UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2019
or
☐
TRANSITION 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
(State or other jurisdiction of
incorporation or organization)
1001 17th Street, Suite 500
Denver, CO
(Address of principal executive offices)
27-1925611
(I.R.S. Employer
Identification No.)
80202
(Zip Code)
(866) 777-2673
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value per share
Trading Symbol
COR
Name of each exchange on which registered
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 ☒ No ☐
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 ☐ No ☒
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒
Accelerated Filer ☐
Non-accelerated Filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of common equity held by non-affiliates of the registrant was approximately $3,591.8 million as of June 28, 2019, the last
trading day of the registrant’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 10% of the registrant’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 5, 2020, there were 37,694,718 shares of the registrant’s Common Stock, $0.01 par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed in conjunction with the registrant’s 2020 Annual Meeting of Stockholders, which is
expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2019, are incorporated by reference in Part III of this report.
Table of Contents
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . .
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . . .
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16. FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit 4.3
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
Page
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4
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88
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2
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (this “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”), namely Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the PSLRA and include this statement for purposes of complying
with these safe harbor provisions.
In particular, statements pertaining to our capital resources, portfolio performance, business strategies and
results of operations contain forward-looking statements. You can identify forward-looking statements by the use of
forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro
forma” or “anticipates” or the negative of these words and phrases or similar words or phrases that are predictions of or
indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking
statements by discussions of strategy, plans or intentions. Such statements are subject to risks, uncertainties and
assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or
projected. The following factors, among others, could cause actual results and future events to differ materially from
those set forth or contemplated in the forward-looking statements: (i) the geographic concentration of our data centers in
certain markets and any adverse developments in local economic conditions or the level of supply of or 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, including
indirect competition from cloud service providers, 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 develop and lease available space to existing or new customers; (viii) our
failure to obtain necessary outside financing; (ix) our ability to service existing debt; (x) our failure to qualify or
maintain our status as a real estate investment trust (“REIT”); (xi) financial market fluctuations; (xii) changes in real
estate and zoning laws and increases in real estate taxes; (xiii) delays or disruptions in third-party network connectivity;
(xiv) service failures or price increases by third party power suppliers; (xv) inability to renew net leases on the data
center properties we lease; and (xvi) other factors affecting the real estate or technology industries 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” 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,” “CoreSite” and “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 to
which we refer to as “our Operating Partnership.”
3
ITEM 1. BUSINESS
The Company
PART I
We deliver secure, reliable, high-performance data center and interconnection solutions to a growing customer
ecosystem across eight key North American communication markets. More than 1,350 of the world’s leading
enterprises, network operators, cloud providers, and supporting service providers choose CoreSite to connect, protect
and optimize their performance-sensitive data, applications and computing workloads.
Our Business
We are a fully integrated, self-administered, and self-managed REIT for federal income tax purposes and we
conduct certain activities through our taxable REIT subsidiaries. Through our controlling interest in CoreSite, L.P., a
Delaware limited partnership, our “Operating Partnership,” we are engaged in the business of ownership, acquisition,
construction and operation of strategically located data centers in some of the largest and fastest growing data center
markets in the United States, including the San Francisco Bay area, Los Angeles, the Northern Virginia area (including
Washington D.C.), the New York area, Boston, Chicago, Denver and Miami. We are a Maryland corporation organized
in 2010.
Our 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,
cloud companies and other service providers to exchange traffic and interoperate with each other. Our data centers
feature advanced reliable and efficient power, cooling and security systems, and many are points of network
interconnection that provide the evolved ecosystems our customers need to meet their own competitive challenges,
digital transformations, and other business goals. We believe we have the flexibility and scalability to satisfy the full
spectrum of our 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. Our data center campuses are
particularly suitable for customers serving consumers and businesses with low-latency digital products in our major
metro markets as well as customers deploying hybrid-cloud / multi-cloud information technology architectures.
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, and since then we have continued to acquire, develop and operate these types
of data center facilities. Our properties are self-managed, including construction project management in connection with
our development initiatives. As of December 31, 2019, our property portfolio included 23 operating data center facilities,
office and light-industrial space and multiple development projects and space, which collectively comprise, when fully
built-out, over 4.6 million net rentable square feet (“NRSF”), of which over 2.6 million NRSF is existing operating data
center space.
Recent Developments
On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our
Santa Clara campus for a purchase price of $26 million. We expect to develop an approximately 200,000 NRSF turn-key
data center building on the acquired land parcel, which we refer to as SV9, as the existing office tenants vacate upon
expiration of their leases and upon the receipt of necessary entitlements.
Our Competitive Strengths
We believe the following key competitive strengths position us to compete, efficiently scale our business,
capitalize on the demand for data center space and interconnection services, and thereby grow our cash flow.
Secure, Reliable, and Compliant. We help businesses protect mission-critical data, performance sensitive
applications and information technology (“IT”) infrastructure by delivering secure, reliable, and compliant data center
4
solutions. Our data centers feature advanced efficient power and cooling infrastructure to support our customers’ IT
infrastructures with additional power capacity to support continued growth. We provide twenty-four-hours-a-day,
seven-days-a-week in-house data center operations with customizable security features. We also provide the
infrastructure and physical security required to support many of our customers’ information, data, and security
compliance needs across all of our properties.
High Performance Interconnection. We offer cloud-enabled, network rich data center campuses with over
28,000 interconnections across our portfolio. Our customers have direct access to over 450 carriers and Internet Service
Providers (“ISPs”) and over 325 leading cloud and IT service providers, including 10 cloud on-ramps deployed on-site
in our campuses currently, which we expect to increase in 2020. In addition to standard interconnection offerings, we
also operate the CoreSite Open Cloud Exchange™, and the Any2 Exchange for Internet Peering, the second largest
peering exchange in the U.S. The diverse network and cloud connectivity options at many of our data centers provide us
with a competitive advantage by creating an ideal environment for enterprises to build holistic, streamlined hybrid and
multi-cloud architectures. 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, while increasing their performance, by directly connecting to service providers in the same data center in a
cost effective manner.
Scalable. Across 23 operating data centers in eight key North American markets, we lease space to enterprises,
cloud and IT service providers, and network and mobility providers. 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
top data center markets in the U.S. with the ability to meet customers’ growing capacity requirements within those
markets.
We have the ability to increase our occupied data center square footage by approximately 2,053,000 NRSF, or
93%, through leasing our 409,000 NRSF of unoccupied space and the development of 196,000 NRSF of space under
construction and approximately 1,448,000 NRSF at multiple facilities that are held for future development based on
market supply and demand, in each case, as of December 31, 2019.
High-Quality Customer Experience. We believe our 464 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 our customers. Our leasing and
sales professionals can develop complex data center solutions for the most demanding customer requirements and our
experienced and committed operations and facilities personnel are available for extensive management support. We
believe one of the data points validating our customer satisfaction is indicated by the 85% of annualized rent signed
during the year ended December 31, 2019, which came from existing customers.
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 concentration 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 the San Francisco Bay area, Los Angeles, the
Northern Virginia area (including Washington D.C.), the New York area, Boston, Chicago, Denver and Miami. 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.
Diversified Customer Base. We have a diverse, global customer base, which we believe is a reflection of our
strong reputation and proven track record, as well as our customers’ trust in our ability to house their mission-critical
applications and vital communications technology. Our diverse customer base spans many industries across eight key
North America markets. In addition to geographic markets, we group our customers into the following industry verticals:
• Enterprises: digital content and multimedia, systems integrators and managed service providers (“SI &
MSP”), financial, healthcare, education, government, manufacturing and professional services;
• Cloud and IT Service Providers; and
5
• Networks and Mobility: domestic and international telecommunications carriers, subsea cables, ISPs and
Content Delivery Networks (“CDNs”).
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. Key components of our strategy include the following:
Increase Cash Flow from In-Place Data Center Space. We actively manage and lease our properties to
increase cash flow by:
• Leasing Available Space. We have the ability to increase both our revenue and our revenue per square foot
by leasing additional space and power services to new and existing data center customers. As of
December 31, 2019, our existing data center facilities had approximately 367,000 NRSF of data center
space available to lease, or 14.0% of our current operating data center portfolio. We believe our available
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 deploy in our data center facilities, it
benefits their business partners and customers to deploy 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.
Capitalize on Embedded Expansion Opportunities. We plan to grow by developing new secure, reliable and
high-performance data center space. Our development opportunities include 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. Including the space currently under construction,
pre-construction projects, and space and land targeted for future development at December 31, 2019, we own land and
buildings sufficient to develop approximately 1,644,000 NRSF of data center space. The following table summarizes the
NRSF under construction and NRSF held for development throughout our portfolio, each as of December 31, 2019:
Facilities
San Francisco Bay
Development Opportunities (in NRSF)
Held for
Under
Construction(1)
Development(2)
Total
SV8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SV9(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco Bay Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
One Wilshire campus
LA1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LA3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Los Angeles Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northern Virginia
Reston Campus Expansion(4) . . . . . . . . . . . . . . . . . . . . . . . . . .
New York
54,056
—
54,056
—
51,000
51,000
—
200,000
200,000
10,352
109,000
119,352
54,056
200,000
254,056
10,352
160,000
170,352
—
809,742
809,742
NY2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,589
81,799
116,388
Boston
BO1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
110,985
110,985
Chicago
CH2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56,000
113,000
169,000
Miami
MI1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Facilities(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
195,645
13,154
1,448,032
13,154
1,643,677
6
(1) Represents NRSF for which substantial construction activities are ongoing to prepare the property for its intended
use following development. The NRSF reflects management’s estimate of engineering drawings and required
support space and is subject to change based on final demising of space.
(2) Represents estimated incremental data center capacity currently vacant in existing facilities or on vacant land in our
portfolio that requires significant capital investment in order to develop into data center facilities.
(3) On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our
Santa Clara campus for a purchase price of $26 million. We expect to develop an approximately 200,000 NRSF
turn-key data center building on the acquired land parcel, which we refer to as SV9. We began pre-construction
activities, including environmental permitting and other processes, and we anticipate commencing development as
the existing office tenants vacate upon expiration of their leases and upon receipt of the necessary entitlements.
(4) The NRSF for these facilities reflect management’s estimates based on our current construction plans and
expectations regarding entitlements. These estimates are subject to change based on current economic conditions,
final zoning approvals, and the supply and demand dynamics of the market.
(5) In addition to our development opportunities disclosed within this table, we have land adjacent to our NY2 facility,
in the form of an existing parking lot. By utilizing this land, we believe that we could develop 100,000 NRSF on our
available acreage in Secaucus, New Jersey, upon receipt of necessary entitlements.
Selectively Pursue Acquisition and Development Opportunities in New and Existing Markets. We
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 also intend to
continue to implement the “hub-and-spoke strategy” that we have deployed in our four largest markets, namely Los
Angeles, New York, and the San Francisco Bay and Northern Virginia areas. 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 strategy,” we typically rely on third-party providers of network connectivity to
establish highly reliable network connectivity within and between facilities. Our two ground-up development projects,
CH2 and LA3, and our SV9 held-for-development project, when constructed, will be connected via dark fiber to their
respective campus hubs.
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’ planned growth. We historically have been successful in leveraging this market visibility to expand our
footprint and customer base in our 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, health care, educational institutions and government
agencies.
7
Our Portfolio
As of December 31, 2019, our property portfolio included 23 operating data center facilities, office and
light-industrial space and multiple potential development projects that collectively comprise over 4.6 million NRSF, of
which over 2.6 million NRSF is existing data center space. The approximately 1.6 million NRSF of development
capacity includes space available for development and construction of new data center facilities. We expect that this
development potential plus any incremental investment into existing or new markets will enable us to accommodate
existing and future customer demand and position us to continue to increase our operating cash flows. The following
table provides an overview of our property portfolio as of December 31, 2019:
Data Center Operating NRSF (1)
Pre-Stabilized (2)
Stabilized
Total
Development
NRSF (3)
Total NRSF
Total
Total
Portfolio
Market/Facilities
San Francisco Bay
Annualized
Rent ($000)(4) Total
Percent
Occupied(5)
Total
Percent
Occupied(5)
Total
Percent
Occupied(5)
SV1 . . . . . . . . . . . . . . . . . . . $
SV2 . . . . . . . . . . . . . . . . . . .
Santa Clara campus(6)
(SV3-SV9) . . . . . . . . . . . . .
San Francisco Bay Total. . . . . .
Los Angeles
One Wilshire campus
LA1* . . . . . . . . . . . . . . . . . .
LA2 . . . . . . . . . . . . . . . . . . .
LA3 . . . . . . . . . . . . . . . . . . .
LA4* . . . . . . . . . . . . . . . . . .
Los Angeles Total . . . . . . . . . .
Northern Virginia
VA1 . . . . . . . . . . . . . . . . . . .
VA2 . . . . . . . . . . . . . . . . . . .
VA3 . . . . . . . . . . . . . . . . . . .
DC1* . . . . . . . . . . . . . . . . . .
DC2* . . . . . . . . . . . . . . . . . .
Reston Campus Expansion(7) . .
Northern Virginia Total . . . . . .
New York
NY1* . . . . . . . . . . . . . . . . . .
NY2 . . . . . . . . . . . . . . . . . . .
New York Total . . . . . . . . . . . .
Chicago
CH1 . . . . . . . . . . . . . . . . . . .
CH2 . . . . . . . . . . . . . . . . . . .
Chicago Total . . . . . . . . . . . . .
Boston
5,994
7,619
88,251
76,676
96,575
110,188
723,181
888,108
76.3 %
86.3
96.9
93.9
—
—
—
—
— %
—
88,251
76,676
76.3 %
86.3
—
—
88,251
76,676
—
—
723,181
888,108
96.9
93.9
254,056
254,056
977,237
1,142,164
30,653
50,578
—
1,209
82,440
25,798
22,560
3,398
3,043
175
—
54,974
145,776
384,965
—
21,850
552,591
201,719
188,446
52,758
22,137
—
—
465,060
6,098
16,232
22,330
48,404
101,742
150,146
16,348
—
16,348
178,407
—
178,407
94.6
92.0
—
98.2
92.9
81.0
99.5
100.0
75.1
—
—
90.4
93.8
92.9
93.2
81.4
—
81.4
17,238
39,925
—
—
57,163
—
—
77,646
—
24,563
—
102,209
—
18,121
18,121
—
—
—
1.6
23.6
—
—
17.0
—
—
14.0
—
4.4
—
11.7
—
18.5
18.5
—
—
—
163,014
424,890
—
21,850
609,754
201,719
188,446
130,404
22,137
24,563
—
567,269
48,404
119,863
168,267
178,407
—
178,407
84.7
85.5
—
98.2
85.8
81.0
99.5
48.8
75.1
4.4
—
76.2
93.8
81.6
85.1
81.4
—
81.4
10,352
—
160,000
—
170,352
—
—
—
—
—
809,742
809,742
—
116,388
116,388
—
169,000
169,000
173,366
424,890
160,000
21,850
780,106
201,719
188,446
130,404
22,137
24,563
809,742
1,377,011
48,404
236,251
284,655
178,407
169,000
347,407
BO1 . . . . . . . . . . . . . . . . . . .
15,360
122,730
75.2
19,961
—
142,691
64.7
110,985
253,676
Denver
DE1* . . . . . . . . . . . . . . . . . .
DE2* . . . . . . . . . . . . . . . . . .
Denver Total . . . . . . . . . . . . . .
Miami
4,248
471
4,719
14,154
5,140
19,294
88.7
74.0
84.8
15,630
—
15,630
35.6
—
35.6
29,784
5,140
34,924
60.8
74.0
62.8
—
—
—
29,784
5,140
34,924
MI1 . . . . . . . . . . . . . . . . . . .
Total Data Center Facilities . . . $
1,537
307,896
30,176
2,406,512
—
60.8
90.6 % 213,084
—
30,176
14.3 % 2,619,596
60.8
13,154
84.4 % 1,643,677
43,330
4,263,273
Office and Light-Industrial(7) . . . .
Reston Office and Light-
Industrial(8) . . . . . . . . . . . . . .
8,655
364,941
78.0
1,186
82,801
100.0
—
—
—
364,941
78.0
—
364,941
—
82,801
100.0
(82,801)
—
Total Portfolio . . . . . . . . . . . . . $
317,737
2,854,254
89.3 % 213,084
14.3 % 3,067,338
84.0 % 1,560,876
4,628,214
*
Indicates properties in which we hold a leasehold interest.
(1) Represents NRSF at each operating facility that is currently occupied or readily available for lease as data center
space and pre-stabilized data center space. Both occupied and available data center NRSF includes a factor based on
management’s estimate to account for a customer’s proportionate share of the required data center support space
(such as the mechanical, telecommunications and utility rooms) and building common areas, which may be updated
on a periodic basis to reflect the most current build-out of our properties. Operating data center NRSF may require
investment of Deferred Expansion Capital (see definition on page 11).
