 

(440

)

—

 

—

 

(440

)

—

 

(440

)

—

 

Dividends and distributions

 

—

 

—

 

—

 

—

 

(17,050

)

—

 

—

 

(17,050

)

(20,542

)

(37,592

)

—

 

Net income

 

—

 

—

 

—

 

—

 

5,048

 

—

 

—

 

5,048

 

5,668

 

10,716

 

—

 

Change in fair value on derivative contracts

 

—

 

—

 

—

 

—

 

—

 

(31

)

—

 

(31

)

(41

)

(72

)

—

 

Reclassification of other comprehensive loss to interest expense

 

—

 

—

 

—

 

—

 

—

 

65

 

—

 

65

 

80

 

145

 

—

 

Balance at December 31, 2012

 

$

115,000

 

21,202,673

 

$

207

 

$

259,009

 

$

(35,987

)

$

—

 

$

—

 

$

338,229

 

$

372,544

 

$

710,773

 

$

—

 

 
  
 Common Shares  
 Accumulated
Other
Comprehensive
Loss		  
  
  
  
 
 
 Preferred
Stock		 Additional
Paid-in
Capital		 Distributions
in Excess of
Net Income		 Total
Stockholders'
Equity		 Noncontrolling
Interests		 Total
Equity		 
 
 Number Amount 

Balance at January 1, 2013

  115,000  21,202,673  207  259,009  —  (35,987) 338,229  372,544  710,773 

Issuance of stock awards, net of forfeitures

  —  129,698  1  —  —  —  1  —  1 

Exercise of stock options

  —  54,781  1  924  —  —  925  —  925 

Offering costs

  —  —  —  (27) —  —  (27) —  (27)

Share-based compensation

  —  —  —  7,559  —  —  7,559  —  7,559 

Dividends declared on preferred stock

  —  —  —  —  —  (8,338) (8,338) —  (8,338)

Dividends and distributions

  —  —  —  —  —  (24,780) (24,780) (29,418) (54,198)

Net income

  —  —  —  —  —  18,841  18,841  12,771  31,612 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​

Balance at December 31, 2013

 $115,000  21,387,152 $209 $267,465 $— $(50,264)$332,410 $355,897 $688,307 

Issuance of stock awards, net of forfeitures

  —  181,124  —  —  —  —  —  —  — 

Exercise of stock options

  —  189,090  1  944  —  —  945  —  945 

Share-based compensation

  —  —  2  6,629  —  —  6,631  —  6,631 

Dividends declared on preferred stock

  —  —  —  —  —  (8,338) (8,338) —  (8,338)

Dividends and distributions

  —  —  —  —  —  (31,701) (31,701) (37,280) (68,981)

Net income

  —  —  —  —  —  22,765  22,765  17,287  40,052 

Other comprehensive loss

  —  —  —  —  (125) —  (125) (150) (275)
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Balance at December 31, 2014

 $115,000  21,757,366 $212 $275,038 $(125)$(67,538)$322,587 $335,754 $658,341 

Redemption of noncontrolling interests

  —  8,500,000  85  110,396  (301) —  110,180  (110,180) — 

Issuance of stock awards, net of forfeitures

  —  207,937  —  —  —  —  —  —  — 

Exercise of stock options, net of settlements

  —  185,400  3  (2,866) —  —  (2,863) —  (2,863)

Share-based compensation

  —  —  1  7,632  —  —  7,633  —  7,633 

Dividends declared on preferred stock

  —  —  —  —  —  (8,338) (8,338) —  (8,338)

Dividends and distributions

  —  —  —  —  —  (47,721) (47,721) (37,110) (84,831)

Net income

  —  —  —  —  —  34,706  34,706  22,153  56,859 

Other comprehensive loss

  —  —  —  —  (67) —  (67) (429) (496)
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Balance at December 31, 2015

 $115,000  30,650,703 $301 $390,200 $(493)$(88,891)$416,117 $210,188 $626,305 
​​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​​
​​​​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

   

See accompanying notes to consolidated financial statements.


52


Table of Contents


CORESITE REALTY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS



(in thousands)

 

 

The Company

 

The Predecessor

 

 

 

 

 

 

 

For the period

 

 

 

 

 

Year Ended

 

Year Ended

 

September 28, 2010

 

For the period January

 

 

 

December 31,

 

December 31,

 

through December 31,

 

1, 2010 through

 

 

 

2012

 

2011

 

2010

 

September 27, 2010

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

10,716

 

$

(10,779

)

$

(10,722

)

$

(1,555

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

64,327

 

68,967

 

19,146

 

11,848

 

Amortization of above/below market leases

 

(1,505

)

(1,650

)

(390

)

(171

)

Amortization of deferred financing costs

 

1,681

 

1,556

 

427

 

323

 

Gain on early extinguishment of debt

 

—

 

(939

)

—

 

—

 

Amortization of share-based compensation

 

5,650

 

2,958

 

538

 

—

 

Amortization of discount to fair market value of acquired loan

 

—

 

687

 

916

 

—

 

Bad debt expense

 

544

 

292

 

25

 

(82

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Restricted cash

 

132

 

712

 

3,670

 

(250

)

Accounts receivable

 

(3,657

)

(1,523

)

(1,790

)

583

 

Due to and due from related parties

 

—

 

2

 

—

 

875

 

Deferred rent receivable

 

(3,966

)

(4,986

)

(995

)

(1,656

)

Deferred leasing costs

 

(4,105

)

(4,215

)

(503

)

(4,449

)

Other assets

 

(2,597

)

(1,227

)

(987

)

(253

)

Accounts payable and accrued expenses

 

2,245

 

7,273

 

(176

)

(317

)

Prepaid rent and other liabilities

 

(1,611

)

2,820

 

1,528

 

(222

)

Deferred rent payable

 

794

 

1,258

 

400

 

143

 

Net cash provided by operating activities

 

68,648

 

61,206

 

11,087

 

4,817

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Tenant improvements

 

(6,075

)

(5,328

)

(4,623

)

(287

)

Real estate improvements

 

(83,837

)

(112,196

)

(6,725

)

(44,404

)

Assumption of cash balances in connection with the contribution of the CoreSite Acquired Properties

 

—

 

—

 

10,269

 

—

 

Acquisition of Comfluent, net of cash received

 

(2,581

)

—

 

—

 

—

 

Changes in reserves for capital improvements

 

8,691

 

4,965

 

50

 

239

 

Net cash used in investing activities

 

(83,802

)

(112,559

)

(1,029

)

(44,452

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Issuance of common stock

 

—

 

—

 

310,960

 

—

 

Offering costs

 

—

 

(17

)

(25,182

)

—

 

Proceeds from exercise of stock options

 

1,564

 

31

 

—

 

—

 

Gross proceeds from issuance of Series A Preferred Stock

 

115,000

 

—

 

—

 

—

 

Series A Preferred Stock offering costs paid

 

(4,190

)

—

 

—

 

—

 

Redemption of operating partnership units

 

—

 

—

 

(125,513

)

—

 

Proceeds from revolving credit facility

 

72,750

 

5,000

 

—

 

—

 

Payments on revolving credit facility

 

(77,750

)

—

 

—

 

—

 

Proceeds from mortgage loans payable

 

—

 

6,440

 

60,000

 

10,302

 

Repayments of mortgage loans payable

 

(57,114

)

(14,189

)

(152,600

)

—

 

Payments of loan fees and costs

 

(503

)

(1,745

)

(3,440

)

(272

)

Reduction in contribution receivables

 

—

 

—

 

2,703

 

—

 

Contributions

 

—

 

—

 

—

 

33,399

 

Dividends and distributions

 

(33,101

)

(23,785

)

—

 

(2,000

)

Net cash provided by (used in) financing activities

 

16,656

 

(28,265

)

66,928

 

41,429

 

Net change in cash and cash equivalents

 

1,502

 

(79,618

)

76,986

 

1,794

 

Cash and cash equivalents, beginning of period

 

6,628

 

86,246

 

9,260

 

7,466

 

Cash and cash equivalents, end of period

 

$

8,130

 

$

6,628

 

$

86,246

 

$

9,260

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

5,492

 

$

4,360

 

$

1,278

 

$

1,193

 

NON-CASH INVESTING AND FINANCING ACTIVITY

 

 

 

 

 

 

 

 

 

Construction costs payable capitalized to real estate

 

$

10,520

 

$

5,564

 

$

2,890

 

$

1,516

 

Contribution of the CoreSite Acquired Properties for Operating Partnership units

 

$

—

 

$

—

 

$

316,836

 

$

—

 

Accrual of dividends and distributions

 

$

13,384

 

$

8,453

 

$

5,967

 

$

—

 

Accrued offering costs

 

$

—

 

$

—

 

$

124

 

$

—

 

 
 Year Ended December 31, 
 
 2015 2014 2013 

CASH FLOWS FROM OPERATING ACTIVITIES

          

Net income

 $56,859 $40,052 $31,612 

Adjustments to reconcile net income to net cash provided by operating activities:

          

Depreciation and amortization

  95,702  80,722  65,785 

Amortization of above/below market leases

  (520) (556) (823)

Amortization of deferred financing costs

  1,246  1,897  1,739 

Gain on real estate disposal

  (36) (1,208) — 

Share-based compensation

  7,114  6,125  6,770 

Bad debt expense

  201  648  244 

Changes in operating assets and liabilities:

          

Accounts receivable

  (2,146) (599) (682)

Deferred rent receivable

  (7,799) (4,245) (2,248)

Deferred leasing costs

  (17,555) (21,390) (6,852)

Other assets

  (5,535) (4,459) (7,157)

Accounts payable and accrued expenses

  6,532  (4,160) 3,756 

Unearned revenue, prepaid rent and other liabilities

  9,561  7,350  262 

Deferred rent payable

  (1,051) (661) 5,317 
​​​ ​ ​​ ​ ​​​ ​

Net cash provided by operating activities

  142,573  99,516  97,723 
​​​ ​ ​​​ ​​ ​ ​

CASH FLOWS FROM INVESTING ACTIVITIES

          

Tenant improvements

  (7,736) (5,893) (7,128)

Real estate improvements

  (122,196) (100,299) (185,452)

Acquisition of NY2

  —  —  (21,889)

Proceeds from real estate disposal

  2,399  —  — 
​​​ ​​​ ​ ​​ ​​

Net cash used in investing activities

  (127,533) (106,192) (214,469)
​​​ ​ ​​ ​ ​​ ​ ​

CASH FLOWS FROM FINANCING ACTIVITIES

          

Proceeds from exercise of stock options

  1,393  2,354  925 

Offering costs

  —  (147) (27)

Proceeds from revolving credit facility

  87,000  88,250  174,250 

Payments on revolving credit facility

  (163,250) (44,000) — 

Proceeds from senior unsecured term loan

  150,000  100,000  — 

Repayments of mortgage loans payable

  —  (58,250) (1,500)

Payments of loan fees and costs

  (2,315) (1,000) (2,621)

Payments to net settle equity awards

  (4,256) (1,410) — 

Dividends and distributions

  (87,420) (73,772) (57,098)
​​​ ​ ​​ ​​​ ​ ​

Net cash provided by (used in) financing activities

  (18,848) 12,025  113,929 
​​​ ​​​ ​ ​​ ​​

Net change in cash and cash equivalents

  (3,808) 5,349  (2,817)

Cash and cash equivalents, beginning of year

  10,662  5,313  8,130 
​​​ ​ ​​ ​ ​​​ ​

Cash and cash equivalents, end of year

 $6,854 $10,662 $5,313 
​​​ ​ ​​​ ​​ ​ ​
​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

          

Cash paid for interest, net of capitalized amounts

 $6,219 $4,072 $2,044 

NON-CASH INVESTING AND FINANCING ACTIVITY

          

Construction costs payable capitalized to real estate

 $37,033 $16,142 $19,821 

Accrual of dividends and distributions

 $28,104 $22,355 $18,804 

   

See accompanying notes to consolidated financial statements.


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CORESITE REALTY CORPORATION



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



December 31, 20122015

1. Organization

        

CoreSite Realty Corporation (the “Company,” “we,”"Company," "we," or “our”"our") was organized in the state of Maryland on February 17, 2010 and is a fully integrated, self-administered, and self-managed real estate investment trust (“REIT”("REIT"). Through our controlling interest in CoreSite, L.P. (our “Operating Partnership”"Operating Partnership"), we are engaged in the business of owning, acquiring, constructing and managing technology-related real estate or more commonly referred to asoperating data centers. On September 28, 2010, we closed our initial public offering (the “IPO”) which resulted in the sale of 19,435,000 shares of our common stock at a price per share of $16.00, generating net proceeds to the Company of $285.6 million. As of December 31, 2012,2015, the Company owns a 44.8%64.1% common interest in the Operating Partnership.

Upon completion of the IPO, our Operating Partnership entered into various formation transactions and acquired 100%affiliates of the ownership interests in the entities that owned our Predecessor from certain real estate funds (the “Funds”) affiliated with The Carlyle Group. Our Predecessor includes the limited liability companies which were all wholly owned, directly or indirectly, by CRP Fund V Holdings, LLC. We determined that CRP Fund V Holdings, LLC was the acquirer for accounting purposesGroup and therefore, interests contributed by CRP Fund V Holdings, LLC in the formation transactions (the Predecessor entities and properties) were recorded at historical cost. The Fundsothers own approximately 55% of the commona 35.9% interest in the our Operating Partnership. See additional discussion in Note 11, Noncontrolling Interests—Operating Partnership.

Additionally, our Operating Partnership acquired 100% of the ownership interests in the entities that owned the CoreSite Acquired Properties from the Funds and their affiliates. The contribution or acquisition of interests in the CoreSite Acquired Properties was accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of the contribution.

The financial condition and results of operations for the entities acquired by our Predecessor in connection with the IPO and related formation transactions are only included in the consolidated financial statements since the date of the transactions. Prior to the date of the transactions of September 28, 2010, the consolidated financial statements include only the activities and capital structure of our Predecessor. More specifically, our results of operations for the year ended December 31, 2010 reflect the operations of the consolidated Predecessor entities together with the CoreSite Acquired Properties from the date of their acquisition. Changes in our capital structure that occurred on September 28, 2010, including the acquisition of our Predecessor by our Operating Partnership, are reflected since that date in the financial statements including the allocation of net loss attributable to noncontrolling interest holders and calculations of net loss per share.

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2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

        

The accompanying consolidated financial statements have been prepared by our management in accordance with U.S. generally accepted accounting principles (“GAAP”("GAAP"). and in compliance with the rules and regulations of the United States Securities and Exchange Commission. Intercompany balances and transactions have been eliminated in these consolidated financial statements.upon consolidation. The Company reviewed subsequent events through the issuance date for inclusion in these consolidated financial statements.

Recent Accounting Pronouncements

        In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-05,Customer's Accounting for Fees Paid in a Cloud Computing Arrangement,Adjustments which provides explicit guidance to help companies evaluate the accounting for fees paid by a customer in a cloud computing arrangement. ASU 2015-05 is effective for annual and Reclassificationsinterim periods beginning after December 15, 2015, with early adoption permitted. We did not early adopt this standard and we do not expect the provisions of ASU 2015-05 to have a material impact on our consolidated financial statements.

Interconnection revenue, included        In April 2015, the FASB issued ASU 2015-03,Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. Effective the fourth quarter of 2015, we adopted the provisions of ASU 2015-03 on a full retrospective basis. For the year ended December 31, 2014, $0.8 million was reclassified from other assets to debt on our consolidated statements of operations, and cash used for tenant improvement investing activities, included in the consolidated statements of cash flows, for 2011 and 2010 have been reclassifiedbalance sheet to conform to the 2012 financial statements presentation.presentation required by ASU 2015-03.

        In February 2015, the FASB issued ASU 2015-02,Amendments to the Consolidation Analysis, which amends the current consolidation guidance. ASU 2015-02 is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The standard permits the use of either modified retrospective or cumulative effect transition method. We have not elected early adoption and we do not expect that provisions of ASU 2015-02 will result in a consolidation of entities not previously consolidated nor a deconsolidation of entities previously consolidated.

        In May 2014, the FASB issued guidance codified in Accounting Standards Codification ("ASC") Topic 606, Revenue Recognition—Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition. The standard is effective for interim and annual reporting periods beginning after December 15, 2017. The standard permits the use of either the retrospective or


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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

cumulative effect transition method. We are currently evaluating the impact of the provisions of ASC 606 on our revenue recognition policies as well as the transition method to be used to implement this guidance.