(2) Pre-stabilized NRSF represents projects or 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.
8
(3) Represents incremental data center capacity currently vacant in existing facilities in our portfolio that requires
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 and
NRSF in pre-construction, which are projects in the design and permitting stages. The 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, 2019,
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 $323.6 million as of December 31, 2019, which
includes $5.8 million in operating expense reimbursements under modified gross and triple-net leases.
(5) Includes customer leases that have commenced and are occupied as of December 31, 2019. The percent occupied is
determined based on occupied square feet as a proportion of total operating NRSF as of December 31, 2019. The
percent occupied for stabilized data center space would have been 91.4%, rather than 90.6%, if all leases signed in
the current and prior periods had commenced. The percent occupied for our total portfolio, including stabilized data
center space, pre-stabilized space and office and light-industrial space, would have been 85.5%, rather than 84.0%,
if all leases signed in current and prior periods had commenced.
(6) On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our
Santa Clara campus for a purchase price of $26 million. We expect to develop a turn-key data center building on the
acquired land parcel, which we refer to as SV9, as the existing office tenants vacate upon expiration of their existing
leases and upon receipt of the necessary entitlements. Included within our Santa Clara campus development NRSF
is 200,000 NRSF that is being held for development related to SV9.
(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.
(8) Included within our Reston Campus Expansion held for development space is 82,801 NRSF that is currently
operating as office and light-industrial space.
9
“Same-Store” statistics are based on space within each data center facility that was leased or available to be
leased as of December 31, 2017, excluding space for which development was completed and became available to be
leased after December 31, 2017. 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, 2019, Same-Store operating statistics. For
comparison purposes, the operating activity totals as of December 31, 2018, and 2017, for this space are provided at the
bottom of this table.
Market/Facilities
San Francisco Bay
Same-Store Property Portfolio (in NRSF)
Office and Light-Industrial
Data Center
Annualized
Rent ($000)(1) Total
Percent
Occupied(2)
Percent
Total
Occupied(2) Total
Total
Percent
Occupied(2)
SV1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
SV2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Santa Clara campus (SV3 - SV7) . . . . . . . . . . . . . . . . . . .
San Francisco Bay Total. . . . . . . . . . . . . . . . . . . . . . . . . .
Los Angeles
One Wilshire campus
LA1* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LA2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Los Angeles Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northern Virginia
VA1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VA2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VA3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DC1* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reston Campus Expansion . . . . . . . . . . . . . . . . . . . . . . .
Northern Virginia Total . . . . . . . . . . . . . . . . . . . . . . . . . .
New York
NY1* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NY2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago
11,967
7,619
76,595
96,181
88,251
76,676
615,500
780,427
76.3 %
86.3
96.3
93.1
231,919
—
1,176
233,095
83.1 %
—
87.8
83.1
320,170
76,676
616,676
1,013,522
81.2 %
86.3
96.3
90.8
30,362
36,213
66,575
27,087
22,603
857
3,043
1,186
54,776
6,112
16,490
22,602
139,053
309,437
448,490
201,719
188,446
52,758
22,137
—
465,060
48,404
101,742
150,146
94.2
90.0
91.3
81.0
99.5
100.0
75.1
—
90.4
93.8
92.8
93.1
4,373
7,417
11,790
61,050
4,308
—
—
82,801
148,159
209
20,735
20,944
64.7
80.1
74.4
87.8
26.5
—
—
100.0
92.8
100.0
53.6
54.1
143,426
316,854
460,280
262,769
192,754
52,758
22,137
82,801
613,219
48,613
122,477
171,090
93.3
89.8
90.8
82.6
97.9
100.0
75.1
100.0
91.0
93.8
86.1
88.3
CH1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,285
178,407
81.3
4,946
31.3
183,353
79.9
Boston
BO1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,595
122,730
75.2
19,495
53.3
142,225
72.2
Denver
DE1* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DE2* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denver Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miami
2,891
471
3,362
14,154
5,140
19,294
88.7
74.0
84.8
—
—
—
—
—
—
14,154
5,140
19,294
MI1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Facilities at December 31, 2019(3) . . . . . . . . . . . . . . . $
1,564
276,940
30,176
2,194,730
60.8
89.7 %
1,934
440,363
32,110
74.7
82.8 % 2,635,093
Total Facilities at December 31, 2018 . . . . . . . . . . . . . . . . $
283,758
Total Facilities at December 31, 2017 . . . . . . . . . . . . . . . . $
269,173
92.1 %
90.7 %
81.6 %
83.9 %
88.7
74.0
84.8
61.7
88.5 %
90.4 %
89.6 %
*
Indicates properties in which we hold a leasehold interest.
(1) Represents the monthly contractual rent under existing commenced customer leases as of each respective period,
multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent
abatements and excludes power revenue, interconnection revenue and operating expense reimbursement.
(2) Includes customer leases that have commenced and are occupied as of each respective period. The percent occupied
is determined based on occupied square feet as a proportion of total operating NRSF.
(3) The percent occupied for data center space, office and light-industrial space, and total space as of December 31,
2019, would have been 90.6%, 83.2% and 89.3%, respectively, if all leases signed in the current and prior periods
had commenced.
Same-Store annualized rent decreased to $276.9 million at December 31, 2019, compared to $283.8 million at
December 31, 2018. The decrease of $6.8 million is primarily due to the move-out of a customer at our BO1 property
during the year ended December 31, 2019, partially offset by the commencement of new and expansion leases.
10
Capital Expenditures
The following table sets forth information regarding capital expenditures during the year ended December 31,
2019 (in thousands):
Data center expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-recurring investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tenant improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recurring capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
382,761
6,429
4,267
7,404
400,861
Year Ended
December 31, 2019
During the year ended December 31, 2019, we incurred approximately $400.9 million of capital expenditures,
of which approximately $382.8 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 amount of capital we deploy 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 a 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 centers.
During the year ended December 31, 2019, we completed development of 224,000 NRSF comprised of one
computer room at BO1, one computer room at LA1, three computer rooms at LA2, two computer rooms at SV8, and at
VA3 an infrastructure building, a data center core and shell building, and therein one computer room. As of
December 31, 2019, we had ongoing construction projects at CH2, LA3, NY2, and SV8 scheduled to complete
development at various times during the year ending December 31, 2020. The following table sets forth capital
expenditures spent on data center expansion NRSF placed into service or acquired during the year ended December 31,
2019, and under construction as of December 31, 2019:
NRSF
Property
SV8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CH2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VA3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SV9(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NY2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LA3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LA2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
LA1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BO1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Data Center
Expansion
129,364
85,496
54,722
27,614
22,896
19,652
14,003
11,450
9,620
7,944
382,761
Under
Placed into
Service
107,681
—
51,233
—
—
—
28,191
17,238
19,961
—
224,304
Construction(1)
54,056
56,000
—
—
34,589
51,000
—
—
—
—
195,645
(1) Represents NRSF under construction for which substantial activities are ongoing to prepare the property for its
intended use following development and NRSF in pre-construction, which are projects in the design and permitting
stages.
(2) On April 12, 2019, we acquired a 3.8-acre land parcel with a single story office building, located adjacent to our
Santa Clara campus for a purchase price of $26 million. We expect to develop an approximately 200,000 NRSF
turn-key data center building on the acquired land parcel, which we refer to as SV9. We began pre-construction
activities, including environmental permitting and other processes, and we anticipate commencing development as
the existing office tenants vacate upon expiration of their leases and upon receipt of the necessary entitlements.
11
During the year ended December 31, 2019, we incurred approximately $6.4 million in non-recurring
investments, of which $2.5 million was a result of internal IT software development and the remaining $3.9 million was
a result of other non-recurring investments, such as remodel or upgrade projects.
During the year ended December 31, 2019, we incurred approximately $4.3 million in tenant improvements,
which related to tenant-specific power installations at various properties.
During the year ended December 31, 2019, we incurred approximately $7.4 million of recurring capital
expenditures within our portfolio, which included required equipment upgrades at our various facilities that have a future
economic benefit and was offset by a $1.7 million energy efficiency rebate received from the local power utility related
to the replacement of our chiller plant at LA2.
Customer Diversification
The following table sets forth information regarding the ten largest customers in our portfolio based on total
portfolio annualized rent as of December 31, 2019:
CoreSite Vertical Customer Industry
1 Cloud
2 Cloud
3 Enterprise
4 Enterprise
5 Cloud
6 Enterprise
7 Network
8 Enterprise
Public Cloud . . . . . . . . . . . . . . .
Public Cloud . . . . . . . . . . . . . . .
Digital Content . . . . . . . . . . . . .
Travel / Hospitality . . . . . . . . .
Public Cloud . . . . . . . . . . . . . . .
SI & MSP . . . . . . . . . . . . . . . . .
Global Service Provider . . . . .
SI & MSP . . . . . . . . . . . . . . . . .
US National Service
Provider . . . . . . . . . . . . . . . . . .
10 Enterprise
Colocation / Reseller . . . . . . . .
Total/Weighted Average . . . . . . . . . . . . . . . . .
9 Network
Number
of
Total
Percentage
of Total
Occupied Operating
NRSF(2)
Annualized
Rent
($000)(3)
Percentage
of Total
Annualized
Rent(4)
Locations NRSF(1)
8
11
6
3
3
3
8
1
203,876
305,446
119,447
73,158
118,691
62,268
31,962
17,922
6.6 % $ 40,338
18,312
10.0
17,623
3.9
15,277
2.4
13,344
3.9
9,271
2.0
6,442
1.0
5,461
0.6
Weighted
Average
Remaining
Lease
Term in
Months(5)
95
58
36
14
41
6
29
26
12.7 %
5.8
5.5
4.8
4.2
2.9
2.0
1.7
16
5
42,853
35,469
1,011,092
1.4
1.2
5,245
4,594
33.0 % $ 135,907
1.7
1.5
42.8 %
42
7
51
(1) Total occupied NRSF is determined based on contractually leased square feet for leases that have commenced on or
before December 31, 2019. We calculate occupancy based on factors in addition to contractually occupied square
feet, including required data center support space (such as the mechanical, telecommunications and utility rooms)
and building common areas.
(2) Represents the customer’s total occupied square feet divided by the total operating NRSF in the portfolio as of
December 31, 2019.
(3) Represents the monthly contractual rent under existing commenced customer leases as of December 31, 2019,
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 in the portfolio as of
December 31, 2019.
(5) Weighted average based on percentage of total annualized rent expiring calculated as of December 31, 2019.
Lease Expirations
The following summary table sets forth a schedule of the expirations for leases in place as of December 31,
2019, plus unoccupied space, for each of the five full calendar years beginning January 1, 2020, at the properties in our
12
portfolio (excluding space held for development, under construction, or in pre-construction). The information set forth in
the table assumes that customers exercise no renewal options or early termination rights.
Total
Number Operating Percentage
NRSF of
Expiring(1) Leases NRSF
Expiring Operating
of
Leases
of Total Annualized
Rent
($000)(2)
of Total
Annualized
Rent
Rent Per
Leased
NRSF
Percentage Annualized Annualized
Annualized
Rent Per
Leased
Expiration NRSF at
Rent at
($000)(3)
Expiration(4)
—
— $
—
409,180
13.4 % $
—
— % $
— $
Year of Lease Expiration
Unoccupied data center . . . . . . .
Unoccupied office and light-
industrial . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . .
2025-Thereafter . . . . . . . . . . . .
Office and light-industrial (5) . . .
Portfolio Total / Weighted
—
1,300
629
309
71
75
32
140
80,149
610,022
347,782
363,481
192,055
132,940
564,136
367,593
2.6
19.8
11.3
11.9
6.3
4.3
18.4
12.0
—
96,090
56,329
53,872
24,330
16,551
60,724
9,841
—
30.2
17.7
17.0
7.7
5.2
19.1
3.1
—
158
162
148
127
125
108
27
—
96,767
58,033
54,960
26,634
19,201
72,373
10,463
—
159
167
151
139
144
128
28
Average . . . . . . . . . . . . . . . .
2,556 3,067,338
100.0 % $ 317,737
100.0 % $
123 $ 338,431
$
131
(1) Includes leases that upon expiration will automatically be renewed, primarily on a year-to-year 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, 2019, 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.
(3) Represents the final monthly contractual rent under existing customer leases as of December 31, 2019, 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. Leases expiring during
2019 include annualized rent of $8.3 million associated with lease terms currently on a month-to-month basis.
(4) 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.
(5) The occupied office and light-industrial leases are scheduled to expire as follows:
Year
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025-Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total OLI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NRSF of
Expiring
Leases
Annualized
Rent
($000)
37,083
47,501
78,431
140,380
9,190
55,008
367,593
$
$
1,200
1,572
1,470
3,906
218
1,475
9,841
13
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 construction, or in pre-construction) under lease as of
December 31, 2019:
NRSF Under Lease(1)
Unoccupied data center . . . . . . . . . . . . .
Unoccupied office and light-industrial . .
Data center NRSF:
5,000 or less . . . . . . . . . . . . . . . . . . . .
5,001 - 10,000 . . . . . . . . . . . . . . . . . .
10,001 - 25,000 . . . . . . . . . . . . . . . . .
Greater than 25,000 . . . . . . . . . . . . . .
Powered shell . . . . . . . . . . . . . . . . . . . .
Office and light-industrial . . . . . . . . . . .
Portfolio Total . . . . . . . . . . . . . . . . . . .
—
—
2,332
38
21
8
17
140
2,556
Number
of
Leases(2)
Percentage
of All
Leases
Total
Operating
NRSF of
Leases
409,180
80,149
— %
—
91.2
1.5
0.8
0.3
0.7
5.5
100.0 %
814,987
261,469
325,513
385,721
422,726
367,593
3,067,338
Percentage
of Total
Operating
NRSF
Annualized
Rent
($000)(3)
Percentage
of Total
Annualized
Rent
13.4 % $
2.6
—
—
26.5
8.5
10.6
12.6
13.8
12.0
100.0 % $
136,733
43,322
46,667
64,752
16,422
9,841
317,737
— %
—
43.0
13.6
14.7
20.4
5.2
3.1
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 agreement 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, 2019,
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.
Competition
We compete with numerous developers, public and private 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 CyrusOne, Inc., Cyxtera Technologies, Inc., Digital Realty Trust, Inc., Equinix, Inc., Evoque
(formerly AT&T, Inc. Data Centers), Flexential, Internap Network Services Corporation, Quality Technology Services,
RagingWire Data Centers, a NTT Communications company, SABEY Corporation, Stack Infrastructure, Switch, Inc.,
and Zayo 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, ownership of more data centers more broadly distributed geographically, access to less
expensive power, and more robust interconnected hubs in certain geographic markets, 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’ 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 or development, increase the price of these properties and reduce the
demand for data center space in the markets we seek to serve.
14
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” or “commercial facilities” as defined by the ADA. The ADA
requires properties that are places of “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” as well as “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’ fees to private litigants. The obligation to make readily achievable accommodations as 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’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
15
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 Factors—Risks Related to
Our Business and Operations—Environmental problems are possible and can be costly.”
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 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—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” in Item 1A. of this Annual Report.
Employees
As of December 31, 2019, we had 464 full-time and part-time employees, of which 242 employees were
salaried with the remainder paid on an hourly basis. None of our employees is a member of a labor union and we believe
that our relations with employees are good.
Offices
Our corporate offices are located at 1001 17th Street, Suite 500, Denver, CO 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. 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.
16
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. Additional risks and uncertainties of which we are unaware or that we currently deem immaterial also may
become important factors that affect our Company. See “Cautionary Note Regarding Forward-Looking Statements.”
Risks Related to Our Business and Operations
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 of data centers geographically concentrated in the San Francisco Bay area,
Los Angeles, the Northern Virginia area (including Washington D.C.), the New York area, Chicago, Boston, Denver and
Miami. These markets comprised 35.8%, 26.8%, 17.8%, 7.3%, 5.3%, 5.0%, 1.5%, and 0.5%, respectively, of our
annualized data center rent as of December 31, 2019. 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.
We may be vulnerable to physical and electronic security breaches and cyber-attacks 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, among other things, misappropriate our proprietary information and the personal information of our customers
and employees, cause interruptions or malfunctions in our or our customers’ operations, cause delays or interruptions to
our ability to meet customer needs, cause us to breach our legal, regulatory or contractual obligations, create an inability
to access or rely upon critical business records or cause other disruptions in our operations. These breaches may result
from human errors, equipment failure, or fraud or malice on the part of employees or third parties. Our exposure to
cybersecurity threats and negative consequences of cybersecurity breaches will likely increase as we store increasing
amounts of customer data. Additionally, as we increasingly market the security features in our data centers, our data
centers may be targeted by computer hackers seeking to compromise data security.