Use of Estimates

        

The preparation of consolidated financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates, including those related to assessing the carrying values of our real estate properties, goodwill, accrued liabilities and performance-based equity compensation plans. We base our estimates on historical experience, current market conditions, and various other assumptions that we believe to be reasonable under the circumstances. Actual results may vary from those estimates and those estimates could vary under different assumptions or conditions.

Adjustments and Reclassifications

        Certain immaterial amounts included in the consolidated financial statements for prior periods have been reclassified to conform to the 2015 financial statement presentation.

Investments in Real Estate

        

Real estate investments are carried at cost less accumulated depreciation and amortization. The cost of real estate includes the purchase price of the property and leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized. During the land development and construction periods, we capitalize construction costs, legal fees, financing costs, real estate taxes and insurance and internal costs of personnel performing development, if such costs are incremental and identifiable to a specific development project. Capitalization of costs begins upon commencement of development efforts and ceases when the property is ready for its intended use and held available for occupancy. Interest is capitalized during the period of development based upon applying the weighted-average borrowing rate to the actual development costs expended. Capitalized interest costs were $1.8$3.7 million, $1.6 million, less than $0.1$4.6 million and $0.5$4.4 million for the years ended December 31, 20122015, 2014, and 2011, for the period from September 28, 2010 to December 31, 2010 and for the period from January 1, 2010 to September 27, 2010,2013, respectively.

        Depreciation and amortization are calculated using the straight-line method over the following useful lives of the assets:

Buildings

27 to 40 years

Building improvements

1 to 1510 years

Leasehold improvements

The shorter of the lease term or useful life of the asset

        

Depreciation expense was $42.3$76.1 million, $33.7 million, $7.4$65.1 million and $9.6$53.3 million for the years ended December 31, 20122015, 2014 and 2011, for the period from September 28, 2010 to 2013, respectively.


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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2010, and for the period from January 1, 2010 to September 27, 2010, respectively.2015

2. Summary of Significant Accounting Policies (Continued)

Acquisition of Investment in Real Estate

        

Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and building improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and the value of customer relationships.

        

The fair value of the land and building of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant”"as-if-vacant" fair value is then allocated to land and building based on management’smanagement's determination of the fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases.

        

The fair value of intangibles related to in-place leases includes the value of lease intangibles for above-market and below-market leases, lease origination costs, and customer relationships, determined on a lease-by-lease basis. Above-market and

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below-market leases are valued based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases and (ii) management’smanagement's estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelablenoncancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. Lease origination costs include estimates of costs avoided associated with leasing the property, including tenant allowances and improvements and leasing commissions. Customer relationship intangibles relate to the additional revenue opportunities expected to be generated through interconnection services and utility services to be provided to the in-place lease tenants. During the year ended December 31, 2012, the Company recorded a net $2.7 million in intangible assets and liabilities due to the acquisition of Comfluent, a Denver, Colorado based data center operator, consisting of two leased locations, DE1 and DE2.

        

The capitalized values for above and below-market lease intangibles, lease origination costs, and customer relationships are amortized over the term of the underlying leases or the expected customer relationship. Amortization related to above-market and below-market leases where the Company is the lessor is recorded as either a reduction of or an increase to rental income,revenue, amortization related to above-market and below-market leases where the Company is the lessee is recorded as either a reduction of or an increase to rent expense. Amortization for lease origination costs and customer relationships are recorded as amortization expense. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off.

        The carrying value of intangible assets is reviewed for impairment in connection with its respective asset group whenever events or changes in circumstances indicate that the asset group may not be recoverable. An impairment loss is recognized if the carrying amount of the asset group is not recoverable and its carrying amount exceeds its estimated fair value. No impairment loss related to these intangible assets was recognized for the years ended December 31, 2012, 2011,2015, 2014, or 2010.2013.

        

The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. As of December 31, 20122015, and 2011,2014, we had approximately $41.2 million of goodwill.goodwill at each date. The Company’sCompany's goodwill has an indeterminate life and is not amortized, but is tested for impairment on an


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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. We utilized the qualitative assessment for our 2012 annual impairment test. No impairment loss was recognized for the years ended December 31, 2012, 2011,2015, 2014, or 2010.2013.

Cash and Cash Equivalents

        

Cash and cash equivalents include all non-restricted cash held in financial institutions and other non-restricted highly liquid short-term investments with original maturities at acquisition of three months or less.

Restricted CashDeferred Costs

        

The Company is required to maintain certain minimum cash balances in escrow by loan agreements to cover various building improvements. The Company is legally restricted by these agreements from using this cash other than for the purposes specified therein. During the year ended December 31, 2012, restricted cash decreased by $8.8 million primarily due to the release of lender held escrows associated with the SV1 mortgage loan. The loan agreement required us to fund a specified amount of capital improvements at SV1 which were completed during 2012, and the lender released the escrows.

Deferred Costs

Deferred leasing costs include commissions paid to third parties, including brokers, leasing agents, referral agents, and internal sales commissions paid to employees for successful execution of lease agreements. These commissions and other direct and incremental costs incurred to obtain new customer leases which are capitalized and amortized over the lease terms of the related leases using the straight-line method. If a lease terminates prior to the expiration of its initial term, any unamortized deferred costs related to the lease are written off to amortization expense. Deferred leasing costs are included within other assets in the consolidated balance sheets and consisted of the following, net of amortization, as of December 31, 2015, and 2014 (in thousands):

 
 December 31,
2015		 December 31,
2014		 

Internal sales commissions

 $17,558 $13,171 

Third party commissions

  15,866  13,665 

External legal counsel

  718  393 
​​​ ​ ​​ ​​

Total

 $34,142 $27,229 
​​​ ​ ​​ ​​
​​​​​​​​
​​​ ​ ​​ ​ ​

        

Deferred financing costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are capitalized and amortized on a straight-line basis, which approximates the effective-interest method, over the term of the loan and arethe amortization is included as a component of interest expense.

Recoverability of Long-Lived Assets

        

The Company reviewsWe review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the assets. The estimation of expected future net cash flows is inherently uncertain and relies, to a considerable extent, on assumptions regarding current and future economics and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into the impairment review analysis, the changes could result in an adjustment to the carrying amount of the long-lived assets. To the extent that impairment has occurred, the excess of the carrying amount of long-lived assets over its estimated fair value would be recognized as an impairment loss charged to net income. For the years ended December 31, 2012, 20112015, 2014, and 2010,2013, no impairment of long-lived assets was recognized.

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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

Derivative Instruments and Hedging Activities

        

We reflect all derivative instruments at fair value as either assets or liabilities on the consolidated balance sheets. For those derivative instruments that are designated and qualify as hedging instruments, we record the effective portion of the gain or loss on the hedge instruments as a component of accumulated other comprehensive income (loss).or loss. Any ineffective portion of a derivative’sderivative's change in fair value is immediately recognized in earnings.within net income. For derivatives that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized within net income. See additional discussion in earnings. AsNote 9, Derivatives and Hedging Activities.

Internal-Use Software

        We recognize internal-use software development costs based on the development stage of the project and nature of the cost. Internal and external costs incurred during the preliminary project stage are expensed as they are incurred. Internal and external costs incurred to develop internal-use software during the application development stage are capitalized. Internal and external training costs and maintenance costs during the post-implementation-operation stage are expensed as incurred. Completed projects are placed into service and amortized over the estimated useful life of the software. For the years ended December 31, 2012, the Company had no derivative instruments outstanding.2015, 2014, and 2013, we recorded $0.3 million, $2.0 million, and none, respectively, related to impairment of internal use software.

Revenue Recognition

        

Revenue Recognition

All customer leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the non-cancellablecustomer's lease term of the agreements. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rent receivable.receivable, and included in other assets in the consolidated balance sheets. If a lease terminates prior to its stated expiration, the deferred rent receivable relating to that lease is written off as a reduction of rental revenue.

        

When arrangements include both lease and nonleasemultiple elements, the revenue associated with separate elements areis allocated based on theirthe relative fair values.values of those elements. The revenue associated with each element is then recognized as earned. Interconnection utilityservices and poweradditional space services are considered as separate earnings processes that are provided and completed on a month-to-month basis and revenue is recognized in the period that the services are performed. Utility and power services are included in power revenue in the accompanying statements of operations. Set-upCustomer set-up charges and utility installation fees are initially deferred and recognized over the term of the arrangement as other revenue or the expected period of performance unless management determines a separate earnings process exists related to an installation charge.revenue.

        

Tenant reimbursements for real estate taxes, common area maintenance, and other recoverable costs are recognized as revenue in the period that the related expenses are incurred.

        

A provision for uncollectible accounts is recorded if a receivable balance relating to contractual rent, rent recorded on a straight-line basis, or tenant reimbursements or other billed amounts is considered by management to be uncollectible. At December 31, 2012,2015, and December 31, 2011,2014, the allowance for doubtful accounts totaled $0.6$0.1 million and $0.5$0.1 million, respectively.


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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

Share-Based Compensation

        

We account for share-based compensation using the fair value method of accounting. The estimated fair value of the stock options granted by us is being amortizedcalculated based on a straight-line basis over the vesting period.Black-Scholes option-pricing model. The fair value of restricted share-based and Operating Partnership unit compensation is based on the marketfair value of our common stock on the date of the grant andgrant. The fair value of performance share awards, which have a market condition, is based on a Monte Carlo simulation. The fair value for all share-based compensation is amortized on a straight-line basis over the vesting period.

Asset Retirement and Environmental Remediation Obligations

        

We record accruals for estimated retirement and environmental remediation obligations. The obligations relate primarily to the removal of asbestos and contaminated soil during development of the properties as well as the estimated equipment removal costs upon termination of a certain lease where the Company iswe are the lessee. At December 31, 20122015, and 2011,2014, the amount included in unearned revenue, prepaid rent and other liabilities on the consolidated balance sheets was approximately $2.6$1.7 million and $1.9$2.3 million, respectively.

Income Taxes

        

We have elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”"Code"), commencing with our initial taxable year endingended December 31, 2010. To qualify as a REIT, we are required to distribute at least 90% of our taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we generally are generally not subject to corporate level federal income tax on the earnings distributed currently to our stockholders. If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.

        

To maintain REIT status, we must distribute a minimum of 90% of our taxable income. However, it is our policy and intent, subject to change, to distribute 100% of our taxable income and therefore, no provision is required in the accompanying consolidated financial statements for federal income taxes with regards to activities of the REIT and its subsidiary pass-through entities. Any taxable income prior to the completion of the IPO is the responsibility of the Company’s prior members. The allocable share of taxable income is included in the income tax returns of the members.its stockholders. The Company is subject to the statutory requirements of the locations in which it conducts business. State and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.

        

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We have elected to treat two of ourcertain subsidiaries as taxable REIT subsidiaries (“TRS”).a TRS. Certain activities that we undertake must be conducted by a TRS, such as services for our tenants that wouldcould be considered otherwise be impermissible for us to perform and holding assets that we cannot hold directly. A TRS is subject to corporate level federal and state income taxes. Relative deferred tax assets and liabilities arising from temporary differences in financial reporting versus tax reporting are also established as determined by management.

        

Deferred income taxes are recognized in certain taxable entities. Deferred income tax generally is generally a function of the period’speriod's temporary differences (items that are treated differently for tax purposes than for financial reporting purposes), the utilization of tax net operating losses generated in prior


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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

2. Summary of Significant Accounting Policies (Continued)

years that previously had been previously recognized as deferred income tax assets and the reversal of any previously recorded deferred income tax liabilities. A valuation allowance for deferred income tax assets is provided if we believe all or some portion of the deferred income tax asset may more likely than not be not realized. Any increase or decrease in the valuation allowance resulting from a change in circumstances that causes a change in the estimated realizability of the related deferred income tax asset is included in deferred tax expense. As of December 31, 2012,2015, and 2014, the deferred income taxes were not material.

        

We currently have no liabilities for uncertain income tax positions. The earliest tax year thatfor which we are subject to examination is 2010. Prior to their contribution to our Operating Partnership, our subsidiaries were treated as pass-through entities for tax purposes and the earliest year subject to examination of our subsidiaries is 2009.2012.

Concentration of Credit Risks

        

Our cash and cash equivalents are maintained in various financial institutions, which, at times, may exceed federally insured limits. The Company hasWe have not experienced any losses in such accounts, and management believes that the Company is not exposed to any significant credit risk in this area. We have no off-balance-sheetoff-balance sheet concentrations of credit risk, such as foreign exchange contracts, option contracts, or foreign currency hedging arrangements.

Segment Information

        

We manage our business as one reportable segment consisting of investments in data centers located in the United States. Although we provide services in several markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics amongst all markets, including the nature of the services provided and the type of customers purchasing these services.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The accounting update amends the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements in order to achieve further convergence with International Financial Reporting Standards. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We adopted the provisions of this standard effective January 1, 2012.  The adoption of this standard did not have a material impact on our consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity. Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We adopted the provisions of this standard effective January 1, 2012, by presenting a separate Consolidated Statement of Comprehensive Income.

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3. Acquisitions

        

In April 2012, the Company paid cash of $2.6 million, net of cash received, to acquire a leasehold interest in two additional locations, DE1 and DE2, through the acquisition of Comfluent, a Denver, Colorado based data center operator.

On February 7, 2013, the Company paid cash of $23.4 million to acquirewe acquired land and a vacant building NY2, in Secaucus, NJ.

On September 28, 2010, we acquired the CoreSite Acquired PropertiesNew Jersey, referred to as partNY2, with a total of the Company’s IPO for $316.8 million. In connection with236,251 NRSF (unaudited) and a book value of $23.4 million, to develop into a data center. Since the acquisition we have developed six computer rooms at NY2, consisting of the CoreSite Acquired Properties, we incurred $3.3 millionan aggregate of transaction costs. The results101,742 NRSF (unaudited), which is 68.5% occupied (unaudited) as of operations for each of the acquired entities are included in our consolidated statements of operations only from the date of acquisition. The following table reflects the allocation of the purchase price for the entities we acquired on September 28, 2010 (in thousands):December 31, 2015.

Consideration paid

 

 

 

Issuance of operating partnership units

 

$

316,836

 

Allocation of consideration paid to acquire Coresite Acquired Properties

 

Net investments in real estate

 

$

334,839

 

Lease intangibles

 

82,124

 

Goodwill

 

41,191

 

Mortgage loans payable

 

(143,863

)

Below-market leases

 

(15,686

)

Other assets and liabilities acquired, net

 

18,231

 

Total allocation of consideration paid

 

$

316,836

 

4. Acquired Intangible Assets and Liabilities

        

During the year ended December 31, 2012, through the acquisition of DE1 and DE2, the Company added $2.9 million of new intangible assets and $0.2 million of new intangible liabilities with a weighted average life of 4.4 years and 0.5 years, respectively. The Company did not add new intangible assets or liabilities during the year ended December 31, 2011. During the year ended December 31, 2010, the Company added approximately $82.1 million of new intangible assets (excluding amounts attributed to goodwill) and $15.7 million of new intangible liabilities with a weighted average of 3.2 years and 10.8 years, respectively.

The gross above-market and below-market lease value at December 31, 2012,2015, and 2014, was $6.8$2.2 million and $18.6$2.7 million, respectively, and total accumulated amortization at December 31, 2012,2015, and 2014, was $4.5$1.8 million and $10.1$1.9 million, respectively. The gross above-market and below-market lease value at December 31, 2011,2015, and 2014, was $8.7$10.0 million and $21.1$10.3 million, respectively, and total accumulated amortization at December 31, 2012,2015, and 2014, was $4.3$5.3 million and $9.3$4.7 million, respectively. The net effect of amortization of acquired above-market and below-market leases resulted in an increase to rental incomerevenue of $1.5$0.5 million, $1.7 million, $0.4$0.6 million, and $0.2$0.8 million, for the years ended December 31, 20122015, 2014, and 2011, the period from September 28, 2010 to December 31, 2010, and the period from January 1, 2010 to September 27, 2010,2013, respectively. The estimated amortization of acquired below-market leases, net of acquired


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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

4. Acquired Intangible Assets and Liabilities (Continued)

above-market leases for each of the five succeeding fiscal years, which will be a net increase to rental revenue, is as follows (in thousands):

Year Ending December 31,
  
 

2016

 $541 

2017

  572 

2018

  573 

2019

  245 

2020

  136 

Thereafter

  2,195 
​​​ ​ ​

Total

 $4,262 
​​​ ​ ​
​​​​​
​​​ ​ ​

        

Year Ending December 31, 

 

 

 

2013

 

$

758

 

2014

 

488

 

2015

 

544

 

2016

 

561

 

2017

 

592

 

Thereafter

 

3,211

 

Total

 

$

6,154

 

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Amortization of all other identified intangible assets was $18.1$2.0 million, $32.2 million, $11.1$3.4 million, and $0.7$7.4 million, for the years ended December 31, 20122015, 2014, and 2011, the period from September 28, 2010 to December 31, 2010, and the period from January 1, 2010 to September 27, 2010,2013, respectively. At December 31, 20122015, and 2011,2014, the gross intangible value was $45.7asset values were $14.0 million and $61.6$18.8 million, respectively, and the total accumulated amortization balance was $28.6$9.7 million and $29.5$12.5 million, respectively. The estimated amortization of all other identified intangible assets for each of the five succeeding fiscal years is as follows (in thousands):

Year Ending December 31, 

 

 

 

2013

 

$

7,405

 

2014

 

3,153

 

2015

 

2,071

 

2016

 

1,664

 

2017

 

1,174

 

Thereafter

 

1,601

 

Total

 

$

17,068

 

Year Ending December 31,
  
 

2016

 $1,630 

2017

  1,136 

2018

  621 

2019

  316 

2020

  115 

Thereafter

  457 
​​​ ​ ​

Total

 $4,275 
​​​ ​ ​
​​​​​
​​​ ​ ​

Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

5. Investment in Real Estate

        

The following is a summary of the properties owned andor leased by market at December 31, 20122015 (in thousands):

Market
 Land Buildings and
Improvements		 Construction in
Progress		 Total Cost 

Boston

  5,154  82,373  10,203  97,730 

Chicago

  5,493  93,861  1,582  100,936 

Denver

  —  4,349  68  4,417 

Los Angeles

  28,467  207,337  12,957  248,761 

Miami

  728  10,418  1  11,147 

New York

  2,388  125,914  38,371  166,673 

Northern Virginia

  9,623  190,541  54,001  254,165 

San Francisco Bay

  22,966  322,334  66,006  411,306 
​​​ ​​​ ​ ​​ ​​​ ​ ​

Total

 $74,819 $1,037,127 $183,189 $1,295,135 
​​​​ ​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​ ​ ​​ ​​​ ​ ​​ ​ ​

        

Property Name

 

Location

 

Land

 

Buildings and
Improvements

 

Leasehold
Improvements

 

Construction
in Progress

 

Total Cost

 

SV1

 

San Jose, CA

 

$

6,863

 

$

102,390

 

$

—

 

$

4,352

 

$

113,605

 

SV2

 

Milpitas, CA

 

5,086

 

22,086

 

—

 

462

 

27,634

 

SV3

 

Santa Clara, CA

 

3,972

 

45,196

 

—

 

17

 

49,185

 

SV4

 

Santa Clara, CA

 

4,442

 

55,800

 

—

 

27,836

 

88,078

 

Santa Clara Campus

 

Santa Clara, CA

 

12,617

 

11,553

 

—

 

1,775

 

25,945

 

BO1

 

Somerville, MA

 

6,100

 

68,337

 

—

 

2,063

 

76,500

 

NY1

 

New York, NY

 

—

 

—

 

31,069

 

223

 

31,292

 

VA1

 

Reston, VA

 

12,100

 

102,366

 

—

 

5,356

 

119,822

 

DC1

 

Washington, DC

 

—

 

—

 

6,341

 

452

 

6,793

 

CH1

 

Chicago, IL

 

5,493

 

68,138

 

—

 

7,305

 

80,936

 

LA1

 

Los Angeles, CA

 

—

 

—

 

48,345

 

3,489

 

51,834

 

LA2

 

Los Angeles, CA

 

28,467

 

107,488

 

—

 

7,781

 

143,736

 

MI1

 

Miami, FL

 

728

 

9,666

 

—

 

91

 

10,485

 

DE1

 

Denver, CO

 

—

 

—

 

143

 

126

 

269

 

DE2

 

Denver, CO

 

—

 

—

 

9

 

—

 

9

 

Total

 

 

 

$

85,868

 

$

593,020

 

$

85,907

 

$

61,328

 

$

826,123

 

In November 2014, the Massachusetts Bay Transportation Authority acquired 52,248 square feet of land at BO1 pursuant to an order of taking. Based on the relative fair value of the parcel, the carrying value of land was allocated to the disposed parcel. The Company recognized a $1.2 million gain on land disposal in the consolidated statements of operations during the period ended December 31, 2014.

60


Table of Contents6. Other Assets

        

6.Other Assets

Our other assets consisted of the following, net of amortization and depreciation, if applicable, as of December 31, 20122015, and 20112014 (in thousands):

 
 December 31,
2015		 December 31,
2014		 

Deferred leasing costs

 $34,142 $27,229 

Deferred rent receivable

  29,309  21,510 

Corporate furniture, fixtures and equipment

  6,157  7,474 

Internal-use software

  10,467  7,980 

Deferred financing costs

  2,251  1,600 

Prepaid expenses

  2,689  6,251 

Other

  1,618  2,735 
​​​ ​ ​​ ​ ​

Total

 $86,633 $74,779 
​​​ ​ ​​ ​ ​
​​​​​​​​
​​​ ​ ​​ ​ ​

Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

6. Other Assets (Continued)

        

 

 

December 31,

 

December 31,

 

 

 

2012

 

2011

 

Deferred leasing costs

 

$

14,886

 

$

11,601

 

Deferred rent receivable

 

15,017

 

11,051

 

Deferred financing costs

 

2,520

 

3,607

 

Leasehold interests in corporate headquarters

 

4,152

 

2,719

 

Other

 

7,981

 

4,765

 

Total

 

$

44,556

 

$

33,743

 

Deferred leasing costs are amortized as amortization expense on a straight-line basis over the remaining lifelease terms of the underlying leases. The estimated amortization of deferred leasing costs for each of the five succeeding fiscal years is as follows (in thousands):

Year Ending December 31, 

 

 

 

2013

 

$

3,396

 

2014

 

3,043

 

2015

 

2,0566

 

2016

 

1,687

 

2017

 

1,161

 

Thereafter

 

3,543

 

Total

 

$

 

14,886

 

Year Ending December 31,
  
 

2016

  12,500 

2017

  9,590 

2018

  5,217 

2019

  1,753 

2020

  1,183 

Thereafter

  3,899 
​​​ ​ ​

Total

 $34,142 
​​​ ​ ​
​​​​​
​​​ ​ ​

7. Leases

        

The future minimum lease payments to be received under noncancelable operating leases in effect at December 31, 20122015, are as follows (in thousands):

Year Ending December 31,
  
 

2016

 $183,565 

2017

  139,735 

2018

  96,508 

2019

  57,714 

2020

  39,560 

Thereafter

  71,173 
​​​ ​ ​

Total

 $588,255 
​​​ ​ ​
​​​​​
​​​ ​ ​

        

Year Ending December 31, 

 

 

 

2013

 

$

112,961

 

2014

 

91,528

 

2015

 

66,263

 

2016

 

50,527

 

2017

 

33,477

 

Thereafter

 

68,157

 

Total

 

$

422,913

 

ForAs the years endedlessee, the Company currently leases data center space under noncancelable operating lease agreements at NY1, LA1, DC1, DE1, and DE2, and its headquarters located in Denver, CO. The future minimum lease payments to be paid under noncancelable leases in effect at December 31, 2012, 2011 and 2010, total operating revenues recognized from one customer accounted for 8.4%, 11.4%, and 16.4%, respectively.2015, are as follows (in thousands):

Year Ending December 31,
  
 

2016

 $19,899 

2017

  19,678 

2018

  19,284 

2019

  19,827 

2020

  20,181 

Thereafter

  36,578 
​​​ ​ ​

Total

 $135,447 
​​​ ​ ​
​​​​​
​​​ ​ ​

61


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

8. Debt

        

A summary of outstanding indebtedness as of December 31, 20122015, and 20112014, is as follows (in thousands):

 

 

Interest Rate

 

Maturity
Date

 

December 31,
2012

 

December 31,
2011

 

SV1 - Mortgage loan

 

3.71% and 3.75% at December 31, 2012, and 2011, respectively

 

October 9, 2014

 

$

59,750

 

$

60,000

 

Revolving credit facility

 

2.46% and 2.54% at December 31, 2012, and 2011, respectively

 

January 3, 2017

 

—

 

5,000

 

CH1 - Senior mortgage loan

 

Repaid in March 2012

 

N/A

 

—

 

25,000

 

VA1 - Mortgage loan

 

Repaid in December 2012

 

N/A

 

—

 

31,864

 

Total principal outstanding

 

 

 

 

 

$

59,750

 

$

121,864

 

 
 Interest Rate Maturity Date December 31,
2015		 December 31,
2014		 

Revolving credit facility

 1.98% and 2.17% at December 31, 2015, and December 31, 2014, respectively June 24, 2019 $142,250 $218,500 

2019 Senior unsecured term loan(1)

 3.23% at December 31, 2015, and at December 31, 2014 January 31, 2019  100,000  100,000 

2020 Senior unsecured term loan(2)

 2.43% at December 31, 2015 June 24, 2020  150,000  — 
​​​​​​​ ​ ​​ ​ ​

Total principal outstanding

      392,250  318,500 

Unamortized deferred financing costs

      (1,243) (821)
​​​​​​​ ​ ​​ ​ ​

Total debt

     $391,007 $317,679 
​​​​​​​ ​ ​​ ​ ​
​​​​​​​​​​​​
​​​​​​​​ ​​ ​ ​
(1)
The Operating Partnership entered into a swap agreement with respect to the 2019 Term Loan to swap the variable interest rate associated with $100 million, or 100%, of the 2019 Term Loan to a fixed rate of approximately 3.23% per annum at our current leverage ratio. See "Derivatives and Hedging Activities" in Note 9 below.

(2)
The Operating Partnership entered into a swap agreement with respect to the 2020 Term Loan to swap the variable interest rate associated with $75 million, or 50%, of the principal amount of the 2020 Term Loan to a fixed rate of approximately 2.93% per annum at our current leverage ratio. The interest rate on the remaining $75 million of the 2020 Term Loan is based on LIBOR plus the applicable spread. The effective interest rate as of December 31, 2015, is 2.43%. See "Derivatives and Hedging Activities" in Note 9 below.

Revolving Credit Facility

        

On January 3, 2013,June 24, 2015, our Operating Partnership and certain subsidiary co-borrowers entered into ana third amended and restated senior unsecured revolving credit facility (the “Second Amended and Restated Credit Agreement”(as amended, the "Credit Agreement") with a group of lenders for which KeyBank National Association acts as the administrative agent. The Second Amended and Restated Credit Agreement amendedamends the Operating Partnership’s senior securedPartnership's second amended and restated unsecured revolving credit facility, dated December 15, 2011 (the “Prior Facility”), and provides forJanuary 3, 2013 (as amended, the release of the properties owned by the Operating Partnership’s wholly-owned subsidiaries from the existing liens in favor of the credit facility lenders, with the facility continuing on an unsecured basis and unconditionally guaranteed on a senior unsecured basis by the Company. Our Operating Partnership acts as the parent borrower, and our subsidiaries that own or lease real estate properties, are co-borrowers under the Second Amended and Restated Credit Agreement.

"Prior Facility"). The Second Amended and Restated Credit Agreement increased the commitment from the Prior Facility of $225.0 million to $355.0 million and extended the initial maturity date of the Prior Facility from December 15, 2014, to January 3, 2017,is June 24, 2019, with a one-time extension option, which, if exercised, would extend the maturity date to January 3, 2018.June 24, 2020. The exercise of the extension option is subject to the payment of an extension fee equal to 2510 basis points of the total commitment under the Second Amended and Restated Credit Agreement at initial maturity and certain other customary conditions. The Second AmendedCredit Agreement


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

8. Debt (Continued)

increases the commitment of $405 million from the Prior Facility to $500 million, providing for a $350 million revolving credit facility and Restateda $150 million unsecured term loan scheduled to mature on June 24, 2020. See "2020 Senior Unsecured Term Loan" below for a discussion of the $150 million term loan. The Credit Agreement contains an accordion feature, to allowwhich allows our Operating Partnership to increase the total commitment by $145.0from $500 million to $500.0$700 million, under specified circumstances. As of December 31, 2012,circumstances, including securing capital from new or existing lenders.

        On February 2, 2016, we partially exercised the Credit Agreement accordion feature and December 31, 2011, $0 and $5.0entered into a $100 million respectively, was outstandingsenior unsecured term loan (the "2021 Term Loan") increasing our total commitment under the facility.

Under the Second Amended and Restated Credit Agreement our Operating Partnership may electfrom $500 million to have$600 million. The 2021 Term Loan has a five-year term maturing on February 2, 2021. The borrowings under the 2021 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 200150 basis points to 275220 basis points, or (ii) a base rate plus 10050 basis points to 175120 basis points, each depending on our Operating Partnership’sPartnership's leverage ratio. Following the 2021 Term Loan, the Credit Agreement accordion feature increased by $100 million, which allows our Operating Partnership to increase the total commitment from $600 million to $800 million under specified circumstances, including securing capital from new or existing lenders.

        Borrowings under the revolving credit facility bear interest at a variable rate per annum equal to either (i) LIBOR plus 155 basis points to 225 basis points, or (ii) a base rate plus 55 basis points to 125 basis points, each depending on our Operating Partnership's leverage ratio. At December 31, 2015, the Operating Partnership's leverage ratio was 16.7% and the interest rate was LIBOR plus 155 basis points.

The total amount available for borrowingsborrowing under the Second Amended and Restatedrevolving credit facility, which is part of the Credit Agreement, will beis subject to the lesser of the facility amount$350.0 million or the availability calculated based on our unencumbered asset pool. As of January 3, 2013, $346.5December 31, 2015, the borrowing capacity was $350.0 million. As of December 31, 2015, $142.3 million was borrowed and outstanding, $6.3 million was outstanding under letters of credit and $201.4 million remained available for us to borrow under the Second Amended and Restated Credit Agreement.revolving credit facility.

        

Our ability to borrow under the Second Amended and RestatedCredit Agreement is subject to ongoing compliance with a number of financial covenants and other customary restrictive covenants, including:including, among others:

    •
    ·a maximum leverage ratio (defined as total consolidated total indebtedness to total gross asset value) of 60%;

    ·, which, as of December 31, 2015, was 16.7%.

    •
    a maximum secured debt ratio (defined as total consolidated total secured debt to total gross asset value) of 40%;

    ·, which, as of December 31, 2015, was 0%.

    •
    a minimum fixed charge coverage ratio (defined as adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.751.7 to 1.0, which, as of December 31, 2015, was 10.1 to 1.0; and

    ·

    •
    a maximum unhedged variable rate debt ratio (defined as unhedged variable rate indebtedness to gross asset value) of 30%.

    As, which, as of December 31, 2012, we were in compliance with the covenants under2015, our Second Amended and Restated Credit Agreement.

    62unhedged variable rate debt ratio was 8.9%.



Table of Contents


CORESITE REALTY CORPORATION

SV1 Mortgage LoanNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

8. Debt (Continued)

        

As of December 31, 2012, SV1 had2015, we were in compliance with all of the covenants under the Credit Agreement.

2019 Senior Unsecured Term Loan

        On January 31, 2014, our Operating Partnership and certain subsidiaries entered into a $59.8$100 million mortgage loan. On October 9, 2012, we exercisedsenior unsecured term loan (as amended, the "2019 Term Loan"). The 2019 Term Loan has a five-year term and contains an accordion feature, which allows our two-year option extendingOperating Partnership to increase the maturity datetotal commitments by $100 million, to October 9, 2014. Subsequent to$200 million under specified circumstances, including securing capital from new or existing lenders. The 2019 Term Loan ranks pari passu with the extension,Credit Agreement (including the loan bears variable interest2020 Term Loan and requires the payment of interest2021 Term Loan) and principal until maturity. The mortgage requires ongoing compliance by us with variouscontains the same financial covenants including liquidity and net operating incomeother customary restrictive covenants. As of December 31, 2012,2015, we were in compliance with all of the covenants.covenants under the 2019 Term Loan.