We expend significant financial resources to protect against such threats and may be required to further expend
financial resources to alleviate problems caused by physical, electronic, and cyber security breaches. As techniques used
to breach security are growing in frequency and sophistication and are generally not recognized until launched against a
target, regardless of our expenditures and protection efforts, 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.
In the event of a breach resulting in loss of data, such as personally identifiable information or other such data
protected by data privacy or other laws, we may be liable for damages, fines and penalties for such losses under
applicable regulatory frameworks despite not handling the data. Furthermore, if a high profile security breach or cyber-
attack occurs with respect to another provider of mission-critical data center facilities, our customers and potential
customers may lose trust in the security of these business models generally, which could harm our reputation and brand
image as well as our ability to retain existing customers or attract new ones. In addition, the regulatory framework
around data custody, data privacy and breaches varies by jurisdiction and is an evolving area of law. We may not be able
to limit our liability or damages in the event of such a loss.
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 facilities in
particular. A decrease in the demand for data center space, Internet gateway facilities or other technology-related real
17
estate would have a greater adverse effect on our business and financial condition than if we owned a portfolio with a
more diversified customer base or less specialized use. Our substantial development 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’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. The development of new technologies, the adoption of new industry
standards or other factors could render many of our 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’s decision to lease 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 network 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.
Macroeconomic conditions, including economic and market downturns 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 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.
One of our corporate objectives is to increase the volume of higher margin interconnection services and
value-add power services, as well as to increase rental rates and obtain attractive customers, 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 cloud 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 attracting or
retaining customer deployments requiring such ecosystems, and increasing the volume of higher margin interconnection
services and value-add power services within that market to levels that are comparable to our most highly evolved
interconnected ecosystems, which may have a material adverse effect on our financial condition and results of
operations.
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 is
a significant factor in our customers’ decisions to lease space in our data centers. Our data center infrastructure may
18
become obsolete due to the development of new systems that 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 sophisticated, expensive and time consuming 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 within 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 or such extra
requirements demanded by certain customers, 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:
•
•
•
•
•
•
•
human error;
power loss;
equipment failure;
exposure to temperature, humidity, smoke and other environmental hazards;
improper building maintenance by our landlords in the buildings that we lease;
physical, electronic or cyber 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 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. Service
interruptions, especially if significant or frequent, 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.
19
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 certain of our data centers. Our hub-and-spoke
approach makes us dependent on these third parties to provide these services between our data centers. There can be no
assurance 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 network 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.
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. Since our properties have access to a finite amount of
power, it 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 center portfolio 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.
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 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 customers 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 adversely affect both our ability
to generate revenues and our operating results, and harm our reputation.
Furthermore, we may be subject to risks and unanticipated costs associated with obtaining power from various
utility companies. Municipal utilities may experience unexpected costs relating to the production or transmission of
power, including environmental and other variability associated with downed utility lines. 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,
including efforts to regulate carbon 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 have begun to procure electricity from renewable energy sources. The costs of procuring such electricity
may exceed the costs of procuring electricity from existing sources, such as existing utilities or electric service provided
20
through conventional grids. Efforts to support and enhance renewable electricity generation may increase our costs of
electricity above those that would be incurred through procurement of conventional electricity from existing sources.
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 and network providers.
We consider certain of these customers to be key in that they attract 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 and services offered by us, the overall mix of customers, the presence of key customers attracting business
through vertical market ecosystems, the data center’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, an 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.
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 prices of similar properties, 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 the estimated
future cash flows 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 estimated future 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 decline in real estate prices where we operate may
cause us to reevaluate the assumptions used in our impairment analysis. Impairment charges could adversely affect our
financial condition, results of operations and the market price of our stock.
Potential losses to our properties may not be covered by insurance or may exceed our policy coverage limits.
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, floods and other natural disasters. 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.
21
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.
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, 2019, we had the ability to expand our operating data center square footage by
approximately 1,644,000 NRSF, or 63%, 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 the acquisition of real property, 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, 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. There can be no assurance 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.
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 or pay dividends.
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. Instability in the U.S., Asian, European and other
international financial markets and economies, including the adoption and expansion of trade restrictions or the
occurrence or escalation of trade wars, may adversely affect our ability, and the ability of our customers, 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 customers’ 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. There can
be no assurance that long-term disruptions in the global economy and the return of tighter credit conditions, 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
operations, 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.
22
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:
•
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general economic and financial market conditions;
a 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 flows and cash distributions; and
the market price per share of our capital 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 indebtedness. 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.
Our level of indebtedness and debt service obligations could have adverse effects on our business.
As of December 31, 2019, we had total principal indebtedness of approximately $1.5 billion and the ability to
borrow up to an additional $382.6 million under our revolving credit facility, subject to satisfying certain financial and
covenant tests. While there are limits in our revolving credit facility, senior unsecured term loans, and senior unsecured
notes on the amount of debt that we may incur, and additional limits on our indebtedness which may be imposed by
future agreements or by a policy adopted by our board of 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 stock as
currently contemplated or necessary to maintain our qualification as a REIT;
• make it more difficult for us to satisfy our financial obligations, including borrowings under our revolving
credit facility;
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•
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;
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•
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•
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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;
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’ ability to:
• merge, consolidate or transfer all or substantially all of our or our subsidiaries’ assets;
•
incur additional debt, including use of our existing capacity under our revolving credit facility;
• make certain investments or acquisitions;
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create liens on our or our subsidiaries’ assets;
sell assets;
• make capital expenditures;
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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.
Fluctuations in interest rates could materially affect our financial results.
Because a 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, 2019, if interest rates were to
increase by 100 basis points, the corresponding increase in interest expense on our variable rate debt would decrease
future earnings and cash flows by approximately $4.4 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
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rates that our variable rate debt is based upon. Potential future increases in interest rates and credit spreads may increase
our interest expense and therefore negatively affect our financial condition and results of operations, and reduce our
access to the debt or equity capital markets.
In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced
it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. The
Alternative Reference Rates Committee (“ARRC”) has proposed that the Secured Overnight Financing Rate (“SOFR”)
is the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial
contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from
USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it
relates to derivatives and cash markets exposed to USD-LIBOR. We have material contracts, including agreements
governing certain of our indebtedness that are indexed to USD-LIBOR and are monitoring this activity and evaluating
the related risks. In September 2019, the FASB proposed guidance that would help facilitate the market transition from
existing reference rates to alternative rates. However, at this time, it is not possible to predict the effect of any such
changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the
United Kingdom or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other
reforms may adversely affect the trading market for LIBOR-based securities, including our material contract that are
indexed to USD-LIBOR. Furthermore, we may need to renegotiate any credit agreements extending beyond 2021 that
utilize LIBOR as a factor in determining the interest rate to replace LIBOR with the new standard that is established.
There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement
rate. As such, potential effect of any such event on our business, financial condition and results of operations cannot yet
be determined.
Any interest rate 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. As of December 31, 2019, we
are a party to a five-year interest rate swap agreement that effectively fixes the interest rate on $75 million of outstanding
debt at approximately 2.63% per annum through May 5, 2020, a five-year interest rate swap agreement that effectively
fixes the interest rate on $75 million of outstanding debt at approximately 3.92% per annum through April 5, 2023, an
approximately six-year interest rate swap agreement that effectively fixes the interest rate on $100 million of outstanding
debt at approximately 2.79% per annum through April 1, 2025, and an approximately six-year interest rate swap
agreement that effectively fixes the interest rate on $75 million of outstanding debt at approximately 2.79% per annum
through April 1, 2025.
These and any other hedging transactions into which we enter could expose us to certain risks, including:
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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.
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 attractive properties on favorable terms and
successfully develop and operate them involves significant risks including, but not limited to:
•
our inability to acquire a desired property because of competition from other data center companies or real
estate investors with more capital;
25
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competition from other potential acquirers that may significantly increase the purchase price of a desired
property that we are ultimately able to acquire;
our inability to realize the intended benefits from acquisitions or achieve anticipated operating or financial
results;
our inability to finance the acquisition on favorable terms or at all;
underestimates of the costs to make necessary improvements to acquired properties;
our inability 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 that may be subject to tax reassessments, which may result in higher than expected real
estate tax payments;
our inability to access sufficient utility power on favorable terms or at all; and
• market conditions that 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 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 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 Funds or their
affiliates under the contribution agreement.
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Our data center 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.
Because our real estate investments are relatively illiquid, our ability to respond to adverse changes in the
performance of our properties may be limited, which may adversely affect our business, results of operating and
financial condition. The risks associated with the illiquidity of our data centers are even greater. 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 continue to make 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.
Over the past several years, we have made significant investments to overhaul our back office information
technology systems and expect such investments to continue for the foreseeable future for ongoing improvements to the
customer experience. Difficulties with our systems may adversely affect our business, results of operations, financial
condition or cash flows. We may need to expend significant attention, time and resources to correct problems or find
alternative sources for performing various functions. Such significant investments in our back office systems may take
longer 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, 2019,
2018, and 2017, we did not recognize any impairment charges on internal-use software.
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 continue 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 customers 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, lower levels of leverage, 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, 2019, data center leases representing 30.2%, 17.7% and 17.0% of our total portfolio
annualized rent will expire during 2020, 2021, and 2022, 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.
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In addition, certain of our leases contain early termination provisions that allow our customers to reduce the
term of their leases subject, in some cases, to payment of an early termination charge that is often a specified portion of
the remaining rent payable under such leases. The exercise by customers of early termination options could have an
adverse effect on our business, financial condition and results of operations.
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 results of operations and cash flows.
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 operating revenues, and the loss of any of these
customers could significantly harm our business, financial condition and results of operations.
We 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
42.8% of our total portfolio annualized rent as of December 31, 2019. 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 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 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.
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 same company that relies on a key competitor for a
significant part of its operating 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.
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Our contracts with our customers could subject us to significant liability, which may adversely affect our business,
results of operations and financial condition.
In the ordinary course of business, we enter into agreements with our customers pursuant to which our
customers lease data center space and power from us as well as purchase connectivity products. These contracts typically
contain indemnification and liability provisions, in addition to service level commitments, which could potentially
impose a significant liability on us in the event of losses arising out of certain breaches of such agreements, services to
be provided by us or our subcontractors or from third-party claims. Customers increasingly are looking to pass through
their regulatory obligations and other liabilities to their outsourced data center providers and we may not be able to limit
our liability or damages in an event of loss suffered by such customers whether as a result of our breach of agreement or
otherwise. Further, liabilities and standards for damages and enforcement actions, including the regulatory framework
applicable to different types of losses, vary by jurisdiction, and we may be subject to greater liability for certain losses in
certain jurisdictions. Additionally, in connection with our acquisitions, we have assumed existing agreements with
customers that may subject us to greater liability for such an event of loss. If such an event of loss occurred, we could be
liable for material monetary damages and could incur significant legal fees in defending against such an action, which
could adversely affect our financial condition and results of operations.
The bankruptcy or insolvency of a major customer may adversely affect the income produced by our properties.
If any customer becomes a debtor in a case under the federal Bankruptcy Code, we cannot evict the customer
solely because of the bankruptcy. In addition, the bankruptcy court might authorize the customer to reject and terminate
its lease with us. Our claim against the customer 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, 2019, we had no material customers in bankruptcy. Our operating
revenues and cash available for distribution could be materially adversely affected if any of our significant customers
were to become bankrupt or insolvent, or suffer a downturn in their business, or fail to renew their lease or renew on
terms less favorable to us than their 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 seven 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:
Current Lease
Term Expiration Renewal Rights
NRSF
Base Rent Increases at Renewal
Apr. 2023 2 × 5 years FMR(1)
July 2029 3 × 5 years 103% of previous monthly base rent
Dec. 2021 1 × 5 years Greater of 104% of previous monthly base rent or FMR(1)
July 2023 2 × 5 years Greater of 100% of previous monthly base rent or FMR(1)
Property
NY1 . . . . .
48,404
LA1 . . . . . 171,016
6,723
LA1 . . . . .
21,850
LA4 . . . . .
22,137 May 2021 2 × 5 years Greater of 103% of previous monthly base rent or 95% of FMR(1)
DC1 . . . . .
106% of previous monthly base rent for the renewal and 103% of
July 2028 3 × 5 years
previous monthly base rent thereafter
Oct. 2024 3 × 5 years 102.5% of previous monthly base rent
Dec. 2026 4 × 5 years 102.5% of previous monthly base rent
Dec. 2024
DC2 . . . . .
DE1 . . . . .
DE1 . . . . .
DE2 . . . . .
24,563
5,878
23,906
5,140
N/A
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(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.
When the primary terms of our leases expire, we generally have the right to extend the terms of our leases as
indicated above. For three 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. Additionally, we may be unable to maintain good working relationships with the landlords of our leased
properties, which would adversely affect our relationship with our customers and could result in the loss of current
customers.
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.
Increases in our property taxes 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, if the
vote to repeal Proposition 13, which will be included on the November 2020 ballot and currently limits annual real estate
tax increases to 2% of assessed value per annum, in the State of California is successful, it would increase the assessed
value and/or tax rates applicable to commercial property in California, including our data centers. We expect to be
notified by local taxing authorities if 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 flows and ability to make distributions to our stockholders would be adversely affected.
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 performed our evaluation as of December 31, 2019, and concluded internal control over financial
reporting is operating effectively. Although we believe our internal control over financial reporting is operating
effectively, in the course of 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, to issue unqualified audit reports in the 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 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. 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.
Additionally, our financial forecasts are dependent on estimates and assumptions including budgeting and
planning data, market growth, our ability to remain qualified as a REIT, and our ability to generate sufficient cash flow
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to reinvest in the business to fund internal growth, make acquisitions, pay dividends and meet our debt obligations. Our
financial projections are based on historical experience and on various other assumptions that our management believes
to be reasonable under the circumstances and at the time they are made. However, if our external and internal
information is inadequate, our actual results may differ materially from our forecasts and cause us to make inappropriate
financial decisions. Any material variation between our financial forecasts and our actual results may also adversely
affect our future profitability, stock price and stockholder confidence.
The market price of our stock may continue to be highly volatile, and the value of an investment in our common stock
may decline.
During the year ended December 31, 2019, the closing sale price of our common stock on the New York Stock
Exchange (“NYSE”) has ranged from $84.51 to $122.38 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.
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:
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our operating results or forecasts;
new issuances of equity, debt or convertible debt by us;
changes to our capital allocation or business strategies;
developments in our relationships with our customers;
announcements by our customers or competitors;
changes in regulatory policy or interpretation (including changes in federal, state, and local tax policies);
governmental investigations;
litigation;
changes in the ratings of our debt or stock by rating agencies or securities analysts;
changes in market interest rates or other general market and economic conditions, including inflationary
concerns;
changes in our distribution rate as a percentage of stock price relative to market interest rates;
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 or dispositions of properties; or
the operational performance of our data centers.
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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.
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 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 operating revenue from our business. Our expenses also
will 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 expenses through higher customer lease rates, which could have a
material adverse effect on our results of operations and 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 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.
We may be adversely affected by climate change and regulations related to climate change.
Extreme, and oftentimes unpredictable, weather events such as droughts, heat waves, fires, hurricanes,
tornadoes, rising sea levels and flooding pose a threat to our business through physical damage to, a decrease in demand
for, and/or a decrease in rent from and value of, our data centers located in the areas affected by these events. For
example, changes in average daily temperatures as a result of climate change could increase the cost of cooling our data
centers, which would have an adverse effect on our business. These weather events may also lead to power supply
disruption to our data centers, which could also negatively impact our business operations.
We maintain disaster recovery and business continuity plans that we have utilized in the past and that would be
utilized if severe weather events interrupt our business. While these plans are designed to help us recover from natural
disasters or other events that could interrupt our business, such as extreme weather events related to climate change, we
cannot assure you that our plans will adequately or completely protect us or our customers from all such disasters or
events. Furthermore, an increase in the frequency, duration and severity of such extreme weather events and/or our
failure to prevent or mitigate the impact of such events on our customers could have a material adverse effect on our
business.
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In addition, 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. In addition, the EPA and the states and localities in
which we operate may adopt new regulations related to the use of fossil fuels or requiring the use of alternative fuel or
renewable energy sources to power energy resources that serve our data centers. Furthermore, our customers, investors
and/or other stakeholders may require us to take steps to demonstrate that we are taking actions towards improving the
operation of our business in a measurably sustainable manner and reducing our carbon footprint. However, our
customers, investors and/or other stakeholders might not be satisfied with our sustainability efforts or the speed of their
adoption. If we do not meet such expectations, our business may be harmed and/or our share price may decline. Given
the nature of our business, our data centers require and consume significant amounts of power, including electricity
generated by the burning of fossil fuels. These laws, regulations and stakeholder requests could limit our ability to
develop new facilities or result in substantial compliance costs, maintenance costs, repair costs, retrofit costs and
construction costs, including capital expenditures for environmental control facilities and other new equipment. For
example, in the normal course of business, we enter into agreements with providers of electric power for our data
centers, and the costs of electric power comprise a significant component of our operating expenses. Changes in
regulations that affect electric power providers such as regulations related to the control of greenhouse gas emissions or
other climate change related matters could adversely affect the costs of electric power and increase our operating costs,
which could adversely affect our business, financial condition and results of operations or those of our customers.