        The borrowings under the 2019 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 175 basis points to 265 basis points, or (ii) a base rate plus 75 basis points to 165 basis points, each depending on our Operating Partnership's leverage ratio. At December 31, 2015, the Operating Partnership's leverage ratio was 16.7% and the interest rate was LIBOR plus 175 basis points.

2020 Senior Unsecured Term Loan

On October 7, 2010,June 24, 2015, in connection with the Credit Agreement, our Operating Partnership and certain subsidiaries entered into a $150 million senior unsecured term loan (the "2020 Term Loan"). The 2020 Term Loan has a five-year term maturing on June 24, 2020. The 2020 Term Loan ranks pari passu with the 2019 Term Loan and the Credit Agreement (including the 2021 Term Loan) and contains the same financial covenants and other customary restrictive covenants. As of December 31, 2015, we were in compliance with all of the covenants under the 2020 Term Loan.

        The borrowings under the 2020 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus 150 basis points to 220 basis points, or (ii) a base rate plus 50 basis points to 120 basis points, each depending on our Operating Partnership's leverage ratio. At December 31, 2015, the Operating Partnership's leverage ratio was 16.7% and the interest rate was LIBOR plus 150 basis points.


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

8. Debt (Continued)

Debt Maturities

        The following table summarizes the amount of our outstanding debt and when such debt currently becomes due (in thousands):

Year Ending December 31,
  
 

2016

 $— 

2017

  — 

2018

  — 

2019

  242,250 

2020

  150,000 
​​​ ​​

Total principal outstanding

  392,250 

Unamortized deferred financing costs

  (1,243)
​​​ ​ ​

Total debt

 $391,007 
​​​ ​ ​
​​​​​
​​​ ​ ​

9. Derivatives and Hedging Activities

        On April 9, 2015, we entered into a $60.0$75 million forward starting five-year interest rate swap agreement, effective May 5, 2015, to protect against adverse fluctuationsfluctuation in interest rates by reducingrates. The swap reduces our exposure to variability in cash flows relating to interest payments on $75 million of one-month LIBOR variable rate debt and effectively fixes the SV1 mortgage. Theinterest rate at approximately 2.93% per annum. Also, on February 3, 2014, we entered into a five-year interest rate swap maturedagreement that effectively fixes the interest rate on October 9, 2012, and was not extended.$100 million of outstanding debt at approximately 3.23% per annum. Both interest rate swap agreements were designated for hedge accounting.

Debt Maturities

The following table summarizes the amount of our debt maturities when such debt currently becomes due (in thousands):

Year Ending December 31, 

 

 

 

2013

 

$

1,500

 

2014

 

58,250

 

Total

 

$

59,750

 

9. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

        

The Company isWe are exposed to certain riskrisks arising from both itsour business operations and economic conditions. The CompanyWe principally manages itsmanage our exposures to a wide variety of business and operational risks through management of itsour core business activities. The Company managesWe manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of itsour debt funding and the use of derivative financial instruments. Specifically, the Company enterswe enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known andor uncertain cash amounts, the value of which are determined by interest rates. The Company’sOur derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’sour known or expected cash receipts and itsour known or expected cash payments principally related to the Company’sour investments and borrowings.

Cash Flow Hedges of Interest Rate Risk

        

The Company’sOur objectives in using interest rate derivatives are to add stability toreduce variability in interest expense and to manage itsour exposure to adverse interest rate movements. To accomplish this objective, the Companywe primarily usesuse interest rate swaps and caps as part of itsour interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

9. Derivatives and Hedging Activities (Continued)

for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.

        

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss)or loss on the consolidated balance sheets and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The amountamounts recorded in accumulated other comprehensive income (loss) is not considered materialrelated to the unrealized loss on derivative contracts of $2.4 million, $1.4 million, and none for any period. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.years ended December 31, 2015, 2014, and 2013, respectively. The amountamounts reclassified from other comprehensive income to interest expense on the consolidated statements of operations was $ 0.1were $1.9 million, $0.2$1.1 million, and $0none for the years ended December 31, 2012, 2011,2015, 2014, and 2010,2013, respectively. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the years ended December 31, 2012, 2011,2015, 2014, and 2010, the Company2013, we did not record any amount in earnings related to derivatives due toas there was no hedge ineffectiveness.

        Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt. During the subsequent twelve months, beginning January 1, 2016, we estimate that $1.4 million will be reclassified as an increase to interest expense.

All derivatives        Derivatives are recognizedrecorded at fair value in our consolidated balance sheets in other assets and unearned revenue, prepaid rent and other liabilities, as applicable. We do not net our derivative position by counterparty for purposes of balance sheet presentation and disclosure. In October 2012, both of the Company’s outstanding interest rate derivatives expiredWe had a $0.8 million and $0.3 million in accordance with their stated maturity datesderivative liabilities recognized in unearned revenue, prepaid rent and the Company will be exposed to future interest rate movements on variable rate debt. At December 31, 2012, the Company had no derivative instruments outstanding. The Company had less than $0.1 million accrued in other liabilities in our consolidated balance sheet relating to outstanding derivatives atsheets as of December 31, 2011.2015 and 2014, respectively.

10. Stockholders' Equity

        At December 31, 2015, 120 million shares were authorized to be issued by the Company, of which 100 million shares represent common stock and 20 million represent preferred stock. The Board may, without stockholder approval, classify or reclassify any unissued shares of stock to increase or decrease the authorized number of shares of common stock and preferred stock and to establish the preferences and rights of any preferred stock or other class of series of shares to be issued.

63Common Stock

        At December 31, 2015, we had 30.7 million shares of common stock issued and outstanding. Since our initial public offering ("IPO"), we have issued common stock under our 2010 Equity Incentive Plan, in which certain of our employees and outside directors participate in stock-based compensation plans that provide compensation in the form of common stock. Under the Equity Incentive Plan, we received proceeds (made payments) from the exercise of stock options, net of settlements, of ($2.9) million, $0.9 million, and $0.9 million for the years ended December 31, 2015, 2014, and 2013, respectively. Also, we issued shares of common stock as restricted stock award and performance stock award grants, net of forfeitures, and option exercises, net of settlements, in the amount of 393,337, 370,214 and 184,479 during the years ended December 31, 2015, 2014, and 2013, respectively. See Note 12, Equity Incentive Plan, for additional information on our 2010 Equity Incentive Plan.



Table of Contents


CORESITE REALTY CORPORATION

10. Noncontrolling Interests — Operating PartnershipNOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Noncontrolling interests represent the limited partnership interests in the Operating Partnership held by individuals and entities other than CoreSite Realty Corporation. Since September 28, 2011, the current holders of Common Operating Partnership units have been eligible to have the Common Operating Partnership units redeemed for cash or, at our option, exchangeable into our common stock on a one-for-one basis. We have evaluated whether we control the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement of the Common Operating Partnership units. Based on the results of this analysis, we concluded that the Common Operating Partnership units met the criteria to be classified within equity at December 31, 2012 and 2011.2015

10. Stockholders' Equity (Continued)

The following table shows the ownership interests in the Common Operating Partnership as of December 31, 2012 and 2011:

 

 

December 31, 2012

 

December 31, 2011

 

 

 

Number of Units

 

Percentage of Total

 

Number of Units

 

Percentage of Total

 

The Company

 

20,610,523

 

44.8

%

20,404,743

 

44.6

%

Noncontrolling interests consist of:

 

 

 

 

 

 

 

 

 

Common units held by third parties

 

25,275,390

 

55.0

%

25,275,390

 

55.2

%

Incentive units held by employees

 

78,319

 

0.2

%

69,692

 

0.2

%

Total

 

45,964,232

 

100.0

%

45,749,825

 

100.0

%

For each share of common stock issued by the Company, the Operating Partnership issues an equivalent Common Operating Partnership unit to the Company.        During the year ended December 31, 2012, the Company issued 205,780 shares of2015, 8,500,000 common stock related to employee compensation arrangements and therefore an equivalent number of Common Operating Partnership units were issued. Additionally, during the year ended December 31, 2012, 8,627 Common Operating Partnership units were issued to employees upon their vesting in the incentive unit awards.

On December 12, 2012, the Operating Partnership issued 4.6 million Preferred Operating Partnership units to CoreSite Realty Corporation.  The Preferred Operating Partnership units rank senior to the Common Operating Partnership units held by the Company and noncontrolling interests.

On November 15, 2011, 889,610 Common Operating Partnership units held by third partiesFunds were redeemed for common stock of the Company. This redemption was recorded as a $13.8 million reduction to noncontrolling interests in the Operating Partnership and an increase to common stock and additional paid in capital.

The redemption value of the noncontrolling interests at December 31, 2012 was $701.3 million based on the closing price of the Company’s stock of $27.66 on that date.

11. Stockholders’ Equity

On September 28, 2010, we completed our IPO which resulted in the sale of 19,435,000 shares of our common stock including 2,535,000in connection with the offer and sale of 8,500,000 shares as a result of the underwriters exercising their over-allotment option, at a price per share of $16.00, generating gross proceeds to the Company of $311.0 million. The proceeds to the Company, net of underwriters’ discounts, commissions and other offering costs were $285.6 million. Underwriters’ discounts, commissions and other offering costs of $25.3 million are reflected as a reduction to additional paid-in capital in the consolidated balance sheets of the Company.

64


Table of Contents

We have declared the following dividends on our common stock and equivalent distributions on units in our by the Funds. See Note 11, Noncontrolling Interests—Operating Partnership, for the years ended December 31, 2012:additional information.

Preferred Stock

        

 

 

 

 

 

 

 

 

Nontaxable

 

 

 

 

 

 

 

Ordinary

 

Return of Capital

 

 

 

 

 

 

 

Taxable Dividend

 

Distributions

 

Record Date

 

Payment Date

 

Cash Dividend

 

(Unaudited)

 

(Unaudited)

 

3/31/2012

 

4/16/2012

 

$

0.18

 

$

0.18

 

$

—

 

6/30/2012

 

7/16/2012

 

0.18

 

0.18

 

—

 

9/30/2012

 

10/15/2012

 

0.18

 

0.18

 

—

 

12/31/2012

 

1/15/2013

(1)

0.27

 

0.27

 

—

 

 

 

 

 

$

0.81

 

$

0.81

 

$

—

 

12/31/2011

 

1/17/2012

(2)

$

0.18

 

$

0.18

 

$

—

 

(1) The $0.27 quarterly dividend paid in January 2013 is included as 2012 taxable common dividends.

(2) The $0.18 quarterly dividend paid in January 2012 is included as 2011 taxable common dividends.

On December 12, 2012, the Company issued an aggregate of 4,600,000 shares of its 7.25% Series A Cumulative Redeemable Preferred Stock, or the series A preferred stock, for net proceeds of $110.6 million. Dividends are cumulative on the series A preferred stock from the date of original issuance in the amount of $1.8125 per share each year, which is equivalent to 7.25% of the $25.00 liquidation preference per share. Dividends on the series A preferred stock are payable quarterly in arrears. The first dividend on the series A preferred stock will be paid on April 15, 2013 and will be a pro rata dividend from and including the original issue date to and including April 14, 2013 in the amount of $0.6193 per share.

        

The series A preferred stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the series A preferred stock will rank senior to the Company common stock with respect to the payment of distributions and other amounts. The Company is not allowed to redeem the series A preferred stock before December 12, 2017, except in limited circumstances to preserve its status as a REIT. On or after December 12, 2017, the Company may, at its option, redeem the series A preferred stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends on such series A preferred stock up to but excluding the redemption date. Holders of the series A preferred stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances. Upon the occurrence of specified changes of control, as a result of which neither the Company’sCompany's common stock nor the common securities of the acquiring or surviving entity (or American Depositary Receipts representing such securities) is listed on the New York Stock Exchange, or NYSE, the NYSE Amex Equities or the NASDAQ Stock Market or listed or quoted on a successor exchange or quotation system, each holder of series A preferred stock will have the right (unless, prior to the change of control conversion date specified in the Articles Supplementary governing the series A preferred stock, the Company has provided or provides notice of its election to redeem the series A preferred stock) to convert some or all of the series A preferred stock held by it into a number of shares of the Company’sCompany's common stock per share of series A preferred stock to be converted equal to the lesser of:

    •
    ·the quotient obtained by dividing (i) the sum of the $25.00 liquidation preference plus the amount of any accrued and unpaid dividends to, but not including, the change of control conversion date (unless the change of control conversion date is after a record date for a series A preferred stock dividend payment and prior to the corresponding series A preferred stock dividend payment date, in which case no additional amount for such accrued and unpaid dividend will be included in this sum) by (ii) the common stock price, as defined; and

    ·

    •
    1.944, or the share cap, subject to certain adjustments;

subject, in each case, to provisions for the receipt of alternative consideration as described in the Articles Supplementary governing the series A preferred stock. Except in connection with specified


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

10. Stockholders' Equity (Continued)

change of control transactions, the series A preferred stock is not convertible into or exchangeable for any other property or securities of the Company.

Dividends

65        In 2015, 2014, and 2013, we paid all our dividends in cash. The following summarizes the taxability of our common and preferred stock dividends per share for the years then ended:

 
 Year Ended December 31, 
 
 2015 2014 2013 

Common Stock:

          

Ordinary income

 $1.70 $1.15 $1.16 

Qualified dividend

  —  —  — 

Capital gains

  —  —  — 

Return of capital

  —  —  — 
​​​ ​ ​​ ​ ​​ ​ ​

Total dividend(1)

 $1.70 $1.15 $1.16 
​​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​

Preferred Stock:

          

Ordinary income

 $1.81 $1.81 $1.98 

Qualified dividend

  —  —  — 

Capital gains

  —  —  — 
​​​ ​ ​​ ​ ​​ ​ ​

Total dividend(2)

 $1.81 $1.81 $1.98 
​​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​
(1)
Of the $1.70 taxable dividend in 2015, $0.53 was paid in January 2016, of which $0.41 will apply to tax year 2016. Of the $1.15 taxable dividends in 2014, $0.42 was paid in January 2015, of which $0.32 applies to tax year 2015. Of the $1.16 taxable dividend in 2013, $0.35 was paid in January 2014.

(2)
Of the $1.81 taxable dividend in 2015, $0.45 was paid in January 2016. Of the $1.81 taxable dividend in 2014, $0.45 was paid in January 2015. Of the $1.98 taxable dividend in 2013, $0.45 was paid in January 2014. The 2013 dividend includes a pro rata dividend from and including the original issue date of December 12, 2012.

        In order to comply with the real estate investment trust requirements of the Code, we are generally required to make common stock distributions (other than capital gain distributions) to our stockholders at least equal to (i) the sum of (a) 90% of our "REIT taxable income" computed without regard to the dividends paid deduction and net capital gains and (b) 90% of the net taxable income (after tax), if any, from foreclosure property, minus (ii) certain excess non-cash income. Our common stock dividend policy is to distribute a percentage of our cash flow to ensure we will meet the distribution requirements of the Internal Revenue Code, while allowing us to retain cash to meet other needs, such as capital improvements and other investment activities.

        Common stock dividends are characterized for federal income tax purposes as ordinary income, qualified dividend, capital gains, non-taxable return of capital or a combination of the four. Common stock dividends that exceed our current and accumulated earnings and profits (calculated for tax



Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

10. Stockholders' Equity (Continued)

purposes) constitute a return of capital rather than a dividend and generally reduce the stockholder's basis in the common stock. To the extent that a dividend exceeds both current and accumulated earnings and profits and the stockholder's basis in the common stock, it will generally be treated as a gain from the sale or exchange of that stockholder's common stock. At the beginning of each year, we notify our stockholders of the taxability of the common stock dividends paid during the preceding year.

        Pursuant to the terms of our preferred stock, we are restricted from declaring or paying any dividend with respect to our common stock unless and until all cumulative dividends with respect to the preferred stock have been paid and sufficient funds have been set aside for dividends that have been declared for the relevant dividend period with respect to the preferred stock.

        Our federal tax return for the year ended December 31, 2015 has not been filed. The taxability information presented for our dividends paid in 2015 is based upon management's estimate.

11. Noncontrolling Interests—Operating Partnership

        Noncontrolling interests represent the limited partnership interests in the Operating Partnership held by individuals and entities other than CoreSite Realty Corporation. The current holders of common Operating Partnership units are eligible to have the common Operating Partnership units redeemed for cash or common stock on a one-for-one basis, at our option.

        In connection with the issuance of our 7.25% Series A cumulative redeemable preferred stock on December 12, 2012, the Operating Partnership issued 4,600,000 7.25% Series A cumulative redeemable preferred Operating Partnership units to us. Preferred Operating Partnership units rank senior to the common Operating Partnership units held by both us and noncontrolling interests.

        The following table shows the ownership interests in the Operating Partnership as of December 31, 2015, and 2014:

 
 December 31, 2015 December 31, 2014 
 
 Number
of Units		 Percentage
of Total		 Number
of Units		 Percentage
of Total		 

CoreSite Realty Corporation

  30,136,556  64.1% 21,287,191  45.6%

Noncontrolling interests

  16,858,347  35.9% 25,360,847  54.4%
​​​ ​​​ ​ ​​ ​​​ ​ ​

Total

  46,994,903  100.0% 46,648,038  100.0%
​​​ ​​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​​​​
​​​ ​ ​​ ​​​ ​ ​​ ​ ​

        For each share of common stock issued by us, the Operating Partnership issues to us an equivalent common Operating Partnership unit. During the year ended December 31, 2015, the Company issued 349,365 shares of common stock related to employee compensation arrangements and therefore an equivalent number of common Operating Partnership units were issued to us by the Operating Partnership.

        Holders of common Operating Partnership units of record as of March 31, 2015, June 30, 2015, and September 30, 2015, received quarterly distributions of $0.42 per unit payable in correlation with declared dividends on common stock. Holders of common Operating Partnership units of record as of December 31, 2015, received quarterly distributions of $0.53 per unit payable in correlation with declared dividends on common stock.


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

11. Noncontrolling Interests—Operating Partnership (Continued)

        During the year ended December 31, 2015, 8,500,000 common Operating Partnership units held by the Funds were redeemed for shares of our common stock in connection with the offer and sale of 8,500,000 shares of our common stock by The Funds. The book value attributable to each common Operating Partnership unit redeemed was $110.2 million and was recorded as a reduction to noncontrolling interests in the Operating Partnership and an increase to common stock and additional paid-in capital.

        The redemption value of the noncontrolling interests at December 31, 2015, was $956.2 million based on the closing price of the Company's common stock of $56.72 on that date.

12. Equity Incentive Plan

        

In connection with our IPO, the Company’sOur Board of Directors has adopted and, with the approval of our stockholders, amended the 2010 Equity Incentive Award Plan which we refer to as(as amended, the 2010 Plan."2010 Plan"). The 2010 Plan is administered by the Compensation Committee of the Board of Directors, or the plan administrator.Directors. Awards issuable under the 2010 Plan include common stock, stock options, restricted stock, stock appreciation rights, dividend equivalents, Operating Partnership units and other incentive awards. We have reserved a total of 3,000,0006,000,000 shares of our common stock for issuance pursuant to the 2010 Plan, which may be adjusted for changes in our capitalization and certain corporate transactions. To the extent that an award expires, terminates or lapses, or an award is settled in cash without the delivery of shares of common stock to the participant, then any unexercisedunvested shares subject to the award will be available for future grant or sale under the 2010 Plan. Shares of restricted stock which are forfeited or repurchased by us pursuant to the 2010 Plan may again be optioned, granted or awarded under the 2010 Plan. The payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the 2010 Plan.

        

As of December 31, 2012, 993,0332015, 3,359,814 shares of our common stock remainedwere available for issuance pursuant to the 2010 Plan.

Stock Options

        

Stock option awards are granted with an exercise price equal to the closing market price of the Company’sCompany's common stock aton the date of grant. The fair value of each option granted under the 2010 Plan is estimated on the date of the grant using the Black-Scholes option-pricing model. The fair values are being expensedamortized on a straight-line basis over the vesting period.periods.


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

12. Equity Incentive Plan (Continued)

        

The following table sets forth the 2010 Plan’s stock option activity under the 2010 Plan for the years ended December 31, 2012, 2011,2015, 2014, and 2010:2013:

 

 

Number of

 

Weighted

 

Weighted Average

 

 

 

 

 

Shares Subject

 

Average

 

Remaining

 

Aggregate Intrinsic

 

 

 

to Option

 

Exercise Price

 

Contractual Term

 

Value

 

Options outstanding, December 31, 2009

 

—

 

$

—

 

 

 

 

 

Granted

 

587,555

 

16.00

 

 

 

 

 

Forfeited

 

—

 

—

 

 

 

 

 

Expired

 

—

 

—

 

 

 

 

 

Exercised

 

—

 

—

 

 

 

 

 

Options outstanding, December 31, 2010

 

587,555

 

16.00

 

9.7 years

 

$

—

 

Granted

 

543,380

 

15.27

 

 

 

 

 

Forfeited

 

(122,848

)

15.80

 

 

 

 

 

Expired

 

(8,074

)

16.00

 

 

 

 

 

Exercised

 

(1,962

)

16.00

 

 

 

Less than $0.1 million

 

Options outstanding, December 31, 2011

 

998,051

 

 

15.63

 

8.9 years

 

$

2.2 million

 

Granted

 

236,893

 

23.87

 

 

 

 

 

Forfeited

 

(119,723

)

16.62

 

 

 

 

 

Expired

 

(156

)

16.00

 

 

 

 

 

Exercised

 

(97,870

)

16.04

 

 

 

$

0.8 million

 

Options outstanding, December 31, 2012

 

1,017,195

 

$

17.25

 

8.2 years

 

$

10.6 million

 

 

 

 

 

 

 

 

 

 

 

Exercisable at December 31,

 

 

 

 

 

 

 

 

 

2010

 

—

 

N/A

 

N/A

 

N/A

 

2011

 

130,942

 

$

16.00

 

8.7 years

 

$

0.2 million

 

2012

 

287,036

 

$

15.74

 

7.9 years

 

$

3.4 million

 

66

 
 Number of
Shares Subject
to Option		 Weighted
Average
Exercise
Price		 Weighted
Average
Remaining
Contractual
Term		 Aggregate
Intrinsic
Value

Options outstanding, December 31, 2012

  1,017,195 $17.25 8.2 years $10.6 million

Granted

  209,268  32.50    

Exercised

  (54,781) 16.86   $1.0 million

Forfeited

  (37,232) 23.00    

Expired

  (535) 34.82    
​​​​ ​​ ​ ​​​​

Options outstanding, December 31, 2013

  1,133,915 $19.89 7.6 years $14.0 million

Granted

  —  —    

Exercised

  (307,022) 16.10   $5.6 million

Forfeited

  (64,851) 25.83    

Expired

  (3,947) 15.80    
​​​ ​ ​​ ​ ​​​​

Options outstanding, December 31, 2014

  758,095 $20.94 6.7 years $13.7 million

Granted

  —  —    

Exercised

  (410,322) 20.15   $12.0 million

Forfeited

  (7,281) 27.53    

Expired

  (282) 15.23    
​​​​ ​​ ​ ​​​​

Options outstanding, December 31, 2015

  340,210 $21.77 5.8 years $11.9 million
​​​ ​​​ ​ ​​​​
​​​​​​​​​​​
​​​ ​​​ ​ ​​​​

Exercisable at December 31,

          

2013

  498,176 $16.51 7.1 years $7.8 million

2014

  474,132 $18.78 6.4 years $9.6 million

2015

  234,943 $18.47 5.4 years $9.0 million


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

12. Equity Incentive Plan (Continued)

The following table sets forth the number of shares subject to optionoptions that are unvested as of December 31, 20122015, 2014, and 2013, and the fair value of these options at the grant date:

 
 Number of
Shares Subject
to Option		 Weighted
Average Fair
Value at
Grant Date		 

Unvested balance, December 31, 2012

  730,159 $5.70 

Granted

  209,268  10.01 

Forfeited

  (37,232) 7.21 

Vested

  (266,456) 5.54 
​​​​ ​​ ​ ​

Unvested balance, December 31, 2013

  635,739 $7.10 

Granted

  —  — 

Forfeited

  (64,851) 8.03 

Vested

  (286,924) 6.25 
​​​ ​ ​​ ​ ​

Unvested balance, December 31, 2014

  283,964 $7.75 

Granted

  —  — 

Forfeited

  (7,281) 8.48 

Vested

  (171,416) 6.86 
​​​​ ​​ ​ ​

Unvested balance, December 31, 2015

  105,267 $9.13 
​​​ ​ ​​ ​ ​
​​​​​​​​
​​​ ​ ​​ ​ ​

        

 

 

Number of
Shares Subject
to Option

 

Weighted
Average Fair
Value at Grant

 

Unvested balance, December 31, 2009

 

—

 

$

—

 

Granted

 

587,555

 

4.95

 

Forfeited

 

—

 

—

 

Vested

 

—

 

—

 

Unvested balance, December 31, 2010

 

587,555

 

$

4.95

 

Granted

 

543,380

 

4.89

 

Forfeited

 

(122,848

)

4.93

 

Vested

 

(140,978

)

4.92

 

Unvested balance, December 31, 2011

 

867,109

 

$

4.92

 

Granted

 

236,893

 

7.76

 

Forfeited

 

(119,723

)

5.24

 

Vested

 

(254,120

)

4.96

 

Unvested balance, December 31, 2012

 

730,159

 

$

5.70

 

As of December 31, 2012,2015, total unearned compensation on options was approximately $3.3$0.4 million, and the weighted averageweighted-average vesting period was 2.31.0 years. The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model. As the Company has been a publicly traded company only since September 28, 2010, expected volatilities used in the Black-Scholes model are based on the historical volatility of a group of comparable REITs. We utilize the simplified method of estimating the term for options granted due to the lack of historical exercise data necessary to provide a reasonable basis upon which to estimate the term. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. No options were granted during the years ended 2015 or 2014. The following table summarizes the assumptions used to value the stock options granted during the yearsyear ended December 31, 2012,2013:


2013

Expected term (in years)

6.25

Expected volatility

43.86%

Expected annual dividend

3.33%

Risk-free rate

1.26%

Restricted Awards and 2011:

 

 

2012

 

2011

 

2010

 

Expected term (in years)

 

6.25

 

6.25

 

6.25

 

Expected volatility

 

44.08

%

43.07

%

43.59

%

Expected annual dividend

 

3.00

%

3.41

%

3.25

%

Risk-free rate

 

1.56

%

2.76

%

1.33

%

67


Table of ContentsUnits

        

Restricted Awards

During the years ended December 31, 2012, 2011,stock awards and 2010, the Company issued 405,608, 263,393 and 185,437 shares of restricted stock, respectively, which had values of $9.9 million, $4.0 million, and $3.0 million, respectively, on the grant date. The restricted stock granted in 2012 includes 176,630 awards granted under new employment agreements. Also during the years ended December 31, 2012, 2011, and 2010, the Company issued 7,172, 10,080 and 10,000 restricted stock units, or RSUs, respectively, which each grant had valuesare granted with a fair value equal to the closing market price of $0.2 millionthe Company's common stock on the grant date.date of grant. The principal difference between these instrumentsrestricted stock awards and RSUs is that RSUs are not shares of the Company’sour common stock and do not have any of the rights or privileges thereof, including voting rights. On the applicable vesting date, the holder of an RSU becomes entitled to a share of common stock. The restricted stock awards will beand


Table of Contents


CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

12. Equity Incentive Plan (Continued)

RSUs are amortized on a straight-line basis to expense over the vesting period. The following table sets forth the number of unvested restricted awardsstock and RSUs and the weighted averageweighted-average fair value of these awards at the date of grant:

 
 Restricted
Awards and
Units		 Weighted
Average Fair
Value at
Grant Date		 

Unvested balance, December 31, 2012

  598,695 $21.37 

Granted

  194,302  32.43 

Forfeited

  (58,199) 28.44 

Vested

  (239,647) 20.96 
​​​​ ​​ ​ ​

Unvested balance, December 31, 2013

  495,151 $25.08 

Granted

  216,175  31.51 

Forfeited

  (109,798) 27.64 

Vested

  (207,512) 22.79 
​​​ ​ ​​ ​ ​

Unvested balance, December 31, 2014

  394,016 $29.10 

Granted

  187,644  47.41 

Forfeited

  (34,788) 36.06 

Vested

  (169,260) 26.96 
​​​​ ​​ ​ ​

Unvested balance, December 31, 2015

  377,612 $38.51 
​​​ ​ ​​ ​ ​
​​​​​​​​
​​​ ​ ​​ ​ ​

        

 

 

Restricted
Awards

 

Weighted
Average Fair
Value at Grant

 

Unvested balance, December 31, 2009

 

—

 

$

—

 

Granted

 

195,437

 

15.98

 

Forfeited

 

—

 

—

 

Vested

 

—

 

—

 

Unvested balance, December 31, 2010

 

195,437

 

15.98

 

Granted

 

273,473

 

15.19

 

Forfeited

 

(51,213

)

15.81

 

Vested

 

(74,466

)

16.10

 

Unvested balance, December 31, 2011

 

343,231

 

15.35

 

Granted

 

412,780

 

24.59

 

Forfeited

 

(48,599

)

18.26

 

Vested

 

(108,717

)

15.46

 

Unvested balance, December 31, 2012

 

598,695

 

$

21.37

 

 

 

 

 

 

 

As of December 31, 2012,2015, total unearned compensation on restricted awards was approximately $9.7$10.0 million, and the weighted averageweighted-average vesting period was 2.3 years.

Operating Partnership UnitsPerformance Stock Awards

        

In connection withWe grant long-term incentives to members of management in the IPO, we issued 25,883 Operating Partnership units, which were fair valued at $15.98 per unit or $0.4 millionform of performance-based restricted stock awards ("PSAs") under the 2010 Plan. The number of PSAs earned is based on our achievement of relative total shareholder return ("TSR") measured versus the MSCI US REIT Index over a three-year performance period, and the number of shares earned under the PSAs may range from 0% to 150% for 2014 grants and from 25% to 175% for 2015 grants. The PSAs are earned as follows: (i) 20% of the PSAs are eligible to be earned upon TSR achievement in total.year one of the performance period, (ii) 20% of the PSAs are eligible to be earned upon TSR achievement in year two of the performance period, (iii) 20% of the PSAs are eligible to be earned upon TSR achievement in year three of the performance period, and (iv) 40% of the PSAs are eligible to be earned upon a cumulative TSR achievement over the three-year performance period. The Operating Partnership unitsPSAs have a service condition and will be amortizedreleased at the end of the three-year performance period, to the extent earned, provided that the holder continues to be employed by the Company at the end of the three-year performance period. Holders of the PSAs are entitled to dividends on a straight-line basisthe PSAs, which will be accrued and paid in cash at the end of the three-year performance period. The PSAs initially are granted and issued at the highest potential percentage of target amount and thereafter are forfeited to expense over the extent vesting period. As of December 31, 2012, 17,254 units have vested, 7,138 units were unvested and 1,491 were forfeited. As of December 31, 2012, total unearned compensation on Operating Partnership units was approximately $0.1 million, and the weighted average vesting period was 0.7 years.conditions are not met.

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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

12. Equity Incentive Plan (Continued)

        On March 4, 2014, we granted 91,335 PSAs, equal to 150% of the target amount, with an aggregate fair value of $1.6 million on the grant date. The PSAs, in addition to a service condition, are subject to our performance versus the MSCI US REIT Index which is a market condition and impacts the number of shares that ultimately vests. Upon evaluating the results of the market condition, the final number of shares is determined and such shares vest based on satisfaction of the service condition. The PSAs are amortized on a straight-line basis over the vesting period. During the years ended December 31, 2015, and 2014, 7,273 and 5,484 of the PSAs granted in March 2014 were forfeited due to termination of service, respectively. During the year ended December 31, 2015, 6,444 PSAs were not achieved due to performance against the MSCI REIT Index correlating to less than 150% of the target amount during the first year of the performance period.

        On March 3, 2015, we granted 78,553 PSAs, equal to 175% of the target amount, with an aggregate value of $2.7 million on the grant date. The PSAs, in addition to a service condition, are subject to our performance versus the MSCI US REIT Index, which is a market condition and impacts the number of shares that ultimately vests. Upon evaluating the results of the market condition, the final number of shares is determined and such shares vest based on satisfaction of the service condition. The PSAs are amortized on a straight-line basis over the vesting period. During the year ended December 31, 2015, 7,129 of the PSAs granted in March 2015 were forfeited due to termination of service.