Failure to comply with applicable laws and regulations or other requirements imposed on us could also lead to fines
and/or lost revenue. We could also face a negative impact on our reputation with the public and our customers 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 flows and ability to make distributions to our stockholders.
We may be subject to securities class action and other periodic litigation, which could result in unexpected expense of
time and resources, and may harm our business and operating results.
We may be subject to securities class action or other periodic 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.
From time to time, we may also be called on to defend ourselves against lawsuits relating to our business
operations. Some of these claims may seek significant damage amounts due to the nature of our business. Due to the
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inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such current or future
proceedings. A future unfavorable outcome in a legal proceeding or any future legal proceedings could have an adverse
impact on our business, financial condition and results of operations. In addition, any significant current and future
litigation, regardless of its merits, could result in substantial legal fees, settlement or judgment costs and a diversion of
management’s attention and resources that are needed to successfully run our 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 and 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 stock and our ability to make
distributions to our stockholders.
The Funds and their affiliates own approximately 22.4% of our Operating Partnership as of December 31, 2019, and
have the right to nominate one director for so long as they hold at least 10% of our outstanding common stock or
common stock equivalents. Their interests may differ from or conflict with the interests of our stockholders.
As of December 31, 2019, the Funds or their affiliates had an aggregate beneficial common ownership interest
in our Operating Partnership of approximately 22.4% which, if exchanged for our common stock, would represent
approximately 22.2% of our outstanding common stock. In addition, the operating agreement for our Operating
Partnership grants the Funds and their affiliates the right to nominate one of the eight directors to our Board of 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, 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 or material 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 to acquire and, as a
result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue.
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 Stock. 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, or more than 9.8% (by value)
of our capital stock. The value and number of the outstanding shares of common 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. 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
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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 Approval. 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’ 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’ 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 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:
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“business combination” provisions that, subject to limitations, prohibit certain business combinations
between us and an “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” provisions that provide that “control shares” of our Company (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 share
acquisition” (defined as the direct or indirect acquisition of ownership or control of “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 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 common Operating Partnership units are exchanged into common stock).
Additionally, 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
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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:
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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 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.
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, 2019, 803,610 common Operating Partnership units held by third parties
were redeemed for shares of our common stock. 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, there can be no assurance that we will remain qualified as a REIT. If, in
any taxable year, we lose our REIT status, we will face serious tax consequences that would substantially reduce our
cash available for distribution to our 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 at regular corporate rates;
• we could be subject to increased state and local taxes; and
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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.
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
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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.
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, 2018, 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 same reduced tax rate. Rather, as provided for in the Tax Cuts and Jobs Act signed into law December 22, 2017,
REIT dividends are subject to tax at rates applicable to ordinary income reduced by 20%, resulting in rates as high as
33.4% (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 our 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.
If tax rates were to change in a manner comparably favorable for regular corporate taxable income and
dividends to that of REITs, investors could perceive investments in REITs to be relatively less attractive than investment
in dividend paying non-REIT corporations, which could adversely affect the value of our common stock. Stockholders
and potential investors should consult their tax advisors regarding their respective tax considerations and rates.
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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 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 taxable REIT subsidiary (“TRS”) entities that are not conducted on an arm’s
length basis. Moreover, our TRS entities are taxable as regular C corporations and will pay federal, state and local
income tax on their net taxable income at the applicable corporate rates.
We could become subject to the imposition of prohibited transactions tax.
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.
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”),
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.
38
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 financial performance and reduce
amounts available for distribution to our stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The information set forth under the caption “Our Portfolio” in Item 1 of this Annual Report is incorporated by
reference herein.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are subject to claims and administrative proceedings. Except as
described below, we are not presently party to any proceeding which we believe to be material or which we would
expect to have, individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows
or results of operations. The outcome of litigation and administrative proceedings is inherently uncertain. Therefore, if
one or more legal or administrative matters are resolved against us in a reporting period for amounts in excess of
management’s expectation, our financial condition, cash flows or results of operations for that reporting period could be
materially adversely affected.
On April 27, 2018, we filed suit against DGEB Management, LLC and its affiliates, the landlord of our DE1
facility (the “Landlord”), in the District Court, City and County of Denver, State of Colorado (the “District Court”), for
certain claims relating to the building where our DE1 facility is located. The parties asserted various claims and
counterclaims related to three primary areas: (1) a construction project within the DE1 building to house electrical
transformers used to supply power, (2) our usage of images of the DE1 building on our website, and (3) the protocol for
cross-connections within the DE1 building. The Landlord demanded approximately $21 million in damages, which
included approximately $2.8 million related to the construction project, and further sought to hold us in default under the
lease. On August 22, 2019, the jury found in our favor on all claims and counterclaims on which it was asked to decide,
and awarded us nominal damages. Upon unopposed application, the District Court vacated deadlines for post-trial
matters, including our application for reimbursement of legal fees under the lease, to provide time for the parties to
discuss settlement of these post-trial matters. On December 20, 2019, the parties entered into a settlement agreement
pursuant to which, among other matters, the parties agreed to file a joint motion to dismiss the litigation with prejudice
and the Landlord agreed to pay us $3.1 million through delivery of a promissory note bearing interest at a floating rate of
prime plus 2% per annum payable monthly. The promissory note is secured by our lease and other payment obligations,
is fully pre-payable without penalty and is due December 20, 2024.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
39
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
Our common stock is listed and traded on the New York Stock Exchange (“NYSE”) under the symbol “COR”.
As of February 5, 2020, we had four holders of record of our common stock. This figure does not reflect the beneficial
ownership of shares held in nominee name.
Distributions and Dividends
In order to comply with the REIT requirements of the Code, we generally are required to make annual
distributions to our stockholders of at least 90% of our net taxable income. Our common stock distribution policy is to
distribute as dividends, at a minimum, a percentage of our cash flow that ensures that we will meet the distribution
requirements of the Code and any subsequent increases and/or anticipated increases are correlated to increases in our
growth of cash flow.
We have made distributions every quarter since the completion of our initial public offering. During the year
ended December 31, 2019, we declared quarterly dividends totaling $4.76 per share of common stock and Operating
Partnership unit. 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 stock 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.
40
Performance Graph
The following line graph sets forth, for the period from December 31, 2014, through December 31, 2019, 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. The graph assumes that $100 was
invested on December 31, 2014, 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
December 31, 2014 . . .
December 31, 2015 . . .
December 31, 2016 . . .
December 31, 2017 . . .
December 31, 2018 . . .
December 31, 2019 . . .
$
$
$
$
$
$
COR
S&P 500
MSCI US REIT
100
150
217
322
257
345
$
$
$
$
$
$
100
101
114
138
132
174
$
$
$
$
$
$
100
103
111
117
112
140
Sales of Unregistered Equity Securities
None.
Repurchases of Equity Securities
None.
41
ITEM 6. SELECTED FINANCIAL DATA
The 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 consolidated
financial statements, including the notes thereto, included in Item 8. “Financial Statements and Supplementary Data” in
this Annual Report and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in this Annual Report.
(in thousands except share and per share data)
Statement of Operations Data
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on land disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests . . . . . . . . . . . . .
Net income attributable to CoreSite Realty Corporation . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issuance costs associated with redeemed preferred stock . .
Net income attributable to common shares . . . . . . . . . . . . . . . . . . . $
Earnings Per Share
Net income per share attributable to common shares
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . $
Balance Sheet Data
Gross investments in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds from Operations ("FFO")
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Real estate depreciation and amortization . . . . . . . . . . . . . . . . . . . .
Gain on land disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FFO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issuance costs associated with redeemed preferred stock . .
FFO attributable to common shares and units . . . . . . . . . . . . . . . . . $
Total weighted average shares and OP units outstanding - diluted . .
FFO per common share and OP unit - diluted . . . . . . . . . . . . . . . . . $
2019
572,727 $
431,911
140,816
—
(41,712)
99,037
23,197
75,840
—
—
75,840 $
Year Ended December 31,
2017
2018
2016
544,392 $
402,113
142,279
—
(35,526)
106,763
28,841
77,922
—
—
77,922 $
481,821 $
357,009
124,812
—
(24,147)
100,491
25,636
74,855
(7,924)
(4,326)
62,605 $
400,352 $
305,735
94,617
—
(12,577)
81,921
23,212
58,709
(8,338)
—
50,371 $
2015
333,292
269,208
64,084
36
(7,098)
56,859
22,153
34,706
(8,338)
—
26,368
2.06 $
2.05
2.23 $
2.22
1.85 $
1.84
1.56 $
1.54
1.05
1.03
4.76 $
4.14 $
3.58 $
2.39 $
1.79
2,478,798 $
2,100,999
1,478,402
2,083,205 $
1,853,667
1,130,823
1,821,217 $
1,625,643
939,570
1,643,576 $
1,553,539
690,450
1,295,135
1,162,543
391,007
99,037 $
147,042
—
246,079
—
—
106,763 $
136,458
—
243,221
—
—
246,079 $
48,219,798
5.10 $
243,221 $
48,040,960
5.06 $
100,491 $
123,848
—
224,339
(7,924)
(4,326)
212,089 $
47,902,639
4.43 $
81,921 $
103,136
—
185,057
(8,338)
—
176,719 $
47,675,311
3.71 $
56,859
87,287
(36)
144,110
(8,338)
—
135,772
47,400,217
2.86
(1) Effective January 1, 2018, we elected to early adopt Accounting Standards Codification (“ASC”) Topic 842, Leases,
using the modified retrospective transition approach as of our January 1, 2016, transition date. Total assets for the
years ended December 31, 2017, and 2016, have been adjusted for the impact of ASC 842. Refer to Item 8.
Financial Statements — Note 2 — Summary of Significant Accounting Policies for additional information.
We consider funds from operations (“FFO”), a non-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. We calculate
FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts
(“Nareit”). Nareit defined FFO represents net income (computed in accordance with GAAP), excluding gains (or losses)
from sales of 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 and original issuance costs associated with redeemed preferred stock 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.
42
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 Nareit standards differently from us. Investors in our securities should not rely on these
measures as a substitute for any GAAP measure, including net income.
43
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion and analysis of our results of operations, financial condition and
liquidity in conjunction with our consolidated financial statements and the related notes included elsewhere in this
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 Note Regarding Forward-Looking Statements.” You
should also review the “Risk Factors” in Item 1A. of this Annual 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
We are engaged in the business of ownership, acquisition, construction and operation of strategically located
data centers in some of the largest and fastest growing data center markets in the United States, including the San
Francisco Bay area, Los Angeles, the Northern Virginia area (including Washington D.C.), the New York area, Boston,
Chicago, Denver and Miami.
We deliver secure, reliable, high-performance data center and interconnection solutions to a growing customer
ecosystem across eight key North American communication markets. More than 1,350 of the world’s leading
enterprises, network operators, cloud providers, and supporting service providers choose us to connect, protect and
optimize their performance-sensitive data, applications and computing workloads.
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,
(ii) capitalizing on embedded expansion opportunities within existing data centers, (iii) selectively pursuing acquisition
and development opportunities in existing and new markets and (iv) leveraging existing customer relationships
and attracting new customers.
Factors that 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, such as the growth of technology and internet companies driven by increased internet traffic and performance
requirements, and finance, all of which are beyond our control. Macro-economic conditions that affect the economy and
the economic outlook of the United States, particularly in our data center industry 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. The amount of revenue generated by the properties in our portfolio depends on several
factors, including our ability to lease available unoccupied and under construction, space at attractive rental rates. As of
December 31, 2019, we had approximately 605,000 NRSF of unoccupied and under construction data center space of
which approximately 77,000 NRSF is leased with a future commencement date. In addition, we exited 2019 with
contiguous space available to lease in Chicago, Los Angeles, the New York area, the San Francisco Bay area, and the
Northern Virginia area, historically our top 5 markets, closer to our historical norms as a result of placing 204,000 NRSF
into service during 2019, and we expect to place an additional 145,000 NRSF into service during the first half of 2020.
The loss, space consolidation, or exertion of significant pricing pressure of multiple significant customers could have a
material adverse effect on our results of operations because our top ten customers in the aggregate accounted for 33.0%
of our total operating NRSF and 42.8% of our total annualized rent as of December 31, 2019, with a weighted average
remaining lease term of 51 months.
44
The following table summarizes our leasing activity during the years ended December 31, 2019:
Year Ended
Total
Number of Annualized Leased
Leases(1) Rent ($000)(2) NRSF(3) Rates(4)
GAAP
GAAP Rental GAAP Rent
Growth(5)
New/expansion leases commenced . . December 31, 2019
December 31, 2018
December 31, 2017
New/expansion leases signed . . . . . . . December 31, 2019
December 31, 2018
December 31, 2017
$
$
519
517
495
507
514
478
48,347 253,664 $
32,940 174,834
32,775 136,902
54,979 278,713 $
27,653 142,116
38,937 180,415
Renewal leases signed . . . . . . . . . . . . . December 31, 2019
December 31, 2018
December 31, 2017
1,214 $
1,134
871
78,261 464,916 $
76,512 470,022
52,345 337,600
195 (6)
182 (6)
239
197
203 (6)
209 (6)
168
163
155
4.2 %
7.5
7.3
(1) Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a
customer could have multiple leases.
(2) GAAP annualized rent represents the monthly average contractual rent as stated on customer contracts, multiplied
by 12. This amount is inclusive of any one-time or non-recurring rent abatements and excludes power revenue,
interconnection revenue and operating reimbursement.
(3) Total leased NRSF is determined based on contractually leased square feet, including required data center support
space (such as the mechanical, telecommunications and utility rooms) and building common areas.
(4) GAAP rental rates represent GAAP annualized rent divided by leased NRSF.
(5) GAAP 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.
(6) From time to time, we execute agreements whereas customers pay reservation fees that secure them the right of first
option to expand into incremental data center space. The GAAP annualized rent includes the reservation payments
when the option agreements are signed and commenced, and the GAAP rental rates and NRSF reflect the results as
options are exercised and the space is committed.
Operating expenses. Our operating expenses primarily consist of utility costs, including power, property
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 data center operations personnel, as well
as utility, operating and maintenance expenses. Pre-stabilized projects produce lower initial investment returns than
stabilized properties due to operating expenses being less dependent on occupancy levels than revenues. We expect
property operating and maintenance expense to increase as we commence new and expansion leases and place new data
center NRSF into service. In addition, real estate taxes and insurance may increase as tax rates and/or assessed property
values change due to factors outside of our control. For example, if the vote to repeal Proposition 13, which will be
included on the November 2020 ballot and currently limits annual real estate tax increases to 2% of assessed value per
annum, in the State of California is successful, it could increase the assessed value and/or tax rates applicable to
commercial property in California, including our data centers.
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.
45
Substantially all of our data center NRSF is subject to the breakered-amp or sub-metered (branch circuit
monitoring) power pricing models. We recover all or substantially all of our electricity costs for our leased data center
space under either model. Under the sub-metered model, a customer pays us monthly for the power attributable to its
equipment in the data center as well as for its ratable allocation of the power used to provide the cooling, lighting,
security and other requirements supporting the data center, in each case, at a rate substantially equivalent to our then
current utility cost. Under the breakered-amp model, a customer pays a fixed monthly fee per committed available
ampere of connected power. The extent to which this fixed monthly fee correlates to the monthly amount we pay to our
utility provider for electricity at each data center facility varies depending upon the amount of power each customer
utilizes each month relative to the amount of committed power and related infrastructure purchased. As more of our
customer licenses are structured under the sub-metered power model and as customers change from the breakered to the
sub-metered model, we believe it may compress our operating income growth rate because the associated revenue, net of
the recoverable electricity costs, may decrease.
Scheduled Lease Expirations. Our ability to re-lease expiring space at rental rates equal to or in excess of
current rental rates will impact our results of operations. While it fluctuates from year to year, not all customers with
expiring leases will extend or renew their leases and some customers may negotiate rate reductions in order to renew or
extend their leases. We have 1,300 and 629 data center leases representing approximately 19.8% and 11.3% of the NRSF
in our operating data center portfolio and 30.2% and 17.7% of our total annualized rent that are scheduled to expire
during the years ending December 31, 2020, and 2021, respectively. These leases represent current annualized rent of
$96.1 million, and $56.3 million with annualized rental rates of $159 per NRSF and $167 per NRSF expiring during the
years ending December 31, 2020, and 2021, respectively. Our past performance may not be indicative of future results,
and there can be no assurance 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 datacenter space, competition from
other datacenter developers or operators, the condition of a particular property and whether a property, or space within a
property, has been developed.
Acquisitions, Development and Financing. Our ability to grow rental and operating revenues depends on our
ability to acquire, develop and lease data center space at favorable rental rates. As of December 31, 2019, we had
approximately 1,644,000 NRSF of space available for future data center development, pre-construction projects, and
space currently under development, or approximately 36% of the total space in our portfolio. We may encounter
increasing real estate acquisition prices, 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 through our revolving credit facility and other unsecured and secured
borrowings, construction financings and the issuance of additional equity and debt securities if needed and when market
conditions permit. We will require additional capital to finance future development activities, which may not be
available or may not be available on terms favorable or acceptable to us.
Conditions in Significant Markets. Positive or negative changes in market conditions including supply and
demand, rental rates, utility costs, and general economic conditions in any of our markets could impact our overall
performance. The following table provides a geographic overview of our property portfolio as a percentage of total data
center annualized rent as of December 31, 2019:
Metropolitan Market
San Francisco Bay . . . . . . . . . . . . . . . . . . . . .
Los Angeles . . . . . . . . . . . . . . . . . . . . . . . . . .
Northern Virginia . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miami . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Percentage of Total Data
Center Annualized Rent
35.8 %
26.8
17.8
7.3
5.3
5.0
1.5
0.5
100.0 %
46
Results of Operations
A discussion of the changes in our financial condition and results of operations for the years ended
December 31, 2018, and 2017 has been omitted from this Annual Report, but may be found in Item 7. Management’s
Discussion and Analysis and Analysis of Financial Condition and Results of Operations of our Annual Report on
Form 10-K for the year ended December 31, 2018, filed with the SEC on February 8, 2019, which is available free of
charge on the SEC’s website www.sec.gov and our corporate website (www.coresite.com).
Year Ended December 31, 2019, Compared to Year Ended December 31, 2018
The discussion below relates to our financial condition and results of operations for the years ended
December 31, 2019, and 2018. A summary of our operating results for the years ended December 31, 2019, and 2018, is
as follows (in thousands).
Year Ended December 31,
2019
2018
$ Change % Change
Operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 572,727 $ 544,392 $ 28,335
29,798
Operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,463)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,186
(7,726)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
402,113
142,279
35,526
106,763
431,911
140,816
41,712
99,037
5.2 %
7.4
(1.0)
17.4
(7.2)
Operating Revenues
Operating revenues during the years ended December 31, 2019, and 2018, were as follows (in thousands):
Data center revenue:
Year Ended December 31,
2019
2018
$ Change % Change
Rental, power, and related revenue . . . . . . . . . . . . . . . . . . . . . . . . $ 485,131 $ 463,086 $ 22,045
Interconnection revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,042
28,087
Total data center revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, light-industrial and other revenue . . . . . . . . . . . . . . . . . . . .
248
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 572,727 $ 544,392 $ 28,335
69,709
532,795
11,597
75,751
560,882
11,845
4.8 %
8.7
5.3
2.1
5.2 %
A majority of the increase in operating revenues was due to a $22.0 million increase in data center rental,
power, and related revenue during the year ended December 31, 2019, compared to the 2018 period. Data center rental,
power, and related revenue increased due to the organic growth of our customer base through favorable renewals, new
customer leases and lease expansions into new and existing space, and increased power consumption by our customers
within their deployments. Most notably, data center rental, power, and related revenue at our LA2, SV7, and SV8
properties, where we have placed into service large contiguous data center NRSF within the last two years, has increased
$9.4 million, $3.7 million, and $4.0 million respectively, compared to the year ended December 31, 2018. This increase
is primarily due to the commencement of large scale leases throughout the years ended December 31, 2019, and 2018,
which experience variable revenue growth as customers deploy their IT equipment and increase their power
consumption. The remaining increase in data center rental, power, and related revenue during the year ended
December 31, 2019, was due to the renewals and commencements of new and expansion leases at our remaining
properties, partially offset by the move-out of customer leases. In addition, churn was elevated during 2019, as a result of
a few customers going through bankruptcy or out of business, and, to a lesser extent, transitioning to the cloud.
In addition, interconnection revenue increased $6.0 million, or 8.7%, during the year ended December 31, 2019,
compared to the 2018 period. The increase is primarily a result of a net increase in the volume of cross connects from
new and existing customers during the year ended December 31, 2019, and revenue increases resulting from customers
disconnecting old cross connects and migrating to our higher priced fiber and logical cross connect products.
47
Operating Expenses
Operating expenses during the years ended December 31, 2019, and 2018, were as follows (in thousands):
Year Ended December 31,
2019
2018
$ Change % Change
Property operating and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . $ 157,293 $ 152,357 $ 4,936
3,627
Real estate taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,292
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,416
3,674
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,928
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(75)
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 431,911 $ 402,113 $ 29,798
19,239
141,633
21,023
40,090
27,696
75
22,866
152,925
22,439
43,764
32,624
—
3.2 %
18.9
8.0
6.7
9.2
17.8
(100.0)
7.4 %
Property operating and maintenance expense increased $4.9 million, or 3.2%, primarily as a result of an
increase in power expense due to increased customer utilization related to the commencement of new and expansion
leases during the year ended December 31, 2019, partially offset by reduced power utilization from customer move-outs
and decreased maintenance expenses.
Real estate taxes and insurance increased $3.6 million, or 18.9%, during the year ended December 31, 2019,
primarily as a result of increased real estate tax assessments across our markets. In addition, upon completion of projects
under development, we cease capitalization of project costs, and we incur additional real estate taxes and insurance
expense.
Depreciation and amortization expense increased $11.3 million, or 8.0%, during the year ended December 31,
2019, primarily as a result of an increase in depreciation expense from approximately 224,000 NRSF of new data center
expansion projects placed into service, with a cost basis of approximately $240.2 million, during the year ended
December 31, 2019.
Sales and marketing expense increased by $1.4 million, or 6.7%, during the year ended December 31, 2019,
primarily due to an increase in headcount, resulting in higher salaries and non-cash compensation, and additional
marketing expenses related to advertising and events.
General and administrative expense increased by $3.7 million, or 9.2%, during the year ended December 31,
2019, primarily as a result of increased litigation expenses associated with the dispute with our DE1 landlord.
Rent expense increased $4.9 million, or 17.8%, during the year ended December 31, 2019, compared to the
2018 period. This increase was primarily due to additional rent expense recognized during the year ended December 31,
2019, as a result of extending our LA1 lease term on June 30, 2018, and recognizing higher straight-line rent expense
due to the annual rent escalations of the extended term. In addition, we incurred additional rent expense from our
leasehold interest properties during the year ended December 31, 2019, related to placing one computer room at LA1
into service during the three months ended June 30, 2019, and one computer room at DC2 during the three months ended
December 31, 2018.
Interest Expense
Interest expense for the years ended December 31, 2019, and 2018, was as follows (in thousands):
Year Ended December 31,
Interest expense and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,022
3,338
Amortization of deferred financing costs and hedge amortization . . .
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(13,648)
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,712
Percent capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019
$ Change % Change
2018
$ 38,751
2,370
(5,595)
$ 35,526
$ 13,271
968
(8,053)
$ 6,186
34.2 %
40.8
143.9
17.4 %
24.7 %
13.6 %
48
Interest expense increased $6.2 million, or 17.4%, during the year ended December 31, 2019, primarily as a
result of the increase in overall debt outstanding, increased amortization of deferred financing cost as a result of the
credit facility amendment, and higher interest rates, partially offset by increased capitalized interest due to development
space under construction at BO1, CH2, LA3, NY2, SV8, and VA3. The weighted average principal debt outstanding was
$1.3 billion and $1.0 billion during the years ended December 31, 2019, and 2018, respectively. Our daily weighted
average interest rate increased from 3.58% during the year ended December 31, 2018, to 3.83% during the year ended
December 31, 2019.
Liquidity and Capital Resources
Discussion of Cash Flows
Year Ended December 31, 2019, Compared to Year Ended December 31, 2018
Operating Activities
Net cash provided by operating activities was $251.6 million for the year ended December 31, 2019, compared
to $258.8 million for the year ended December 31, 2018. This decrease of $7.2 million, or 2.8%, was primarily due to
increased accounts receivable of $2.8 million during the year ended December 31, 2019, compared to a decrease of
$10.9 million during the year ended December 31, 2018. In addition, other liabilities decreased by $7.8 million,
primarily due to the settlement of an interest rate swap. The decrease was partially offset by organic growth of our
customer revenue base through expansions into new and existing space and as our existing customers increased their
power consumption within their deployments.
Investing Activities
Net cash used in investing activities increased by $116.6 million, or 45.6%, to $372.3 million for the year ended
December 31, 2019, compared to $255.6 million for the year ended December 31, 2018. This increase was due primarily
to higher construction spend on our BO1, CH2, LA3, NY2, SV8, and VA3 development properties and the acquisition of
SV9 during the year ended December 31, 2019, compared to construction spending on fewer active development
projects during the year ended December 31, 2018.
Financing Activities
Net provided by financing activities was $121.1 million during the year ended December 31, 2019, compared to
net cash used in financing activities of $5.8 million during the year ended December 31, 2018.
During the year ended December 31, 2019, we received cash proceeds from issuance of the 2026 Notes, the
2029 Notes, and the 2025 Term Loan (each as defined below), for an aggregate of $500 million, and we made net cash
payments on the revolving credit facility of $149.0 million.
During the year ended December 31, 2018, we received cash proceeds from the issuance of 2023 Term Loan,
(as defined below), of $150.0 million, and we received cash proceeds, net of payments, from the revolving credit facility
of $42.0 million.
We paid $223.9 million in dividends and distributions on our common stock and Operating Partnership units
during the year ended December 31, 2019, compared to $193.0 million during the year ended December 31, 2018, as a
result of an increase in the annual dividend from $4.02 per share and unit paid during the year ended December 31,
2018, to an annual dividend of $4.64 per share and unit paid during the year ended December 31, 2019.
Analysis of Liquidity and Capital Resources
We have an effective shelf registration statement that allows us to offer for sale various unspecified classes of
equity and debt securities. As circumstances warrant, we may issue debt and/or equity securities from time to time on an
opportunistic basis, dependent upon market conditions and available pricing. We make no assurance that we can issue
and sell such securities on acceptable terms or at all.
49
Our short-term liquidity requirements primarily consist of funds needed for interest expense, operating costs
including utilities, property maintenance costs, real estate and personal property taxes, insurance, rental expenses, sales
and marketing and general and administrative expenses, certain capital expenditures, including for the development of
data center space and future distributions to common stockholders and holders of our common Operating Partnership
units during the next twelve months.
As of December 31, 2019, we had $3.0 million of cash and cash equivalents. Subject to our ability to obtain
capital upon favorable terms, we estimate our anticipated development activity over the next twelve months will require
approximately $225 million to $275 million of capital investment to expand our operating data center portfolio.
Our anticipated capital investment over the next twelve months includes the remaining estimated capital
required to fund our current expansion projects under construction as of December 31, 2019, shown in the table below:
Projects/Facilities
TKD expansion(1)
Metropolitan
Market
Estimated
Costs (in thousands)
Incurred to- Estimated
Completion NRSF
Date
Total
Percent
Leased
Power
(MW)
NY2 . . . . . . . . . . . . . . . . . . . . . . New York
SV8 Phase 3 . . . . . . . . . . . . . . . . San Francisco Bay
Q1 / Q2 2020
Q2 2020
Total TKD expansion . . . . . . . . . . .
New development(2)
Ground-up construction
34,589 $
54,056
88,645 $
20,991 $
2,602
23,593 $
51,000
42,000
93,000
3.8 %
—
1.5 %
4.0
6.0
10.0
CH2 Phase 1 . . . . . . . . . . . . . . . . Chicago
LA3 Phase 1 . . . . . . . . . . . . . . . . Los Angeles
Q2 2020
Q3 / Q4 2020
Total new development . . . . . . . . . .
Total development(3) . . . . . . . . . . . .
56,000 $
51,000
95,552 $
48,790
107,000 $
144,342 $
120,000
134,000
254,000
— %
74.3
35.4 %
6.0
6.0
12.0
195,645 $
167,935 $
347,000
20.0 %
22.0
(1) Turn-Key Data Center (“TKD”) estimated development costs include 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.
(2) Includes a portion of the cost of infrastructure to support later phases of the development.
(3) 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. We have an
estimated $26.7 million in Deferred Expansion Capital under construction at multiple properties as of December 31,
2019, of which $6.4 million has been incurred to-date. We estimate approximately $35 million of additional
Deferred Expansion Capital may be required in the future to support existing or anticipated future customer
utilization.
We expect to meet our short-term liquidity requirements, including our anticipated development activity over
the next twelve months, through net cash on hand, cash provided by operations, and we expect to add incremental debt
financing in 2020 to increase liquidity and continue to pay off a portion of the principal of the debt drawn on our
revolving credit facility. Timing, pricing, and the type of debt is dependent on market conditions and we have targeted a
total debt issuance in 2020 of approximately $100 million to $200 million. In addition, as circumstances warrant, we
may issue equity securities on an opportunistic basis, dependent upon market conditions and available pricing.
On November 8, 2019, our Operating Partnership and certain subsidiary co-borrowers amended and restated
our previous credit agreement (as amended and restated, the “Amended and Restated Credit Agreement”), in order to
provide additional liquidity of $100 million, which was used to pay down a portion of the then-current revolving credit
facility balance and for general corporate purposes. The Amended and Restated Credit Agreement, among other things,
(i) extended the maturity on the revolving credit facility from April 19, 2022, to November 8, 2023, with a one year
extension option, (ii) extended the maturity date of the $150 million senior unsecured term loan from April 19, 2023, to
April 19, 2024 (as amended, the “2024 Term Loan”), and (iii) established a new $350 million senior unsecured term loan
maturing on April 1, 2025 (the “2025 Term Loan”), effectively combining and extending the maturities on the $150
million senior unsecured term loan (the “2020 Term Loan”) and the $100 million senior unsecured term loan (the “2021
Term Loan”), which increased our total commitment under the Amended and Restated Credit Agreement from $850
million to $950 million. The accordion feature under the Amended and Restated Credit Agreement was also increased to
50
allow the Operating Partnership to increase the total commitment to $1.5 billion, compared to $1.2 billion previously,
under specified circumstances, including secured capital from new or existing lenders. Refer to Item 8. Financial
Statements — Note 8 — Debt for additional information.
The total amount available for borrowing under our revolving credit facility is equal to the lessor of $450.0
million or the availability calculated on our unencumbered asset pool. As of December 31, 2019, there was $62.5 million
of borrowings outstanding and $4.9 million outstanding under letters of credit. Therefore, $382.6 million remained
available for us to borrow under our revolving credit facility.
Our long-term liquidity requirements primarily consist of the costs to fund the Reston Campus Expansion, the
ground up construction of new data center buildings, including SV9, additional phases of our current CH2, LA3, and
SV8 developments, Deferred Expansion Capital, future development of other space in our portfolio not currently
scheduled, property acquisitions, future distributions to common stockholders and holders of our common Operating
Partnership units, scheduled debt maturities, and other capital expenditures. We expect to meet our long-term liquidity
requirements through net cash provided by operations, after payment of dividends, and by incurring long-term
indebtedness, such as drawing on our revolving credit facility, exercising our senior unsecured term loan accordion
features or entering into new debt agreements with our bank group or existing and new accredited investors. We also
may raise capital through the issuance of additional equity or debt securities, subject to prevailing market conditions,
and/or through the issuance of common Operating Partnership units. However, there is no assurance that we will be able
to successfully raise additional capital on acceptable terms or at all.
In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced
it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR after 2021. We have
material contracts that are indexed to USD-LIBOR, including agreements governing certain of our indebtedness, and are
monitoring this activity and evaluating the related risks. However, at this time, it is not possible to predict the effect of
any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in
the United Kingdom or elsewhere. In September 2019, the FASB proposed guidance that would help facilitate the
market transition from existing reference rates to alternative rates. Uncertainty as to the nature of such potential changes,
alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities,
including our material contracts that are indexed to USD-LIBOR. Furthermore, we may need to renegotiate any credit
agreements extending beyond 2021 that utilize LIBOR as a factor in determining the interest rate to replace LIBOR with
the new standard that is established. There is currently no definitive information regarding the future utilization of
LIBOR or of any particular replacement rate. As such, the potential effect of any such event on our business, financial
condition and results of operations cannot yet be determined. See Item 1A. “Risk Factors – Fluctuations in interest rates
could materially affect our financial results” of this Annual Report for more information.