        As of December 31, 2015, total unearned compensation on PSAs was approximately $2.4 million, and the weighted-average vesting period was 2.0 years. The fair value of each PSA award is estimated on the date of grant using a Monte Carlo simulation. The simulation requires assumptions for expected volatility, risk-free rate of return, and dividend yield. The following table summarizes the assumptions used to value the PSAs granted during the years ended December 31, 2015, and 2014:

 
 2015 2014 

Expected term (in years)

  2.83  2.83 

Expected volatility

  25.51% 32.98%

Expected annual dividend

  —  — 

Risk-free rate

  1.02% 0.64%

13. Earnings Per Share

        

Basic net income (loss) per share is calculated by dividing the net income (loss) attributable to common shares by the weighted averageweighted-average number of common shares outstanding during the period. Diluted net income (loss) per share adjusts basic net income (loss) per share for the effects of potentially dilutive common shares, if the effect is not antidilutive. Potentially dilutive common shares consiststock consists of shares issuable under our equity-based compensation planthe 2010


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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

13. Earnings Per Share (Continued)

Plan. The following is a summary of basic and Operating Partnership units.diluted net income per share (in thousands, except share and per share amounts):

 
 Year Ended December 31, 
 
 2015 2014 2013 

Net income attributable to common shares

 $26,368 $14,427 $10,503 

Weighted-average common shares outstanding—basic

  25,218,500  21,161,614  20,826,622 

Effect of potentially dilutive common shares:

          

Stock options

  302,264  349,533  383,743 

Unvested awards

  185,804  229,560  292,847 
​​​ ​ ​​ ​​​ ​ ​

Weighted-average common shares outstanding—diluted

  25,706,568  21,740,707  21,503,212 
​​​ ​ ​​ ​​​ ​ ​
​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​

Net income per share attributable to common shares

          

Basic

 $1.05 $0.68 $0.50 

Diluted

 $1.03 $0.66 $0.49 

        

 

 

 

 

For the period September

 

 

 

Twelve Months Ended December 31,

 

28, 2010 through

 

 

 

2012

 

2011

 

December 31, 2010

 

Net income (loss) attributable to common shares

 

$

4,608

 

$

(4,611

)

$

(3,351

)

Weighted average common shares outstanding - basic

 

20,537,946

 

19,609,375

 

19,458,605

 

Effect of potentially dilutive common shares:

 

 

 

 

 

 

 

Stock options

 

211,222

 

—

 

—

 

Unvested restricted awards

 

243,122

 

—

 

—

 

Weighted average common shares outstanding - diluted

 

20,992,290

 

19,609,375

 

19,458,605

 

Net income (loss) per share attributable to common shares

 

 

 

 

 

 

 

Basic

 

$

0.22

 

$

(0.24

)

$

(0.17

)

Diluted

 

$

0.22

 

$

(0.24

)

$

(0.17

)

In the calculations above, we have excluded weighted-average potentially dilutive securities of 153,972, 1,341,282117,048, 180,020 and 782,992169,875 for the yearyears ended December 31, 2012, 2011,2015, 2014, and for the period from September 28, 2010, to December 31, 2010,2013, respectively, as their effect would have been antidilutive.

14. Employee Benefit Plan

        We have a tax qualified retirement 401(k) plan that provides employees with an opportunity to save for retirement on a tax advantaged basis. Employees are automatically enrolled upon employment. Additionally at that time, we provide a safe harbor contribution equal to 3% of the participant's annual salary. The employee and employer contributions are limited to the maximum amount allowed by the Internal Revenue Service. Both employee and employer contributions vest immediately. For the years ended December 31, 2015, 2014, and 2013, our contributions were $0.8 million, $0.8 million, and $0.7 million, respectively.

14.15. Estimated Fair Value of Financial Instruments

        

Authoritative guidance issued by the FASB establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring assets and liabilities at fair values. This hierarchy establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy under the authoritative guidance are as follows:

    Level 11— — Inputs are quotedQuoted prices (unadjusted) in active markets for identical assets or liabilities.liabilities that the reporting entity can access at the assessment date.

    Level 22— — Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices included within Level 1 that are observable and market-corroboratedfor the asset or liability, either directly or indirectly.

            Level 3—Unobservable inputs which are derived principally fromfor the asset or corroborated by observable market data.liability.


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CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

15. Estimated Fair Value of Financial Instruments (Continued)

        

Level 3 — Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

Our financial instruments consist of cash and cash equivalents, restricted cash, accounts and other receivables, interest rate swaps, the revolving credit facility, mortgagethe senior unsecured term loans, payable, interest payable and accounts payable. The carrying values of cash and cash equivalents, restricted cash, accounts and other receivables, interest payable and accounts payable approximate fair values due to the short-term nature of these accounts.financial instruments. The interest rate swaps are recorded at fair value.

        The valuation of our derivatives is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative, which reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy; however, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Operating Partnership and its counterparties. As of December 31, 2015, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustment is not significant to the overall valuation of our derivative portfolio. As a result we classify our derivative valuation in Level 2 of the fair value hierarchy.

The combinedtotal principal balance of our mortgagerevolving credit facility and senior unsecured term loans payable was $59.8$392.3 million and $116.9$318.5 million as of December 31, 20122015 and 2011,2014, respectively, with a fair value of $59.6 million and $116.1 million, respectively,that approximated book value, based on Level 3 inputs from the fair value hierarchy. Under the discounted cash flow method, the fair values of mortgage notes payable and the revolving credit facility, and the senior unsecured term loans are based on the Company’sour assumptions of market interest rates and terms available incorporating the Company’sour credit risk.risk for similar loan maturities.

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15. Related Party Transactions

Prior to the closing of the IPO on September 28, 2010, CoreSite, LLC was engaged to act as the Company’s agent for the purpose of coordinating the activities of the property manager, for leasing and servicing the properties, and for overseeing property build-out activities. Subsequent to our Predecessor’s acquisition of CoreSite, LLC as part of the IPO on September 28, 2010, all related party revenue and expenses incurred in connection with CoreSite, LLC’s activities, have been eliminated upon consolidation. For the year ended December 31, 2010, CoreSite, LLC earned management fees from the Predecessor of $3.6 million. For the year ended December 31, 2010, CoreSite, LLC earned lease commissions from our Predecessor of $2.8 million. These commissions are included in deferred leasing costs. For the year ended December 31, 2010, CoreSite, LLC earned construction management fees from our Predecessor of $1.2 million. The construction management fees are included in building improvements and construction in progress. For the year ended December 31, 2010, CoreSite, LLC was reimbursed for payroll related expenses from our Predecessor of $1.2 million. At December 31, 2012 and 2011, none of the fees were payable to CoreSite, LLC.

We lease 1,515 net rentable square feet of space at VA1 to an affiliate of The Carlyle Group. The lease commenced on July 1, 2008 and expires on June 30, 2013. Rental revenue was $0.3 million, $0.2 million, and $0.2 million for the years ended December 31, 2012, 2011 and 2010, respectively.

16. Commitments and Contingencies

        

The Company currently leases data center space under noncancelable operating lease agreements at NY1, LA1, DC1, DE1,Our properties require periodic investments of capital for general capital improvements and DE2,for tenant related capital expenditures. We enter into various construction and equipment contracts with third parties for the Company leases its headquarters located in Denver, Colorado under a noncancelable operating lease agreement. The lease agreements provide for base rental rate increases at defined intervals during the termdevelopment of the lease. In addition, the Company has negotiated rent abatement periodsour properties. At December 31, 2015, we had open commitments related to better match the phased build-outconstruction contracts of the data center space. The Company accounts for such abatements and increasing base rentals using the straight-line method over the noncancelable term of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent payable.approximately $77.2 million.

        

Additionally, the Company haswe have commitments related to telecommunications capacity used to connect data centers located within the same market or geographical area, power usage, and power usage.

The following table summarizes our contractual obligations as of December 31, 2012 (in thousands):

Obligation

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

Operating leases

 

$

18,149

 

$

18,336

 

$

18,014

 

$

17,752

 

$

16,287

 

$

72,518

 

$

161,056

 

Other (1)

 

6,667

 

1,125

 

989

 

527

 

142

 

745

 

 

10,195

 

Total

 

$

24,816

 

$

19,461

 

$

19,003

 

$

18,279

 

$

16,429

 

$

73,263

 

$

171,251

 

(1) Obligations for tenant improvement work at SV1, power contracts, and telecommunications leases.

Rent expense was $18.7 million, $18.3 million, $4.6 million, $2.2 million, for the years ended December 31, 2012 and 2011, for the period from September 28, 2010company-wide improvements that are ancillary to December 31, 2010, and the period from January 1, 2010 to September 27, 2010, respectively.

Our properties require periodic investments of capital for general capital improvements and for tenant related capital expenditures. Additionally, the Company enters into various construction contracts with third parties for the development of our properties.revenue generation. At December 31, 2012,2015, we had open commitments related to constructionthese contracts of approximately $35.0$16.3 million.

        We have agreed with affiliates of the Carlyle Group that have directly or indirectly contributed their interests in the properties in our portfolio to our Operating Partnership that if we directly or indirectly sell, convey, transfer or otherwise dispose of all or any portion of these interests in a taxable transaction, we will make an interest-free loan to the contributors in an amount equal to the contributor's tax liabilities, based on an assumed tax rate, with respect to built-in-gains generated from the initial contribution. These tax protection provisions apply for a period expiring on the earliest of (i) the seventh anniversary of the completion of our IPO, September 23, 2017, and (ii) the date on which these contributors (or certain transferees) dispose in certain taxable transactions of 90% of the


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From time
CORESITE REALTY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2015

16. Commitments and Contingencies (Continued)

Operating Partnership units that were issued to time,them in connection with the contribution of these properties.

        In April 2015, we are partyexecuted a pre-lease and began construction of a 136,580 square-foot build-to-suit powered shell data center, which will be known as SV6, on land we own on our Santa Clara campus. We have incurred $18.1 million of the estimated $30.0 million required to complete the project, and expect to deliver the powered shell to a varietystrategic customer in the first half of legal proceedings arising2016.

        We entered into a Memorandum of Understanding with the Virginia Economic Development Partnership Authority pursuant to which CoreSite is afforded the opportunity to benefit from an exemption from sales and use tax for certain qualifying data center related purchases and equipment leases. This exemption also extends to our customers who execute a Landlord-Tenant Participation Agreement under our Memorandum of Understanding. The Memorandum of Understanding establishes thresholds relating to the level of capital investment and qualifying new jobs created within the Commonwealth of Virginia by us and our customers who have agreed to sign participation agreements. In the event those thresholds are not met as of the agreed upon performance date of June 1, 2017, we would be required to repay the sales and use tax benefit we have received, as well as any tax benefit received by our customers who default on their obligation to repay the tax benefit they have received under the exemption program up to a maximum of $7.5 million. We estimate that we may be required to repay between $0.0 million and $1.0 million for sales and use tax benefits we have received under the exemption program, of which none has been accrued in accounts payable and accrued expenses in our condensed consolidated balance sheet as of December 31, 2015.

        In the ordinary course of business. We believe that, with respectbusiness, we are subject to claims and administrative proceedings. Except as described below, we are not presently party to any such matters thatproceeding, which we are currently a partybelieve to the ultimate disposition of any such matter will not result in abe material adverse effect on us.

As previously disclosed,or which we were involved in litigationwould expect to have, individually or in the Colorado District Court in Denver, Colorado with Ari Brumer, the former general counsel of our affiliate, CoreSite, LLC, arising out of the termination of Mr. Brumer’s employment. The allegations made by Mr. Brumer in his complaint against us, certain of our affiliates, and certain affiliates of The Carlyle Group also have been previously reported, as have been the counterclaims asserted against Mr. Brumer by us and certain of our affiliates. On December 6, 2012, the parties reached binding settlement with Mr. Brumer pursuant to which, following full documentation of the binding settlement terms on January 10, 2013, we paid Mr. Brumer a cash payment in an amount that we do not consider to be material. We do not consider this settlement as havingaggregate, a material adverse effect on our business, financial position, liquiditycondition, cash flows or results of operations. We recorded

        On February 4, 2014, U.S. Colo, LLC ("U.S. Colo"), a current customer, filed a complaint against us in the settlement expense in general and administrative expenseUnited States District Court for the year ended December 31, 2012.Central District of California. In the complaint, U.S. Colo alleged that it should not have been charged for the use of various CoreSite interconnection services under the terms of an existing agreement between the parties.

        On July 23, 2015, after amendments to the complaint, dismissal of several of U.S. Colo's claims, and a remand of the case to the Superior Court of the State of California, County of Los Angeles (the "Superior Court"), U.S. Colo filed an amended complaint alleging breach of contract and breach of the covenant of good faith and fair dealing. The amended complaint seeks $802,564 in damages for charges paid to us for interconnection services; $70,080,000 in damages for alleged losses of revenue and profits; attorney's fees, interest, and costs of the suit; and declaratory and injunctive relief.

70        On February 4, 2016, the Superior Court granted our motion for summary adjudication, finding that U.S. Colo had contractually waived all claims for lost revenue or profits or other consequential damages. Discovery is underway and a trial is currently set for April 11, 2016.

        On July 9, 2015, a purported class action lawsuit was filed in the Superior Court of the State of California, County of Los Angeles, against us, alleging various employment law violations related to overtime, meal and break periods, minimum wage, timely payment of wages, wage statements, payroll



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CORESITE REALTY CORPORATION

One of our former customers, brought an action against us in April 2009 before the American Arbitration Association in California asserting claims of breach of contract, unfair business practices, negligent misrepresentation and fraudulent inducement. Our former customer alleged that it suffered damages of approximately $3.5 million, consisting of license and service fees paid to us, loss of business income and equipment damage, and sought attorney’s fees and punitive damages. We counterclaimed for breach of contract and bad faith dealing. On April 6, 2012, we agreed to pay our former customer $1.5 million to settle the action in its entirety and recorded the settlement expense in general and administrative expense for the year ended NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

December 31, 2012.2015

16. Commitments and Contingencies (Continued)

records and business expenses. The lawsuit is in the early stages and we have filed a responsive pleading generally denying the allegations.

        We intend to vigorously defend both of these legal proceedings. While it is not feasible to predict or determine the outcome of these legal proceedings, as of December 31, 2015, we estimate that the ultimate resolution of these litigation matters and other disputes could result in a loss that is reasonably possible between $0.0 million and $3.0 million in the aggregate, of which $2.8 million has been accrued in accounts payable and accrued expenses in our condensed consolidated balance sheet as of December 31, 2015.