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, except to the extent taxes,
power costs, labor costs, insurance costs, and similar expenses, in aggregate increase more than our rental rates increase.
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.
51
Indebtedness
A summary of outstanding indebtedness as of December 31, 2019, and 2018, is as follows (in thousands):
Revolving credit facility . . . . . . . . . . . . .
2020 Senior unsecured term loan . . . . . . .
2021 Senior unsecured term loan . . . . . . .
2022 Senior unsecured term loan . . . . . . .
2023 Senior unsecured notes . . . . . . . . . .
2024 Senior unsecured term loan . . . . . . .
2024 Senior unsecured notes . . . . . . . . . .
2025 Senior unsecured term loan . . . . . . .
2026 Senior unsecured notes . . . . . . . . . .
2029 Senior unsecured notes . . . . . . . . . .
Total principal outstanding . . . . . . . . . . .
Unamortized deferred financing costs . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . .
Interest Rate
3.01% and 3.95% at December 31, 2019,
and December 31, 2018, respectively
3.37% at December 31, 2018
3.90% at December 31, 2018
2.96% and 3.65% at December 31, 2019,
and December 31, 2018, respectively
4.19% at December 31, 2019, and
December 31, 2018, respectively
3.44% and 4.01% at December 31, 2019,
and December 31, 2018, respectively
3.91% at December 31, 2019, and
December 31, 2018, respectively
2.81% at December 31, 2019
4.52% at December 31, 2019
4.31% at December 31, 2019
Maturity
Date
November 8, 2023
—
—
April 19, 2022
December 31, December 31,
2019
$
62,500
$
—
—
200,000
2018
211,500
150,000
100,000
200,000
June 15, 2023
150,000
150,000
April 19, 2024
150,000
150,000
April 20, 2024
175,000
175,000
April 1, 2025
April 17, 2026
April 17, 2029
350,000
200,000
200,000
1,487,500
(9,098)
1,478,402
—
—
—
1,136,500
(5,677)
1,130,823
$
$
As of December 31, 2019, we were in compliance with the financial covenants under our revolving credit
facility, senior unsecured term loans and senior unsecured notes. For additional information with respect to our
outstanding indebtedness as of December 31, 2019, and 2018, as well as the available borrowing capacity under our
revolving credit facility, debt covenant requirements, and future debt maturities, refer to Item 8—Note 8—Debt in
“Financial Statements and Supplementary Data” included in this Annual Report.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2019, including the maturities
and scheduled principal repayments of indebtedness (in thousands):
2020
Total
Obligation
Thereafter
2021
233,722
Operating leases . . . . . . . . . . . . . . $ 26,842 $ 26,590 $ 26,197 $ 24,350 $ 23,382 $ 106,361 $
Revolving credit facility(1) . . . . . .
69,759
1,883
64,110
1,883
—
1,883
Senior unsecured term loans (2) . . .
787,393
20,903
14,978 161,362 352,481
20,903 216,767
Senior unsecured notes (3) . . . . . . .
911,740
30,788 177,380 194,746 447,251
30,788
30,788
Construction contracts (4) . . . . . . . 189,424
189,424
—
—
Other (5) . . . . . . . . . . . . . . . . . . . . .
74,276
49,304
4,630
6,537
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 276,377 $ 84,794 $ 280,272 $ 285,427 $ 384,049 $ 955,397 $ 2,266,315
—
4,559
—
4,610
—
4,636
—
2024
2022
2023
(1) Includes $62.5 million outstanding and estimated annual interest payments assuming no draws or payments on the
revolving credit facility through the maturity date of November 8, 2023. The revolving credit facility is subject to
variable rates. We estimated interest payments on the revolving credit facility based on the interest rate as of
December 31, 2019.
(2) Includes $200 million, $150 million, and $350 million outstanding and estimated annual interest payments through
the respective maturity dates for the 2022, 2024, and 2025 senior unsecured term loans, respectively. We estimated
interest payments based on our in place interest rate swap agreements and the variable interest rates as of
December 31, 2019.
(3) Includes $150.0 million outstanding and estimated annual interest payments, fixed at 4.19%, through the maturity
date of June 15, 2023, $175 million outstanding and estimated annual interest payments, fixed at 3.91%, through the
52
maturity date of April 20, 2024, $200 million outstanding and estimated annual interest payments, fixed at 4.52%,
through the maturity date of April 17, 2026, and $200 million outstanding and estimated annual interest payments,
fixed at 4.31%, through the maturity date of April 17, 2029.
(4) Consists of obligations for construction contracts for properties under construction, tenant related capital
expenditures, and other capital improvements.
(5) Consists of obligations for power contracts and telecommunications leases.
Off-Balance Sheet Arrangements
As of December 31, 2019, the Company did not have any off-balance sheet arrangements.
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 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 of Significant Accounting Policies” in Item 8
“Financial Statements and Supplementary Data” 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 Estate. When accounting for business combinations and asset acquisitions,
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, value of in-place leases and the value of customer relationships. These
allocation assessments involve significant judgment and complex calculations and have a direct impact on our results of
operations.
Capitalization of Costs. 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. For the year
ended December 31, 2017, we also capitalized a portion of internal sales employees’ compensation and payroll-related
fringe benefits that directly relate to time spent executing successful lease agreements. Effective January 1, 2018, we
adopted Accounting Standards Codification Topic 842, Leases, which provides a narrower definition of initial direct
costs that can be capitalized. As a result, only the incremental costs of signing a lease are capitalized as lease
commissions and costs related to internal sales employees’ compensation, payroll-related fringe benefits and certain
external legal fees are accounted for as a sales and marketing expense in the consolidated statements of operations.
During the years ended December 31, 2019, 2018, and 2017, we capitalized $16.1 million, $7.0 million, and $9.7
million, respectively, of internal initial direct costs.
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
53
relate to the projects under development are not capitalized and are charged to expense as incurred. Indirect costs
capitalized for the years ended December 31, 2019, 2018, and 2017, are as follows (in thousands):
Year Ended December 31,
2018
2019
2017
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,648 $ 5,595 $ 3,282
1,155
Real estate taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . .
708
Employee salaries and benefits . . . . . . . . . . . . . . . . . . . . . . . . . .
4,617 3,618
Capitalized indirect development costs . . . . . . . . . . . . . . . . . . $ 21,597 $ 11,367 $ 7,608
1,934
6,015
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, which includes
the determination of property operating cash flows and forecasted rental rates. 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.
Revenue Recognition. We derive our revenues from leases with customers which include rental revenue lease
components and nonlease revenue components, such as power and tenant reimbursements. Effective January 1, 2018, we
adopted ASC 606, Revenue Recognition – Revenue from Contracts with Customers (“ASC 606”), using the cumulative
effect method and we concurrently adopted ASC 842, Leases (“ASC 842”), using the modified retrospective transition
approach. ASC 606 establishes a five-step model framework which recognizes revenue as an entity transfers goods or
services to the customer and requires enhanced disclosures. ASC 842 establishes our recognition of rental revenue,
which remains mainly consistent with previous guidance, and requires additional enhanced disclosures.
The implementation of the new guidance included an assessment of customer contracts, which contain lease
components and nonlease components, aimed at identifying contractual provisions that could result in a change in the
timing or the amount of revenue recognition in comparison with prior guidance, as well as assessing the enhanced
disclosure requirements of the new guidance. The analysis of contracts required subjective assessment over the
implications of contractual provisions on the timing and amount of revenue recognized.
As a result of the assessment, we determined that the adoption does not change the recognition pattern of our
operating revenues. In accordance with ASC 842 we have elected to combine all of our nonlease revenue components
that have the same pattern of transfer as the related operating lease component into a single combined lease component
recognized under ASC 842. Additional disclosures have also been provided around the nature, timing, and uncertainty of
revenue, certain costs, and cash flows arising from contracts with customers. See additional discussion in Note 2,
Summary of Significant Accounting Policies and Note 7, Lease Revenue.
Lessee Accounting. As mentioned previously, we adopted ASC 842 effective January 1, 2018, which also
impacts our lessee accounting. The standard increases transparency and comparability by requiring the recognition by
lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for those leases classified as operating
leases, as well as enhanced disclosures.
Implementation of the new standard included an analysis of contracts, including real estate leases, to determine
the initial recognition of ROU assets and lease liabilities, which required subjective assessment over discount rates. The
new standard also provided various practical expedients, which were assessed to determine the ultimate impact of the
new standard upon adoption. We elected the package of practical expedients, which permitted us to not reassess
(1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing
leases, and (3) any initial direct costs for any existing leases as of the effective date.
Subsequent measurement and treatment of contract modifications were also assessed as it pertains to our
existing contracts. Measuring new and modified leases requires subjective assessment particularly over discount rates
and contract options, such as termination or extension rights, which impact lease terms and minimum lease payments.
54
As a result of the analysis, adoption of the lease standard had a material impact on our consolidated balance
sheets. As a lessee, we adjusted certain previously reported financial statements to include the recognition of ROU assets
and liabilities for operating leases. Additional disclosures were also provided to enable users of financial statements to
assess the amount, timing, and uncertainty of cash flows arising from leases. See additional discussion in Note 2,
Summary of Significant Accounting Policies and Note 6, Leases.
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, 2019, we had $762.5 million of consolidated principal debt outstanding that bore variable
interest based on one month LIBOR. As of December 31, 2019, we have four effective interest rate swap agreements in
place to fix the interest rate on $325.0 million of our one-month LIBOR variable rate debt. Our interest rate risk not
covered by an interest rate swap agreement is $437.5 million of variable rate debt outstanding as of December 31, 2019.
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 100 basis points change
in interest rates on our $437.5 million of unhedged variable rate debt. If interest rates were to increase or decrease by 100
basis points, 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 approximately $4.4 million 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 an increase in interest rates of significant magnitude, we may take actions to further
mitigate our exposure to 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.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements of CoreSite Realty Corporation
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2019, and 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017 . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018, and 2017 . .
Consolidated Statements of Equity for the years ended December 31, 2019, 2018, and 2017 . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017 . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplemental Schedule—Schedule III—Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . .
Page No.
57
59
60
61
62
63
64
86
56
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
CoreSite Realty Corporation:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of CoreSite Realty Corporation and subsidiaries (the
Company) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income,
equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and
financial statement Schedule III – Real Estate and Accumulated Depreciation (collectively, the consolidated financial
statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted
accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2019 based on criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, 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’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was
maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material
misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used
and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. 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.
Definition and Limitations of Internal Control Over Financial Reporting
A company’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’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
57
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates
to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way
our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical
audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it
relates.
Evaluation of indicators an operating property may not be recoverable
As described in Notes 2 and 4, the Company had $1,758.3 million of net investments in real estate as of
December 31, 2019. The Company reviews properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When an indicator of possible impairment
exists, the Company evaluates the property for impairment by comparing the carrying amount to an estimate of
undiscounted cash flows from the future use of the property and eventual disposal.
We identified the evaluation of indicators an operating property may not be recoverable to be a critical audit matter.
There is a high degree of subjective auditor judgment in evaluating the events or changes in circumstances that may
indicate the carrying value of the operating property may not be fully recoverable. In particular, evaluating the
Company’s assumptions regarding the property’s operating cash flows and forecasted rental rates involve a high
level of subjective and complex auditor judgment.
The primary procedures we performed to address this critical audit matter included the following. We tested certain
internal controls over the Company’s process for identifying indicators that a long-lived asset may not be
recoverable, including controls related to property operating cash flows and forecasted rental rates. We compared
the Company’s historical estimated property’s cash flows to actual results to assess the Company’s ability to
accurately forecast. We evaluated the Company’s assumptions regarding forecasted rental rates by comparing them
to third-party market data.
/s/ KPMG LLP
We have served as the Company’s auditor since 2009.
Denver, Colorado
February 7, 2020
58
CORESITE REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
December 31,
2019
December 31,
2018
Investments in real estate:
ASSETS
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment in operating properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investments in real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts and other receivables, net of allowance for doubtful accounts of $371 and
94,593 $
1,989,731
2,084,324
(720,498)
1,363,826
394,474
1,758,300
172,976
3,048
86,955
1,730,329
1,817,284
(590,784)
1,226,500
265,921
1,492,421
190,304
2,599
$417 as of December 31, 2019, and December 31, 2018, respectively . . . . . . . . . . . . . .
21,008
18,464
Lease intangibles, net of accumulated amortization of $4,022 and $7,756 as of
December 31, 2019, and December 31, 2018, respectively . . . . . . . . . . . . . . . . . . . . . . .
6,943
40,646
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102,290
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,100,999 $ 1,853,667
3,939
40,646
101,082
Liabilities:
Debt, net of unamortized deferred financing costs of $9,098 and $5,677 as of
LIABILITIES AND EQUITY
December 31, 2019, and December 31, 2018, respectively . . . . . . . . . . . . . . . . . . . . . . . $ 1,478,402 $ 1,130,823
202,699
89,315
55,679
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued dividends and distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired below-market lease contracts, net of accumulated amortization of $1,511
187,443
123,304
62,332
and $3,840 as of December 31, 2019, and December 31, 2018, respectively . . . . . . . . .
Unearned revenue, prepaid rent and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders' equity:
Common Stock, par value $0.01, 100,000,000 shares authorized and 37,701,042 and
2,511
33,119
1,887,111
2,846
37,672
1,519,034
36,708,691 shares issued and outstanding at December 31, 2019, and
December 31, 2018, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
363
491,314
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,193)
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(246,929)
Distributions in excess of net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
242,555
92,078
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
334,633
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,100,999 $ 1,853,667
373
512,324
(6,026)
(348,509)
158,162
55,726
213,888
See accompanying notes to consolidated financial statements.
59
CORESITE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
Year Ended December 31,
2018
2017
2019
Operating revenues:
Data center revenue:
Rental, power, and related revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interconnection revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, light-industrial and other revenue . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
485,131 $
75,751
11,845
572,727
463,086 $
69,709
11,597
544,392
407,680
62,293
11,848
481,821
Operating expenses:
Property operating and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate taxes and insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income attributable to noncontrolling interests . . . . . . . . . . . . . . . . . . .
Net income attributable to CoreSite Realty Corporation . . . . . . . . . . . . . . . $
Preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Original issuance costs associated with redeemed preferred stock . . . . . . .
Net income attributable to common shares . . . . . . . . . . . . . . . . . . . . . . . . $
Net income per share attributable to common shares:
157,293
22,866
152,925
22,439
43,764
32,624
—
431,911
140,816
(41,712)
99,104
(67)
99,037 $
23,197
75,840 $
—
—
75,840 $
152,357
19,239
141,633
21,023
40,090
27,696
75
402,113
142,279
(35,526)
106,753
10
106,763 $
28,841
77,922 $
—
—
77,922 $
132,820
14,913
129,251
18,176
37,548
24,125
176
357,009
124,812
(24,147)
100,665
(174)
100,491
25,636
74,855
(7,924)
(4,326)
62,605
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.06 $
2.05 $
2.23 $
2.22 $
1.85
1.84
Weighted average common shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,766,310 34,957,244 33,792,759
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,943,873 35,137,495 34,058,949
See accompanying notes to consolidated financial statements.
60
CORESITE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2019
2018
2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,037 $ 106,763 $ 100,491
Other comprehensive (loss) income:
Unrealized (loss) gain on derivative contracts . . . . . . . . . . . . . . . . .
Reclassification of other comprehensive income (loss) to interest
expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income attributable to noncontrolling interests . . .
Comprehensive income attributable to CoreSite Realty
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,038)
(3,676)
580
212
94,211
22,030
(326)
102,761
27,912
623
101,694
25,985
$ 72,181
$ 74,849 $ 75,709
See accompanying notes to consolidated financial statements.
61
CORESITE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
(in thousands except share data)
Preferred
Stock
115,000 33,896,771 $
Number
Common Shares
Amount
Balance at January 1, 2017 . . . . . . . . . . . . . . . . $
Redemption of noncontrolling interests . . . . . . .
Redemption of preferred stock . . . . . . . . . . . . .
Issuance of stock awards, net of forfeitures . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . .
Dividends declared on preferred stock . . . . . . . .
Dividends and distributions . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . $
Redemption of noncontrolling interests . . . . . . .
Issuance of stock awards, net of forfeitures . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . .
Dividends and distributions . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . $
Redemption of noncontrolling interests . . . . . . .
Issuance of stock awards, net of forfeitures . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . .
Dividends and distributions . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . .
Balance at December 31, 2019 . . . . . . . . . . . . $
—
(115,000)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
15,011
—
131,272
197,761
—
—
—
—
—
34,240,815 $
2,261,068
188,152
18,656
—
—
—
—
36,708,691 $
803,610
171,354
17,387
—
—
—
—
37,701,042 $
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss) Net Income Equity
Distributions
Total
in Excess of Stockholders' Noncontrolling
Interests
Total
Equity
334 $
—
—
—
2
2
—
—
—
—
338 $
23
—
—
2
—
—
—
363 $
8
—
—
2
—
—
—
373 $
438,531 $
167
4,326
—
4,818
9,653
—
—
—
—
457,495 $
20,852
—
310
12,657
—
—
—
491,314 $
5,414
—
364
15,232
—
—
—
512,324 $
(101) $
—
—
—
—
—
—
—
—
854
753 $
127
—
—
—
—
—
(3,073)
(2,193) $
(174)
—
—
—
—
—
(3,659)
(6,026) $
(118,038) $
—
(4,326)
—
—
—
(7,924)
(122,133)
74,855
—
(177,566) $
—
—
—
—
(147,285)
77,922
—
(246,929) $
—
—
—
—
(177,420)
75,840
—
(348,509) $
435,726 $
167
(115,000)
—
4,820
9,655
(7,924)
(122,133)
74,855
854
281,020 $
21,002
—
310
12,659
(147,285)
77,922
(3,073)
242,555 $
5,248
—
364
15,234
(177,420)
75,840
(3,659)
158,162 $
161,360 $
(167)
—
—
—
—
—
(49,554)
25,636
349
137,624 $
(21,002)
—
—
—
(52,456)
28,841
(929)
92,078 $
(5,248)
—
—
—
(53,134)
23,197
(1,167)
55,726 $
597,086
—
(115,000)
—
4,820
9,655
(7,924)
(171,687)
100,491
1,203
418,644
—
—
310
12,659
(199,741)
106,763
(4,002)
334,633
—
—
364
15,234
(230,554)
99,037
(4,826)
213,888
See accompanying notes to consolidated financial statements.
62
CORESITE REALTY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of above/below market leases . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs and hedge amortization . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bad debt expense (recovery) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Initial direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenue, prepaid rent and other liabilities . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES
Year Ended December 31,
2018
2019
2017
99,037 $
106,763 $
100,491
152,925
(254)
3,338
14,384
291
(2,836)
4,827
(13,422)
(8,132)
8,208
(9,097)
2,316
251,585
141,633
(580)
2,370
12,038
(229)
10,923
(3,124)
(11,672)
(4,079)
3,502
(1,275)
2,491
258,761
129,251
(598)
1,676
8,946
1,338
(5,087)
(3,645)
(13,315)
(10,924)
1,224
(2,235)
2,234
209,356
Tenant improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business combinations and asset acquisitions . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,014)
(342,187)
(26,060)
(372,261)
(5,247)
(239,715)
(10,681)
(255,643)
(7,850)
(153,956)
(12,158)
(173,964)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from unsecured debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of loan fees and costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends and distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . .
Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
364
397,298
(546,299)
500,000
(6,337)
—
(223,901)
121,125
449
2,599
3,048 $
310
253,036
(211,036)
150,000
(5,038)
—
(193,038)
(5,766)
(2,648)
5,247
2,599 $
4,820
274,000
(298,500)
275,000
(2,410)
(115,000)
(172,484)
(34,574)
818
4,429
5,247
Cash paid for interest, net of capitalized amounts . . . . . . . . . . . . . . . . . . . . . $
Cash paid for operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
31,123 $
25,206 $
32,579 $
21,994 $
22,252
20,764
NON-CASH INVESTING AND FINANCING ACTIVITY
Construction costs payable capitalized to real estate . . . . . . . . . . . . . . . . . . $
Accrual of dividends and distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
64,776 $
62,332 $
41,328 $
55,679 $
32,228
48,976
NON-CASH OPERATING ACTIVITY
Lease liabilities arising from obtaining right-of-use assets . . . . . . . . . . . . . . $
1,040 $
114,989 $
8,330
See accompanying notes to consolidated financial statements.
63
CORESITE REALTY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
CoreSite Realty Corporation (the “Company,” “we,” “us,” or “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”).
Through our controlling interest in CoreSite, L.P. (our “Operating Partnership”), we are engaged in the business of
owning, acquiring, constructing and operating data centers. As of December 31, 2019, the Company owns a 77.6%
common interest in our Operating Partnership, and affiliates of The Carlyle Group and others own a 22.4% interest in
our Operating Partnership. See additional discussion in Note 11, Noncontrolling Interests – Operating Partnership.
Information with respect to square footage and acres of land is unaudited.
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”) and in compliance with the rules and regulations of the
U.S. Securities and Exchange Commission. In the opinion of our management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been included.
Our Operating Partnership meets the definition and criteria of a variable interest entity (“VIE”) and we are the
primary beneficiary of the VIE. Our sole significant asset is the investment in our Operating Partnership, and
consequently, substantially all of our assets and liabilities represent those assets and liabilities of our Operating
Partnership. Our debt is an obligation of our Operating Partnership where the creditors also have recourse against the
credit of the Company. Intercompany balances and transactions have been eliminated upon consolidation.
Recent Accounting Pronouncements
Fair Value Measurement
In August 2018, the FASB issued guidance codified in ASU 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 improves
the overall usefulness of disclosures to financial statement users and reduces unnecessary costs in preparing fair value
measurement disclosures. The standard will be effective for interim and annual reporting periods beginning after
December 15, 2019, with early adoption permitted. We will adopt this standard effective January 1, 2020, and we do not
expect the provisions of ASU 2018-13 to have a material impact on our consolidated financial statements.
Intangibles – Goodwill and Other – Internal-Use Software
In August 2018, the FASB issued guidance codified in ASU 2018-15, Intangibles – Goodwill and Other –
Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract. ASU 2018-15 clarifies that implementation costs incurred by
customers in cloud computing arrangements are deferred if they would be capitalized by customers in software licensing
arrangements under the internal-use software guidance. Additionally, ASU 2018-15 clarifies that all capitalized costs
must be presented in the same financial statement line item as the cloud computing arrangement. The standard will be
effective, on either a prospective or retrospective basis, for interim and annual reporting periods beginning after
December 15, 2019, with early adoption permitted. We will adopt this standard effective January 1, 2020, and we do not
expect the provisions of ASU 2018-15 to have a material impact on our consolidated financial statements.
We determined that all other recently issued accounting pronouncements will not have a material impact on our
consolidated financial statements or do not apply to our operations.
64
Use of Estimates
The preparation of these 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 our standalone selling prices,
performance-based equity compensation plans and the carrying values of our real estate properties, goodwill and accrued
liabilities. 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.
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 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 land development and construction periods, we capitalize construction costs, legal fees, financing
costs, real estate taxes and insurance, rent expense 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 project 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 $13.6 million, $5.6 million and $3.3 million for the years
ended December 31, 2019, 2018, and 2017, 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 10 years
Leasehold improvements . The shorter of the lease term or useful life of the asset
Depreciation expense was $136.0 million, $122.9 million and $108.1 million for the years ended December 31,
2019, 2018, and 2017, respectively.
Acquisition of Investment in Real Estate
When accounting for business combinations and asset acquisitions, 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 primary difference between business combinations and asset
acquisitions is that asset acquisitions require cost accumulation and allocation at a relative fair value. Acquisition costs
are capitalized for asset acquisitions and expensed for business combinations.
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” fair value is then allocated to land and building based on management’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 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's estimate of market lease rates for the corresponding in-place leases, measured over
a period equal to the remaining noncancelable term of the lease and, for below-market leases, over a time period equal to
the initial term plus any below-market fixed rate renewal periods. Lease origination costs include estimates of costs
65
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 rental
services, interconnection services, and utility services to be provided to the in-place lease tenants.
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 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. 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, 2019,
2018, or 2017.
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, 2019, and
2018, we had $40.6 million of goodwill at each date. The Company’s goodwill has an indeterminate life and is not
amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. No impairment loss was recognized for the years ended December 31, 2019,
2018, or 2017.
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.
Initial Direct Costs
Initial direct costs include commissions paid to third parties, including brokers, leasing and referral agents, and
internal sales commissions paid to employees for successful execution of lease agreements. Initial direct costs are
incremental costs that would not have been incurred if the lease agreement had not been executed. These initial direct
costs are capitalized and generally amortized over the term of the related leases using the straight-line method. If a
customer lease terminates prior to the expiration of its initial term, any unamortized initial direct costs related to the
lease are written off to amortization expense. Amortization of initial direct costs was $14.2 million, $15.6 million, and
$16.3 million for the years ended December 31, 2019, 2018, and 2017, respectively. Initial direct costs are included
within other assets in the consolidated balance sheets and consisted of the following, net of amortization, as of
December 31, 2019, and 2018 (in thousands):
Internal sales commissions . . . . . . . . . . . . . . . . . . . .
Third party commissions . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
15,064
10,845
462
26,371
$
$
14,199
9,855
597
24,651
December 31,
2019
December 31,
2018
Deferred Financing Costs
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 indebtedness and the amortization is included as a component of interest expense.
Depending on the type of debt instrument, deferred financing costs are reported either in other assets or as a direct
deduction from the carrying amount of the related debt liabilities in our consolidated balance sheets.
66
Recoverability of Long-Lived Assets
We 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, 2019, 2018, and 2017, no impairment of long-lived assets was recognized
in the consolidated financial statements.
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 gain or
loss on the hedging instruments as a component of accumulated other comprehensive income or loss. 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 Note 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, 2019, 2018, and 2017, no impairment of internal-use software was
recognized in the consolidated financial statements.
Revenue Recognition
Rental, Power, and Related Revenue
We derive our revenues from leases with customers for data center and office and light-industrial space. Our
leases include rental revenue lease components and nonlease revenue components, such as power and tenant
reimbursements. We have elected to combine all of our nonlease revenue components that have the same pattern of
transfer as the related operating lease component into a single combined lease component.
Our leases with customers are classified as operating leases and rental revenue is recognized on a straight-line
basis over the customer lease term. Occasionally, our customer leases include options to extend or terminate the lease
agreements. We do not include any of these extension or termination options in a customer’s lease term for lease
classification purposes or for recognizing rental revenue unless we are reasonably certain the customer will exercise
these extension or termination options. The excess of rents recognized over amounts contractually due pursuant to the
underlying leases is recorded as deferred rent receivable within other assets on our consolidated balance sheets.
In general, we provide two power products for our data center leased space, consisting of a fixed (breakered-
amperage) and a variable (sub-metered) model. Customer power arrangements are coterminous with the customer’s
underlying lease and have the same pattern of transfer over the lease term and are therefore combined with lease revenue
within our consolidated statements of operations. For fixed power arrangements, a customer pays us a fixed monthly fee
for a committed available amount of power. We recognize the fixed power revenue each month over the term of the
lease. For variable power arrangements, a customer pays us variable monthly fees for the specific amount of power
utilized at the current utility rates. We recognize variable power revenue each month as the uncertainty related to the
consideration is resolved, as power is provided to our customers, and as our customers utilize the power.
67
Some of our leases contain provisions under which our customers reimburse us for common area maintenance
and other executory costs. These customer reimbursements are variable and are recognized in the period that the
expenses are recognized. These services have the same pattern of transfer over the lease term and are also combined with
lease revenue within our consolidated statements of operations.
Interconnection Revenue
We also derive revenue from interconnection services, which are generally contracted on a month-to-month
basis cancellable by us or the customer at any time. Interconnection services are accounted for as separate contracts and
are not combined with lease and power arrangements. We recognize interconnection revenue each month as these
services are delivered to, and utilized by, our customers.
Allowance for Doubtful Accounts
A provision for uncollectible accounts is recorded if a receivable balance relating to contractual rent, rental
revenue recorded on a straight-line basis, tenant reimbursements or other billed amounts is considered by management to
be uncollectible. At December 31, 2019, and 2018, the allowance for doubtful accounts totaled $0.4 million on the
consolidated balance sheets at each date.
Lessee Accounting
We determine if an arrangement is a lease at inception. Our operating lease agreements are primarily for real
estate space and are included within operating lease right-of-use (“ROU”) assets and operating lease liabilities on the
consolidated balance sheets. We elected the practical expedient to combine our lease and related nonlease components
for our lessee building leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our
obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the
commencement date based on the present value of lease payments over the lease term. Our variable lease payments
consist of nonlease services related to the lease. Variable lease payments are excluded from the ROU assets and lease
liabilities and are recognized in the period in which the obligation for those payments is incurred. As most of our leases
do not provide an implicit rate, we use our incremental borrowing rate based on the information available at
commencement date in determining the present value of lease payments. ROU assets also include any lease payments
made and exclude lease incentives. Many of our lessee agreements include options to extend the lease, which we do not
include in our minimum lease terms unless they are reasonably certain to be exercised. Rental expense for lease
payments related to operating leases is recognized on a straight-line basis over the lease term.
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 calculated based on the Black-Scholes option-pricing model. The fair value of
restricted share-based and Operating Partnership unit compensation is based on the fair value of our common stock on
the date of the grant. 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. We have elected to account for forfeitures as they occur.
Asset Retirement and Environmental Remediation Obligations
We record accruals for estimated asset retirement and environmental remediation obligations. The obligations
relate primarily to the removal of asbestos during development of properties as well as the estimated equipment removal
costs upon termination of a certain lease where we are the lessee. At December 31, 2019, and 2018, the amount included
in unearned revenue, prepaid rent and other liabilities on the consolidated balance sheets was approximately $1.7 million
and $1.6 million, respectively.
Income Taxes
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”),
commencing with our taxable year ended December 31, 2010. To qualify as a REIT, we are required to distribute at least
68
90% of our taxable income to our stockholders and meet 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 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.
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 regard to our activities and our
subsidiary pass-through entities. The allocable share of taxable income is included in the income tax returns of its
stockholders. We are subject to the statutory requirements of the locations in which we conduct 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.
We have elected to treat certain subsidiaries as taxable REIT subsidiaries (“TRS”). Certain activities that we
undertake must be conducted by a TRS, such as services for our tenants that could be considered otherwise
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.
Deferred income taxes are recognized in certain taxable entities. Deferred income tax generally is a function of
the period’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 years that previously had been 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 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, 2019, and 2018, the gross deferred income taxes were not material.
We currently have no liabilities for uncertain income tax positions. The earliest tax year for which we are
subject to examination is 2016.
Concentration of Credit Risks
Our cash and cash equivalents are maintained in various financial institutions, which, at times, may exceed
federally insured limits. We 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 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.
3. Acquisitions
On August 29, 2017, we acquired a two-acre land parcel adjacent to our existing Santa Clara campus, with a
total real estate cost of $12.2 million. We are currently constructing a 162,000 NRSF data center building on the
acquired land parcel, which we refer to as SV8, of which we have placed 108,000 NRSF into service during the year
ended December 31, 2019.
On January 29, 2018, we acquired a two-acre land parcel located in downtown Chicago, Illinois, for a purchase
price of $4.5 million. We are currently constructing a 169,000 NRSF turn-key data center building on the acquired land
parcel, which we refer to as CH2.
69
On April 20, 2018, we acquired U.S. Colo, a carrier-neutral, network-dense colocation provider, located in Los
Angeles, California, for a purchase price of $6.3 million, net of previously accrued legal expense. In connection with the
U.S. Colo acquisition, we assumed a leasehold interest of 6,723 square feet at our existing LA1 facility. We also
assumed a leasehold interest of 21,850 square feet at a nearby colocation data center facility, which we refer to as LA4.
On April 12, 2019, we acquired a 3.8-acre land parcel with a single-story office building located adjacent to our
Santa Clara campus, for a purchase price of $26 million. We expect to develop an approximately 200,000 NRSF turn-
key data center building on the acquired land parcel, which we refer to as SV9, as the existing office tenants vacate upon
expiration of their leases and upon the receipt of necessary entitlements.
4. Investment in Real Estate
The following is a summary of the properties owned or leased by market at December 31, 2019 (in thousands):
Market
Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Chicago(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Los Angeles(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miami . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northern Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco Bay(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Buildings and Construction in
Land
Improvements
Progress
Total Cost
5,154 $
5,493
—
18,672
728
2,729
21,856
39,961
94,593 $ 1,989,731 $
119,227 $
115,699
32,659
376,525
14,491
155,746
398,742
776,642
931 $
125,312
221,310
100,118
35,120
2,461
455,375
60,178
15,352
133
214,746
56,271
522,217
101,619
72,763
889,366
394,474 $ 2,478,798
(1) Refer to Note 3, Acquisitions, for further detail on CH2, U.S. Colo, SV8, and SV9 acquisitions.