17. Quarterly Financial Information (unaudited)

        

The table below reflects the selected quarterly information for the years ended December 31, 20122015, and 20112014 (in thousands except share data):

 
 Three Months Ended 
 
 December 31,
2015		 September 30,
2015		 June 30,
2015		 March 31,
2015		 

Revenue

 $90,919 $86,382 $81,336 $74,655 

Operating income

  19,321  16,751  14,676  13,336 

Net income

  17,387  14,530  12,882  12,060 

Net income attributable to common shares

  9,342  6,920  5,538  4,568 

Net income per share attributable to common shares—basic

 $0.32 $0.26 $0.23 $0.21 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Net income per share attributable to common shares—diluted

 $0.32 $0.26 $0.22 $0.21 
​​​ ​ ​​​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​​ ​​ ​ ​

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

 

 

2012

 

2012

 

2012

 

2012

 

Revenue

 

$

55,252

 

$

53,762

 

$

50,636

 

$

47,284

 

Operating income

 

5,936

 

5,059

 

3,814

 

2,234

 

Net income

 

4,578

 

2,947

 

1,848

 

1,343

 

Net income attributable to common shares

 

1,862

 

1,320

 

826

 

600

 

Net income per share attributable to common shares - basic

 

$

0.09

 

$

0.06

 

$

0.04

 

$

0.03

 

Net income per share attributable to common shares - diluted

 

$

0.09

 

$

0.06

 

$

0.04

 

$

0.03

 

 

 

Three Months Ended

 

 

 

December 31,

 

September 30,

 

June 30,

 

March 31,

 

 

 

2011

 

2011

 

2011

 

2011

 

Revenue

 

$

46,029

 

$

44,367

 

$

42,484

 

$

39,966

 

Operating income (loss)

 

1,072

 

1,125

 

(3,473

)

(5,814

)

Net income (loss)

 

462

 

263

 

(3,588

)

(7,916

)

Net income (loss) attributable to common shares

 

179

 

112

 

(1,530

)

(3,372

)

Net income (loss) per share attributable to common shares - basic

 

$

0.01

 

$

0.01

 

$

(0.08

)

$

(0.17

)

Net income (loss) per share attributable to common shares - diluted

 

$

0.01

 

$

0.01

 

$

(0.08

)

$

(0.17

)

 
 Three Months Ended 
 
 December 31,
2014		 September 30,
2014		 June 30,
2014		 March 31,
2014		 

Revenue

 $72,492 $70,515 $65,682 $63,731 

Operating income

  12,477  10,372  12,029  9,309 

Net income

  12,306  8,990  10,638  8,118 

Net income attributable to common shares

  4,664  3,147  3,883  2,733 

Net income per share attributable to common shares—basic

 $0.22 $0.15 $0.18 $0.13 
​​​ ​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​

Net income per share attributable to common shares—diluted

 $0.21 $0.14 $0.18 $0.13 
​​​ ​ ​​​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​​​​
​​​ ​ ​​ ​ ​​​ ​​ ​ ​

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CoreSite Realty Corporation
Schedule III
Real Estate and Accumulated Depreciation


December 31, 20122015
(in thousands)

 
  
  
  
  
 Gross Amount Carried at
December 31, 2015		  
  
 
 
  
 Initial Cost Costs
Capitalized
Subsequent
to
Acquisition		 Accumulated
Depreciation
at
December 31,
2015		  
 
Property
Name
 Location Land Building and
Improvements		 Land Building and
Improvements		 Total Year
Acquired
or Leased		 
 
 (In thousands)
 

BO1

 Somerville, MA $6,100 $26,748 $64,882 $5,154 $92,576 $97,730 $36,496  2007 

CH1

 Chicago, IL  5,493  49,522  45,921  5,493  95,443  100,936  22,195  2010 

DC1

 Washington, DC  —  4,797  3,462  —  8,259  8,259  4,399  2010 

DE1

 Denver, CO  —  37  3,308  —  3,345  3,345  827  2012 

DE2

 Denver, CO  —  4  1,068  —  1,072  1,072  617  2012 

LA1

 Los Angeles, CA  —  41,099  28,321  —  69,420  69,420  26,029  2010 

LA2

 Los Angeles, CA  28,467  94,114  56,760  28,467  150,874  179,341  32,492  2010 

MI1

 Miami, FL  728  9,325  1,094  728  10,419  11,147  2,362  2010 

NY1

 New York, NY  —  —  35,083  —  35,083  35,083  16,677  2007 

NY2

 Secaucus, NJ  4,952  18,408  108,230  2,388  129,202  131,590  8,096  2013 

SV1

 San Jose, CA  6,863  91,719  37,686  6,863  129,405  136,268  23,462  2010 

SV2

 Milpitas, CA  5,086  5,046  22,504  5,086  27,550  32,636  14,883  2006 

SV3

 Santa Clara, CA  4,162  3,482  46,464  3,972  50,136  54,108  24,992  2007 

SV4

 Santa Clara, CA  4,632  3,716  90,182  4,501  94,029  98,530  22,683  2007 

SV5

 Santa Clara, CA  2,572  —  23,486  2,544  23,514  26,058  1,245  2007 

SV6

 Santa Clara, CA  4,741  —  25,500  —  30,241  30,241  —  2007 

SV7

 Santa Clara, CA  3,793  —  29,673  —  33,466  33,466  —  2007 

VA1

 Reston, VA  6,903  32,939  87,806  6,903  120,745  127,648  43,211  2007 

VA2

 Reston, VA  5,197  —  113,060  2,720  115,537  118,257  3,553  2007 
​​​​​ ​​​ ​ ​​ ​​​ ​ ​​ ​​​ ​ ​​ ​ ​​​​

 

Total

 $89,689 $380,956 $824,490 $74,819 $1,220,316 $1,295,135 $284,219    
​​​​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​ ​ ​​​​
​​​​​​​​​​​​​​​​​​​​​​​​​​​​
​​​​​ ​​​ ​ ​​ ​​​ ​ ​​ ​​​ ​ ​​ ​ ​​​​

        None of our properties are encumbered.

 

 

 

 

 

 

 

 

 

 

Costs Capitalized

 

Gross Amount Carried at

 

 

 

 

 

 

 

 

 

 

 

Initial Cost

 

Subsequent to Acquisition

 

December 31, 2012

 

 

 

Year

 

 

 

 

 

 

 

 

 

Building and

 

 

 

Building and

 

 

 

Building and

 

 

 

Accumulated Depreciation

 

Acquired

 

Property Name

 

Location

 

Encumbrances

 

Land

 

Improvements

 

Land

 

Improvements

 

Land

 

Improvements

 

Total

 

at December 31, 2012

 

or Leased

 

 

 

(In thousands)

 

SV1

 

San Jose, CA

 

$

59,750

 

$

6,863

 

$

91,719

 

$

—

 

$

15,023

 

$

6,863

 

$

106,742

 

$

113,605

 

$

7,342

 

2010

 

SV2

 

Milpitas, CA

 

—

 

5,086

 

5,046

 

—

 

17,502

 

5,086

 

22,548

 

27,634

 

8,073

 

2006

 

SV3

 

Santa Clara, CA

 

—

 

3,972

 

3,482

 

—

 

41,731

 

3,972

 

45,213

 

49,185

 

11,246

 

2007

 

SV4

 

Santa Clara, CA

 

—

 

4,442

 

3,716

 

—

 

79,920

 

4,442

 

83,636

 

88,078

 

3,136

 

2007

 

Santa Clara Campus

 

Santa Clara, CA

 

—

 

11,486

 

9,240

 

1,131

 

4,088

 

12,617

 

13,328

 

25,945

 

2,115

 

2007

 

BO1

 

Somerville, MA

 

—

 

6,100

 

26,748

 

—

 

43,652

 

6,100

 

70,400

 

76,500

 

18,682

 

2007

 

NY1

 

New York, NY

 

—

 

—

 

—

 

—

 

31,292

 

—

 

31,292

 

31,292

 

9,199

 

2007

 

VA1

 

Reston, VA

 

—

 

12,100

 

32,939

 

—

 

74,783

 

12,100

 

107,722

 

119,822

 

17,901

 

2007

 

DC1

 

Washington, DC

 

—

 

—

 

4,797

 

—

 

1,996

 

—

 

6,793

 

6,793

 

1,197

 

2010

 

CH1

 

Chicago, IL

 

—

 

5,493

 

49,522

 

—

 

25,921

 

5,493

 

75,443

 

80,936

 

6,008

 

2010

 

LA1

 

Los Angeles, CA

 

—

 

—

 

41,099

 

—

 

10,735

 

—

 

51,834

 

51,834

 

8,505

 

2010

 

LA2

 

Los Angeles, CA

 

—

 

28,467

 

94,114

 

—

 

21,155

 

28,467

 

115,269

 

143,736

 

10,102

 

2010

 

MI1

 

Miami, FL

 

—

 

728

 

9,325

 

—

 

432

 

728

 

9,757

 

10,485

 

964

 

2010

 

DE1

 

Denver, CO

 

—

 

—

 

37

 

 

 

232

 

—

 

269

 

269

 

18

 

2012

 

DE2

 

Denver, CO

 

—

 

—

 

4

 

 

 

5

 

—

 

9

 

9

 

2

 

2012

 

 

 

Total

 

$

59,750

 

$

84,737

 

$

371,788

 

$

1,131

 

$

368,467

 

$

85,868

 

$

740,255

 

$

826,123

 

$

104,490

 

 

 

The aggregate cost of the total properties for federal income tax purposes was approximately $812.2$1,147.4 million (unaudited) at December 31, 2012.2015.

   

See accompanying report of independent registered public accounting firm.

72



Table of Contents


CoreSite Realty Corporation


Schedule III


Real Estate and Accumulated Depreciation

(Continued)
December 31, 20122015

        

The following table reconciles the historical cost and accumulated depreciation of the CoreSite Realty Corporationour properties for the years ended December 31, 2012, 20112015, 2014, and 2010:2013:

 

 

2012

 

2011

 

2010

 

 

 

 

 

(In thousands)

 

 

 

Property

 

 

 

 

 

 

 

Balance, beginning of period

 

$

738,596

 

$

622,622

 

$

234,262

 

Additions - property acquisitions

 

—

 

—

 

332,128

 

Additions - improvements

 

87,527

 

115,974

 

56,232

 

Balance, end of period

 

$

826,123

 

$

738,596

 

$

622,622

 

 

 

 

 

 

 

 

 

Accumulated Depreciation

 

 

 

 

 

 

 

Balance, beginning of period

 

$

64,428

 

$

32,943

 

$

16,207

 

Additions - depreciation, net of disposals

 

40,062

 

31,485

 

16,736

 

Balance, end of period

 

$

104,490

 

$

64,428

 

$

32,943

 

 
 Year Ended December 31, 
 
 2015 2014 2013 
 
 (In thousands)
 

Property

          

Balance, beginning of period

 $1,146,548 $1,048,525 $829,508 

Additions—property acquisitions

  —  —  23,360 

Additions—improvements

  148,587  98,969  195,657 

Deduction—cost of land disposal

  —  (946) — 
​​​ ​ ​​ ​​​ ​ ​

Balance, end of period

 $1,295,135 $1,146,548 $1,048,525 
​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​

Accumulated Depreciation

          

Balance, beginning of period

 $215,978 $155,704 $105,433 

Additions, net of disposals

  68,241  60,274  50,271 
​​​ ​ ​​ ​​​ ​ ​

Balance, end of period

 $284,219 $215,978 $155,704 
​​​ ​ ​​ ​ ​​ ​ ​
​​​​​​​​​​​
​​​​ ​​ ​ ​​ ​ ​

   

See accompanying report of independent registered public accounting firm.


73


Table of Contents

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        

None.

ITEM 9A.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

        

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’sSEC's rules and regulations and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

        

As of December 31, 2012,2015, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2012.2015.

Changes in Internal Control over Financial Reporting

        

There has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the quarteryear ended December 31, 2012,2015, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’sManagement's Annual Report on Internal Control Overover Financial Reporting

        

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act). The internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements.

        

Based on its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures might deteriorate.

        

As of December 31, 2012,2015, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, regarding the effectiveness of our internal control over financial reporting. Based on the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, our Chief Executive Officer and our Chief Financial Officer concluded, as of December 31, 2012,2015, that our internal control over financial reporting was effective in providing reasonable assurance of the fair preparation and presentation of published financial statements.


Table of Contents

        

KPMG LLP, our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of December 31, 2012,2015, as stated in their report which is included on page 4863 of this Annual Report.

ITEM 9B.    OTHER INFORMATION

        

None.

74



Table of Contents


PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        

The information required by Item 10 will be included in the Proxy Statement to be filedour definitive proxy statement relating to our 20132016 Annual Meeting of Stockholders, to be filed no later than April 30, 2013,2016, and is incorporated herein by reference.

        

Because our common stock is listed on the NYSE, our Chief Executive Officer is required to make, and will make, an annual certification to the NYSE stating that he was not aware of any violation by us of the corporate governance listing standards of the NYSE. Our Chief Executive Officer will make his annual certification to that effect to the NYSE within the 30-day period following our 20132016 Annual Meeting of Stockholders.

ITEM 11.    EXECUTIVE COMPENSATION

        

The information required by Item 11 will be included in the Proxy Statement to be filedour definitive proxy statement relating to our 20132016 Annual Meeting of Stockholders, to be filed no later than April 30, 2013,2016, and is incorporated herein by reference.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

        

The information required by Item 12 will be included in the Proxy Statement to be filedour definitive proxy statement relating to our 20132016 Annual Meeting of Stockholders, to be filed no later than April 30, 2013,2016, and is incorporated herein by reference.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

        

The information required by Item 13 will be included in the Proxy Statement to be filedour definitive proxy statement relating to our 20132016 Annual Meeting of Stockholders, to be filed no later than April 30, 2013,2016, and is incorporated herein by reference.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

        

The information required by Item 14 will be included in the Proxy Statement to be filedour definitive proxy statement relating to our 20132016 Annual Meeting of Stockholders, to be filed no later than April 30, 2013,2016, and is incorporated herein by reference.


75


Table of Contents


PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)
Documents filed as part of this Annual Report or incorporated by reference:

(1)

Our consolidated financial statements are provided under Item 8 of this Annual Report.

(2)

Schedule III—Real Estate and Accumulated Depreciation is included herein at page 72. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

(1)
Our consolidated financial statements are provided under Item 8 of this Annual Report.

(2)
Schedule III—Real Estate and Accumulated Depreciation is included herein at page 98. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

(b)
The following exhibits are filed with this Annual Report or incorporated by reference, as indicated:

Exhibit

Exhibit
Number

Description

3.1

3.1

Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)

3.2



3.2



Articles Supplementary of CoreSite Realty Corporation – Corporation—7.25% Series A Cumulative Redeemable Preferred Stock.(8)

3.3



3.3



Bylaws of CoreSite Realty Corporation.(1)

4.1



4.1



Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(2)

10.1



10.1



Amended and Restated Agreement of Limited Partnership of CoreSite, L.P., dated as of December 12, 2012.(8)

10.2



10.2



2010 Equity Incentive Award Plan.(1)Plan (As Amended and Restated).(12)*

10.3



10.3



Form of 2010 Equity Incentive Award Plan Restricted Stock Unit Award Agreement.(1)*

10.4



10.4



Form of 2010 Equity Incentive Award Plan Stock Option Agreement.(1)*

10.5



10.5



Form of 2010 Equity Incentive Award Plan Restricted Stock Award Agreement.(1)*

10.6



10.6



Form of 2010 Equity Incentive Award Plan Restricted Stock Unit Agreement for Non-Employee Directors.(1)*

10.7



10.7



Employment Agreement between CoreSite, L.L.C. and Thomas M. Ray, dated as of August 1, 2010.(1)*

10.8



10.8



Form of Indemnification Agreement for directors and officers of CoreSite Realty Corporation.(1)*

10.9



10.9



Registration Rights Agreement among CoreSite Realty Corporation and the holders listed therein, dated as of September 28, 2010.(3)

10.10



10.10



Tax Protection Agreement among CoreSite Realty Corporation and the persons named therein, dated as of September 28, 2010.(3)

10.11



10.11



Contribution Agreement among CoreSite Realty Corporation, CoreSite, L.P. and the persons named therein, dated as of September 28, 2010.(3)

10.12



10.12



Lease between Hines REIT One Wilshire Services, Inc. and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)

10.13



10.13



First Amendment to Lease between Hines REIT One Wilshire Services, Inc. and CoreSite One Wilshire, L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of January 9, 2013.(10)

Table of Contents

Exhibit
Number		Description

10.14

10.14

Lease between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)

10.15



10.15



First Amendment to Lease between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of May 1, 2008.(1)

10.16



10.16



Second Amendment to Lease between Hines REIT One Wilshire LP and CoreSite One Wilshire, L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of November 5, 2009.(9)

10.17



10.17



Third Amendment to Lease between Hines REIT One Wilshire LP and CoreSite One Wilshire L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of June 15, 2011 (9)2011(9).

10.18



10.18



Fourth Amendment to Lease between Hines REIT One Wilshire LP and CoreSite One Wilshire, L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of January 9, 2013.(10)

10.19





Fifth Amendment to Lease between GI TC One Wilshire, LLC (formerly known as Hines REIT One Wilshire LP) and CoreSite One Wilshire, L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of May 29, 2015.(15)


10.19

Form of Restricted Stock Agreement.(3)*

10.20



10.20



Form of Restricted Unit Agreement.(1)*

10.21



10.21



Form of Management Rights Agreement.(1)*

10.22



10.22



CoreSite Realty Corporation and CoreSite, L.P. Senior Management Severance and Change in Control Program.(1)*

10.23



10.23

CoreSite Realty Corporation Non-Employee Director Compensation Policy.(1)*

10.24



Employment Agreement between CoreSite L.L.C and Jeffrey S. Finnin, dated as of January 4, 2011.(4)*

10.25



10.24



Employment Agreement between CoreSite L.L.C. and Derek McCandless, dated as of February 7, 2011.(5)*

10.26



10.25



Employment Agreement between CoreSite L.L.C. and Jarrett Appleby,Steve Smith, dated as of April 6, 2012.(7)20, 2015.(11)*

10.27



10.26



SecondThird Amended and Restated Credit Agreement, among CoreSite, L.P., as parent borrower, CoreSite Real Estate 70 Innerbelt, L.L.C., CoreSite Real Estate 900 N. Alameda, L.L.C., CoreSite Real Estate 2901 Coronado, L.L.C., CoreSite Real Estate 1656 McCarthy, L.L.C., CoreSite Real Estate 427 S. LaSalle, L.L.C., CoreSite Coronado Stender, L.L.C., CoreSite Real Estate 12100 Sunrise Valley Drive, L.L.C., CoreSite Real Estate 2115 NW 22nd22nd Street, L.L.C., CoreSite One Wilshire, L.L.C. and CoreSite One Wilshire,Real Estate 55 S. Market Street, L.L.C., as subsidiary borrowers, Keybank National Association, the other lenders party thereto and other lenders that may become parties thereto, Keybank National Association, as agent, Regions Bank and TD Securities (USA) LLC, as documentation agent,co-documentation agents, RBC Capital Markets, LLC, as syndication agent, and Keybanc Capital Markets, Regions Bank andCapital Markets, RBC Capital Markets, LLC and TD Securities (USA) LLC as joint lead arrangers and joint book managers, dated as of January 3. 2013.June 24, 2015.(6)

12.1



10.27

Statement


Joinder Agreement, dated as of Computation of Ratios

June 28, 2013, among CoreSite, L.P., a Delaware limited partnership, the subsidiary borrowers party thereto, Toronto Dominion (Texas) LLC and KeyBank National Association, as administrative agent for the lenders thereunder.(13)

76



Table of Contents

21.1

Exhibit
Number		Description
10.28Joinder Agreement, dated as of June 28, 2013, among CoreSite, L.P., a Delaware limited partnership, the subsidiary borrowers party thereto, Wells Fargo Bank, National Association and KeyBank National Association, as administrative agent for the lenders thereunder.(13)


10.29

2015 Executive Short-Term Incentive Plan.(11)*


10.30

Term Loan Agreement, among CoreSite, L.P., as parent borrower, the subsidiary borrowers, Royal Bank of Canada, the other lenders party thereto and other lenders that may become parties thereto, Royal Bank of Canada, as administrative agent, Regions Capital Markets, as syndication agent, and RBC Capital Markets and Regions Capital Markets as joint lead arrangers and joint book managers, dated as of January 31, 2014.(14)


10.31

First Amendment to Term Loan Agreement, among CoreSite, L.P., as parent borrower, the subsidiary borrowers, Royal Bank of Canada, as administrative agent, and the other lenders party thereto, dated as of June 25, 2015.(6)


10.32

Amended and Restated Non-Employee Director Compensation Policy.


12.1

Computation of Ratio of Earnings to Fixed Charges.


12.2

Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.


21.1

Subsidiaries of CoreSite Realty Corporation.

23.1



23.1



Consent of KPMG LLP.

31.1



31.1



Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes—OxleySarbanes-Oxley Act of 2002.

31.2



31.2



Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes—OxleySarbanes-Oxley Act of 2002.

32.1



32.1



Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2



32.2



Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



101. INS



XBRL Instance Document**

Document.



101. SCH



XBRL Taxonomy Extension Schema Document**

Document.

101.CAL



101.CAL



XBRL Taxonomy Extension Calculation Linkbase Document**

Document.

101.LAB



101.LAB



XBRL Taxonomy Extension Label Linkbase Document**

Document.

101.PRE



101.PRE



XBRL Taxonomy Extension Presentation Linkbase Document**

Document.

101.DEF



101.DEF



XBRL Taxonomy Extension Definition Linkbase Document**

Document.
*
Represents management contract or compensatory plan or agreement.

(1)
Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(2)
Incorporated by reference to our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(3)
Incorporated by reference to our Current Report on Form 8-K filed on October 1, 2010.

Table of Contents

(4)
Incorporated by reference to our Current Report on Form 8-K filed on January 6, 2011.

(5)
Incorporated by reference to our Current Report on Form 8-K filed on February 11, 2011.

(6)
Incorporated by reference to our Current Report on Form 8-K filed on June 25, 2015.

(7)
Incorporated by reference to our Current Report on Form 8-K filed April 10, 2012.

(8)
Incorporated by reference to our Current Report on Form 8-K filed on December 18, 2012.

(9)
Incorporated by reference to our Current Report on Form 8-K filed on November 2, 2012.

(10)
Incorporated by reference to our Current Report on Form 8-K filed on January 14, 2013.

(11)
Incorporated by reference to our Quarterly Report on Form 10-Q filed on April 24, 2015.

(12)
Incorporated by reference to our Current Report on Form 8-K filed on May 24, 2013.

(13)
Incorporated by reference to our Current Report on Form 8-K filed on June 28, 2013.

(14)
Incorporated by reference to our Current Report on Form 8-K filed on February 5, 2014.

(15)
Incorporated by reference to our Current Report on Form 8-K filed on June 4, 2015.

*

Represents management contract or compensatory plan or agreement.

**

Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1)

Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(2)

Incorporated by reference to our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(3)

Incorporated by reference to our Current Report on Form 8-K filed on October 1, 2010.

(4)

Incorporated by reference to our Current Report on Form 8-K filed on January 6, 2011.

(5)

Incorporated by reference to our Current Report on Form 8-K filed on February 11, 2011.

(6)  

Incorporated by reference to our Current Report on Form 8-K filed on January 7, 2013.

(7)

Incorporated by reference to our Current Report on Form 8-K filed April 10, 2012.

(8)

Incorporated by reference to our Current Report on Form 8-K filed on December 18, 2012.

(9)

Incorporated by reference to our Current Report on Form 8-K filed on November 2, 2012.

(10)

Incorporated by reference to our Current Report on Form 8-K filed on January 14, 2012.


77


Table of Contents

SIGNATURES
SIGNATURES

        

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: February 25, 201312, 2016

CORESITE REALTY CORPORATION

By:

By:

/s/ THOMAS M. RAY

Thomas M. Ray

Thomas M. Ray

President and Chief Executive Officer

        

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

Title

Date






/s/ THOMAS M. RAY

Thomas M. Ray

President and Chief Executive Officer

Thomas M. Ray


(Principal Executive Officer) and Director

February 25, 2013

12, 2016


/s/ JEFFREY S. FINNIN

Jeffrey S. Finnin


Jeffrey S. Finnin


Chief Financial Officer (Principal Financial and Accounting Officer)



February 25, 2013

12, 2016


/s/ ROBERT G. STUCKEY

Robert G. Stuckey


Robert G. Stuckey


Chairman of the Board of Directors



February 25, 2013

12, 2016


/s/ JAMES A. ATTWOOD, JR.

James A. Attwood, Jr.



Director



February 12, 2016

James A. Attwood, Jr.


/s/ MICHAEL KOEHLER
Michael Koehler



Director



February 25, 2013

12, 2016


/s/ PAUL E. SZUREK

Michael Koehler

Michael Koehler

Director

February 25, 2013

/s/Paul E. Szurek



Director



February 12, 2016

Paul E. Szurek

Director

February 25, 2013


/s/ J. DAVID THOMPSON

J. David Thompson



Director



February 12, 2016

J. David Thompson

Director

February 25, 2013


/s/ DAVID A. WILSON

David A. Wilson



Director


David A. Wilson

Director


February 25, 2013

12, 2016


78


Table of Contents


INDEX TO EXHIBITS

Exhibit

Exhibit
Number

Description

3.1

3.1

Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)

3.2



3.2



Articles Supplementary of CoreSite Realty Corporation – Corporation—7.25% Series A Cumulative Redeemable Preferred Stock.(8)

3.3



3.3



Bylaws of CoreSite Realty Corporation.(1)

4.1



4.1



Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(2)

10.1



10.1



Amended and Restated Agreement of Limited Partnership of CoreSite, L.P., dated as of December 12, 2012.(8)

10.2



10.2



2010 Equity Incentive Award Plan.(1)Plan (As Amended and Restated).(12)*

10.3



10.3



Form of 2010 Equity Incentive Award Plan Restricted Stock Unit Award Agreement.(1)*

10.4



10.4



Form of 2010 Equity Incentive Award Plan Stock Option Agreement.(1)*

10.5



10.5



Form of 2010 Equity Incentive Award Plan Restricted Stock Award Agreement.(1)*

10.6



10.6



Form of 2010 Equity Incentive Award Plan Restricted Stock Unit Agreement for Non-Employee Directors.(1)*

10.7



10.7



Employment Agreement between CoreSite, L.L.C. and Thomas M. Ray, dated as of August 1, 2010.(1)*

10.8



10.8



Form of Indemnification Agreement for directors and officers of CoreSite Realty Corporation.(1)*

10.9



10.9



Registration Rights Agreement among CoreSite Realty Corporation and the holders listed therein, dated as of September 28, 2010.(3)

10.10



10.10



Tax Protection Agreement among CoreSite Realty Corporation and the persons named therein, dated as of September 28, 2010.(3)

10.11



10.11



Contribution Agreement among CoreSite Realty Corporation, CoreSite, L.P. and the persons named therein, dated as of September 28, 2010.(3)

10.12



10.12



Lease between Hines REIT One Wilshire Services, Inc. and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)

10.13



10.13



First Amendment to Lease between Hines REIT One Wilshire Services, Inc. and CoreSite One Wilshire, L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of January 9, 2013.(10)

10.14



10.14



Lease between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)

10.15



10.15



First Amendment to Lease between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of May 1, 2008.(1)

10.16



10.16



Second Amendment to Lease between Hines REIT One Wilshire LP and CoreSite One Wilshire, L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of November 5, 2009.(9)

Table of Contents

Exhibit
Number		Description

10.17

10.17

Third Amendment to Lease between Hines REIT One Wilshire LP and CoreSite One Wilshire L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of June 15, 2011 (9)2011(9).

10.18



10.18



Fourth Amendment to Lease between Hines REIT One Wilshire LP and CoreSite One Wilshire, L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of January 9, 2013.(10)

10.19





Fifth Amendment to Lease between GI TC One Wilshire, LLC (formerly known as Hines REIT One Wilshire LP) and CoreSite One Wilshire, L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of May 29, 2015.(15)


10.19

Form of Restricted Stock Agreement.(3)*

10.20



10.20



Form of Restricted Unit Agreement.(1)*

10.21



10.21



Form of Management Rights Agreement.(1)*

10.22



10.22



CoreSite Realty Corporation and CoreSite, L.P. Senior Management Severance and Change in Control Program.(1)*

10.23



10.23

CoreSite Realty Corporation Non-Employee Director Compensation Policy.(1)*

10.24



Employment Agreement between CoreSite L.L.C and Jeffrey S. Finnin, dated as of January 4, 2011.(4)*

10.25



10.24



Employment Agreement between CoreSite L.L.C. and Derek McCandless, dated as of February 7, 2011.(5)*

10.26



10.25



Employment Agreement between CoreSite L.L.C. and Jarrett Appleby,Steve Smith, dated as of April 6, 2012.(7)20, 2015.(11)*

10.27



10.26



SecondThird Amended and Restated Credit Agreement, among CoreSite, L.P., as parent borrower, CoreSite Real Estate 70 Innerbelt, L.L.C., CoreSite Real Estate 900 N. Alameda, L.L.C., CoreSite Real Estate 2901 Coronado, L.L.C., CoreSite Real Estate 1656 McCarthy, L.L.C., CoreSite Real Estate 427 S. LaSalle, L.L.C., CoreSite Coronado Stender, L.L.C., CoreSite Real Estate 12100 Sunrise Valley Drive, L.L.C., CoreSite Real Estate 2115 NW 22nd22nd Street, L.L.C., CoreSite One Wilshire, L.L.C. and CoreSite One Wilshire,Real Estate 55 S. Market Street, L.L.C., as subsidiary borrowers, Keybank National Association, the other lenders party thereto and other lenders that may become parties thereto, Keybank National Association, as agent, Regions Bank and TD Securities (USA) LLC, as documentation agent,co-documentation agents, RBC Capital Markets, LLC, as syndication agent, and Keybanc Capital Markets, Regions Bank andCapital Markets, RBC Capital Markets, LLC and TD Securities (USA) LLC as joint lead arrangers and joint book managers, dated as of January 3. 2013.June 24, 2015.(6)

12.1



10.27

Statement


Joinder Agreement, dated as of June 28, 2013, among CoreSite, L.P., a Delaware limited partnership, the subsidiary borrowers party thereto, Toronto Dominion (Texas) LLC and KeyBank National Association, as administrative agent for the lenders thereunder.(13)


10.28

Joinder Agreement, dated as of June 28, 2013, among CoreSite, L.P., a Delaware limited partnership, the subsidiary borrowers party thereto, Wells Fargo Bank, National Association and KeyBank National Association, as administrative agent for the lenders thereunder.(13)


10.29

2015 Executive Short-Term Incentive Plan.(11)*

Table of Contents

Exhibit
Number		Description
10.30Term Loan Agreement, among CoreSite, L.P., as parent borrower, the subsidiary borrowers, Royal Bank of Canada, the other lenders party thereto and other lenders that may become parties thereto, Royal Bank of Canada, as administrative agent, Regions Capital Markets, as syndication agent, and RBC Capital Markets and Regions Capital Markets as joint lead arrangers and joint book managers, dated as of January 31, 2014.(14)


10.31

First Amendment to Term Loan Agreement, among CoreSite, L.P., as parent borrower, the subsidiary borrowers, Royal Bank of Canada, as administrative agent, and the other lenders party thereto, dated as of June 25, 2015.(6)


10.32

Amended and Restated Non-Employee Director Compensation Policy.


12.1

Computation of Ratios

Ratio of Earnings to Fixed Charges.

21.1



12.2



Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends.


21.1

Subsidiaries of CoreSite Realty Corporation.

23.1



23.1



Consent of KPMG LLP.

31.1



31.1



Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes—OxleySarbanes-Oxley Act of 2002.

31.2



31.2



Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes—OxleySarbanes-Oxley Act of 2002.

32.1



32.1



Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2



32.2



Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



101. INS

XBRL Instance Document.


101. SCH

XBRL Taxonomy Extension Schema Document.


101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document.


101.LAB

XBRL Taxonomy Extension Label Linkbase Document.


101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document.


101.DEF

XBRL Taxonomy Extension Definition Linkbase Document.

79

*
Represents management contract or compensatory plan or agreement.

(1)
Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(2)
Incorporated by reference to our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(3)
Incorporated by reference to our Current Report on Form 8-K filed on October 1, 2010.

(4)
Incorporated by reference to our Current Report on Form 8-K filed on January 6, 2011.

(5)
Incorporated by reference to our Current Report on Form 8-K filed on February 11, 2011.

(6)
Incorporated by reference to our Current Report on Form 8-K filed on June 25, 2015.


Table of Contents

101. INS

XBRL Instance Document**

101. SCH

XBRL Taxonomy Extension Schema Document**

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document**

101.LAB

XBRL Taxonomy Extension Label Linkbase Document**

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document**

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document**

(7)
Incorporated by reference to our Current Report on Form 8-K filed April 10, 2012.

(8)
Incorporated by reference to our Current Report on Form 8-K filed on December 18, 2012.

(9)
Incorporated by reference to our Current Report on Form 8-K filed on November 2, 2012.

(10)
Incorporated by reference to our Current Report on Form 8-K filed on January 14, 2013.

(11)
Incorporated by reference to our Quarterly Report on Form 10-Q filed on April 24, 2015.

(12)
Incorporated by reference to our Current Report on Form 8-K filed on May 24, 2013.

(13)
Incorporated by reference to our Current Report on Form 8-K filed on June 28, 2013.

(14)
Incorporated by reference to our Current Report on Form 8-K filed on February 5, 2014.

(15)
Incorporated by reference to our Current Report on Form 8-K filed on June 4, 2015.

*

Represents management contract or compensatory plan or agreement.

**

Pursuant to Rule 406T of Regulation S-T, the information in Exhibit 101 is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

(1)

Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(2)

Incorporated by reference to our Post-Effective Amendment to our Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.

(3)

Incorporated by reference to our Current Report on Form 8-K filed on October 1, 2010.

(4)

Incorporated by reference to our Current Report on Form 8-K filed on January 6, 2011.

(5)

Incorporated by reference to our Current Report on Form 8-K filed on February 11, 2011.

(6)

Incorporated by reference to our Current Report on Form 8-K filed on January 7, 2013.

(7)

Incorporated by reference to our Current Report on Form 8-K filed April 10, 2012.

(8)

Incorporated by reference to our Current Report on Form 8-K filed on December 18, 2012.

(9)

Incorporated by reference to our Current Report on Form 8-K filed on November 2, 2012.

(10)

Incorporated by reference to our Current Report on Form 8-K filed on January 14, 2013.

80