The following is a summary of the properties owned or leased by market at December 31, 2018 (in thousands):
Land
Buildings and
Improvements
Construction in
Progress
Total Cost
5,154 $
5,493
—
18,672
728
2,729
22,793
31,386
86,955 $ 1,730,329 $
107,596 $
113,875
30,740
338,011
14,014
152,956
346,209
626,928
114,394
1,644 $
133,846
14,478
31,216
476
408,371
51,688
14,811
69
189,481
33,796
463,625
94,623
727,461
69,147
265,921 $ 2,083,205
Market
Boston . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Chicago . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Los Angeles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miami . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New York . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Northern Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Francisco Bay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
70
5. Other Assets
Our other assets consisted of the following, net of amortization and depreciation, if applicable for each line
item, as of December 31, 2019, and 2018 (in thousands):
December 31, December 31,
Deferred rent receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Initial direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internal-use software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs - revolving credit facility . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
43,162
24,651
17,708
7,090
5,006
2,880
1,793
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 101,082 $ 102,290
2019
38,335 $
26,371
16,747
7,675
4,848
3,148
3,958
Initial direct costs are amortized as amortization expense on a straight-line basis over the remaining lease terms
of the underlying leases. The estimated amortization of initial direct costs for each of the five succeeding fiscal years is
as follows (in thousands):
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10,926
6,722
3,337
1,506
1,247
2,633
26,371
6. Leases
As the lessee, we currently lease real estate space under noncancelable operating lease agreements for our turn-
key data centers at NY1, LA1, LA4, DC1, DC2, DE1, and DE2, and our corporate headquarters located in Denver,
Colorado. Our leases have remaining lease terms ranging from 1 year to 10 years, some of the leases include options to
extend the leases for up to an additional 20 years. We do not include any of our renewal options in our lease terms for
calculating our lease liability as the renewal options allow us to maintain operational flexibility and we are not
reasonably certain we will exercise these renewal options at this time. The weighted-average remaining non-cancelable
lease term for our operating leases was nine years and ten years at December 31, 2019, and December 31, 2018,
respectively. The weighted-average discount rate was 4.9% at each date.
During the year ended December 31, 2019, we extended the term of approximately 5,300 NRSF at our existing
DE1 data center from October 2019 to October 2024. As a result of this extension, we remeasured the lease liability and
adjusted the ROU asset by approximately $1.0 million.
The components of lease expense were as follows (in thousands):
Lease expense:
Operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
26,566
6,058
32,624
$
$
22,927 $
4,769
27,696 $
20,345
3,780
24,125
Year Ended December 31,
2019
2018
2017
71
The future minimum lease payments to be paid under noncancelable operating leases in effect at December 31,
2019, are as follows (in thousands):
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
Operating
Leases
26,842
26,590
26,197
24,350
23,382
106,361
233,722
(46,279)
187,443
7. Lease Revenue
The components of data center, office, light-industrial, and other lease revenue were as follows (in thousands):
Year Ended December 31,
2019
2018
2017
Lease revenue:
Minimum lease revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Variable lease revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
409,622
87,354
496,976
$
$
390,691
83,992
474,683
$
$
350,497
69,031
419,528
The future minimum lease payments to be received under noncancelable data center, office, light-industrial, and
other operating leases in effect at December 31, 2019, are as follows (in thousands):
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Minimum
Lease Payments
354,857
254,291
170,979
111,055
82,759
212,821
1,186,762
72
8. Debt
A summary of outstanding indebtedness as of December 31, 2019, and 2018, is as follows (in thousands):
Revolving credit facility . . . . . . . . . . . . . 3.01% and 3.95% at December 31, 2019, and
December 31, 2018, respectively
Interest Rate
Maturity
Date
November 8, 2023 $
December 31, December 31,
2019
62,500 $
2018
211,500
2020 Senior unsecured term loan . . . . . . . 3.37% at December 31, 2018
2021 Senior unsecured term loan . . . . . . . 3.90% at December 31, 2018
2022 Senior unsecured term loan . . . . . . . 2.96% and 3.65% at December 31, 2019, and
—
—
April 19, 2022
—
—
200,000
150,000
100,000
200,000
December 31, 2018, respectively
2023 Senior unsecured notes . . . . . . . . . . 4.19% at December 31, 2019, and
December 31, 2018, respectively
June 15, 2023
150,000
150,000
2024 Senior unsecured term loan(1) . . . . . 3.44% and 4.01% at December 31, 2019, and
April 19, 2024
150,000
150,000
December 31, 2018, respectively
2024 Senior unsecured notes . . . . . . . . . . 3.91% at December 31, 2019, and
December 31, 2018, respectively
2025 Senior unsecured term loan(1) . . . . . 2.81% at December 31, 2019
2026 Senior unsecured notes(1) . . . . . . . . . 4.52% at December 31, 2019
2029 Senior unsecured notes . . . . . . . . . . 4.31% at December 31, 2019
Total principal outstanding . . . . . . . . . . .
Unamortized deferred financing costs . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . .
April 20, 2024
175,000
175,000
April 1, 2025
April 17, 2026
April 17, 2029
`
350,000
200,000
200,000
1,487,500
(9,098)
1,478,402 $
—
—
—
1,136,500
(5,677)
1,130,823
$
(1) Our Operating Partnership has in place swap agreements with respect to the term loans noted above. The interest
rates presented represent the effective interest rates as of December 31, 2019, including the impact of the interest
rate swaps, which effectively fix the interest rate on a portion of our variable rate debt. See Note 9 – Derivatives and
Hedging Activities.
Revolving Credit Facility
On November 8, 2019, our Operating Partnership and certain subsidiary co-borrowers entered into the Fifth
Amended and Restated Credit Agreement (as amended and restated, the “Amended and Restated Credit Agreement”),
which amended and restated our previous credit agreement, to provide additional liquidity of $100 million, which was
used to pay down a portion of the then-existing revolving credit facility and for general corporate purposes. The
Amended and Restated Credit Agreement, among other things, decreased the interest rates on borrowings under the
revolving credit facility and certain term loans, and extended the maturity date from April 19, 2022, to November 8,
2023, with a one-time extension option, which, if exercised, would extend the maturity date to November 8, 2024. The
exercise of the extension option is subject to payment of an extension fee equal to 10 basis points of total commitments
under the Amended and Restated Credit Agreement at initial maturity and certain other customary conditions. The
Amended and Restated Credit Agreement increased our total commitment from $850 million to $950 million, consisting
of a $450 million revolving credit facility, a $150 million senior unsecured term loan scheduled to mature on April 19,
2024, and a $350 million senior unsecured term loan scheduled to mature on April 1, 2025. See “2024 Senior Unsecured
Term Loan” and “2025 Senior Unsecured Term Loan” below for a discussion of the $150 million and $350 million
senior unsecured term loans, respectively. The Amended and Restated Credit Agreement also increased our accordion
feature by $200 million to $550 million, which allows our Operating Partnership to increase our total commitments from
$950 million to $1.5 billion, under specified circumstances, including secured capital from new or existing lenders.
Borrowings under the revolving credit facility have been amended to bear interest at a variable rate per annum
equal to either (i) LIBOR plus 125 basis points to 185 basis points, or (ii) a base rate plus 25 basis points to 85 basis
points, each depending on our Operating Partnership’s leverage ratio. At December 31, 2019, our Operating
Partnership’s leverage ratio was 29.0% and the interest rate was LIBOR plus 125 basis points.
The total amount available for borrowing under the revolving credit facility, is equal to the lesser of $450.0
million or the availability calculated based on our unencumbered asset pool. As of December 31, 2019, the borrowing
capacity was $450.0 million. As of December 31, 2019, $62.5 million was borrowed and outstanding, $4.9 million was
73
outstanding under letters of credit, and therefore $382.6 million remained available for us to borrow under the revolving
credit facility.
Our ability to borrow under the Amended and Restated Credit Agreement is subject to ongoing compliance
with a number of financial covenants and other customary restrictive covenants, including, among others:
•
•
•
a maximum leverage ratio (defined as total consolidated indebtedness to total gross asset value) of 60%,
which, as of December 31, 2019, was 29.0%;
a maximum secured debt ratio (defined as total consolidated secured debt to total gross asset value) of
40%, which, as of December 31, 2019, was 0%; and,
a minimum fixed charge coverage ratio (defined as adjusted consolidated earnings before interest, taxes,
depreciation and amortization to consolidated fixed charges) of 1.5 to 1.0, which, as of December 31, 2019
5.9 to 1.0.
The Amended and Restated Credit Agreement ranks pari passu with the 2022 Term Loan, the 2024 Term Loan,
the 2025 Term Loan, the 2023 Notes, the 2024 Notes, the 2026 Notes, and the 2029 Notes (each as defined herein) and
contains the same financial covenants and other customary restrictive covenants as those debt instruments. In connection
with the Amended and Restated Credit Agreement, the revolving credit facility and senior unsecured term loans were
amended to remove or change certain financial covenants and other customary restrictive covenants, including removal
of covenants limiting distributions (except upon an event of default), incurrence of unhedged variable rate debt, and
increases or decreases, as applicable to a number of ratios and other figures in the Amended and Restated Credit
Agreement resulting in increased flexibility for our Operating Partnership. As of December 31, 2019, we were in
compliance with all of the financial covenants under the Amended and Restated Credit Agreement.
2022 Senior Unsecured Term Loan
On April 19, 2017, our Operating Partnership and certain subsidiaries entered into an Amended and Restated
Term Loan Agreement (as amended and restated, the “Term Loan Agreement”), which amended and restated the $100
million senior unsecured term loan, originally entered into on January 31, 2014. The Term Loan Agreement was
amended and restated to, among other things, (i) exercise the accordion feature to increase the total commitments to
$200 million, (ii) extend the maturity of the term loan from January 31, 2019, to April 19, 2022, (iii) amend the
accordion feature to allow an increase in total commitments from $200 million to $300 million, under specified
circumstances, including securing capital from new or existing lenders, and (iv) explicitly permit the issuance of the
2024 Notes (the “2024 Notes”).
The 2022 Term Loan ranks pari passu with the 2024 Term Loan, the 2025 Term Loan, the 2023 Notes, the 2024
Notes, the 2026 Notes, the 2029 Notes, and the Amended and Restated Credit Agreement and contains the same
financial covenants and other customary restrictive covenants as those debt instruments. As of December 31, 2019, we
were in compliance with all of the financial covenants under the 2022 Term Loan.
Borrowings under the 2022 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus
120 basis points to 180 basis points, or (ii) a base rate plus 20 basis points to 80 basis points, each depending on our
Operating Partnership's leverage ratio. At December 31, 2019, our Operating Partnership’s leverage ratio was 29.0% and
the interest rate was LIBOR plus 120 basis points.
2024 Senior Unsecured Term Loan
On November 8, 2019, pursuant to the terms of the Amended and Restated Credit Agreement, our Operating
Partnership and certain subsidiaries extended the term of the $150 million senior unsecured term loan (as amended, the
“2024 Term Loan”) from April 19, 2023, to April 19, 2024. The 2024 Term Loan ranks pari passu with the 2022 Term
Loan, the 2025 Term Loan, the 2023 Notes, the 2024 Notes, the 2026 Notes, the 2029 Notes, and the Amended and
Restated Credit Agreement and contains the same financial covenants and other customary restrictive covenants as those
debt instruments. As of December 31, 2019, we were in compliance with all of the financial covenants under the 2024
Term Loan.
74
Borrowings under the 2024 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus
120 basis points to 180 basis points, or (ii) a base rate plus 20 basis points to 80 basis points, each depending on our
Operating Partnership’s leverage ratio. At December 31, 2019, our Operating Partnership’s leverage ratio was 29.0% and
the interest rate was LIBOR plus 120 basis points.
2025 Senior Unsecured Term Loan
On November 8, 2019, pursuant to the terms of the Amended and Restated Credit Agreement, our Operating
Partnership and certain subsidiaries entered into a new $350 million senior unsecured term loan (the “2025 Term Loan”)
maturing on April 1, 2025. The proceeds from the 2025 Term Loan were used to pay down the previous $150 million
2020 Term Loan and the $100 million 2021 Term Loan, pay down a portion of the then-existing revolving credit facility,
and for general corporate purposes. The 2025 Term Loan ranks pari passu with the 2022 Term Loan, the 2024 Term
Loan, the 2023 Notes, the 2024 Notes, the 2026 Notes, the 2029 Notes, and the Amended and Restated Credit
Agreement and contains the same financial covenants and other customary restrictive covenants as those debt
instruments. As of December 31, 2019, we were in compliance with all of the financial covenants under the 2025 Term
Loan.
Borrowings under the 2025 Term Loan bear interest at a variable rate per annum equal to either (i) LIBOR plus
120 basis points to 180 basis points, or (ii) a base rate plus 20 basis points to 80 basis points, each depending on our
Operating Partnership’s leverage ratio. At December 31, 2019, our Operating Partnership’s leverage ratio was 29.0% and
the interest rate was LIBOR plus 120 basis points.
2023 Senior Unsecured Notes
On June 15, 2016, our Operating Partnership issued an aggregate principal amount of $150 million, 4.19%
senior unsecured notes due June 15, 2023 (the “2023 Notes”), in a private placement to certain accredited investors. The
terms of the 2023 Notes are governed by a note purchase agreement, dated June 15, 2016 (the “2023 Note Purchase
Agreement”), by and among our Operating Partnership, the Company and the purchasers of the 2023 Notes.
Interest is payable semiannually, on the 15th day of June and December of each year, commencing on
December 15, 2016. The 2023 Notes are senior unsecured obligations of our Operating Partnership and are jointly and
severally guaranteed by the Company and each of our Operating Partnership’s subsidiaries that guarantees indebtedness
under our Amended and Restated Credit Agreement (the “Subsidiary Guarantors”).
Our Operating Partnership may prepay all or a portion of the 2023 Notes upon notice to the holders for 100% of
the principal amount so prepaid plus a make-whole premium as set forth in the 2023 Note Purchase Agreement. Upon
the occurrence of certain change of control events, holders of the 2023 Notes have the right to require our Operating
Partnership to purchase 100% of such holder’s 2023 Notes in cash at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The 2023 Notes rank pari passu with the 2022 Term Loan, the 2024 Term Loan, the 2025 Term Loan, the 2024
Notes, the 2026 Notes, the 2029 Notes, and the Amended and Restated Credit Agreement. On June 12, 2018, the 2023
Note Purchase Agreement was amended to, among other things, conform to the same financial covenants as the
Amended and Restated Credit Agreement, as described above. In addition, certain additional financial covenants in the
Amended and Restated Credit Agreement were automatically incorporated into the 2023 Note Purchase Agreement, and,
subject to certain conditions, these additional financial covenants will be deleted, removed, amended or otherwise
modified to be more or less restrictive if the analogous covenant in the Credit Agreement is so deleted, removed,
amended or otherwise modified. These covenants are subject to a number of exceptions and qualifications set forth in the
2023 Note Purchase Agreement. As of December 31, 2019, we were in compliance with all of the financial covenants
under the 2023 Note Purchase Agreement.
2024 Senior Unsecured Notes
On April 20, 2017, our Operating Partnership issued an aggregate principal amount of $175 million, 3.91%
senior unsecured notes due April 20, 2024 (the “2024 Notes”), in a private placement to certain accredited investors. The
terms of the 2024 Notes are governed by a note purchase agreement, dated April 20, 2017 (the “2024 Note Purchase
Agreement”), by and among our Operating Partnership, the Company and the purchasers of the 2024 Notes.
75
Interest is payable semiannually, on the 15th day of June and December of each year, commencing on
December 15, 2017. The 2024 Notes are senior unsecured obligations of our Operating Partnership and are jointly and
severally guaranteed by the Company and each of the Subsidiary Guarantors.
Our Operating Partnership may prepay all or a portion of the 2024 Notes upon notice to the holders for 100% of
the principal amount so prepaid plus a make-whole premium as set forth in the 2024 Note Purchase Agreement. Upon
the occurrence of certain change of control events, holders of the 2024 Notes will have the right to require our Operating
Partnership to purchase 100% of such holders’ 2024 Notes in cash at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The 2024 Notes rank pari passu with the 2022 Term Loan, the 2024 Term Loan, the 2025 Term Loan, the 2023
Notes, the 2026 Notes, the 2029 Notes, and the Amended and Restated Credit Agreement. On June 12, 2018, the 2024
Note Purchase Agreement was amended to, among other things, conform to the same financial covenants as the
Amended and Restated Credit Agreement, as described above. In addition, certain additional financial covenants in the
Amended and Restated Credit Agreement were automatically incorporated into the 2024 Note Purchase Agreement, and,
subject to certain conditions, these additional financial covenants will be deleted, removed, amended or otherwise
modified to be more or less restrictive if the analogous covenant in the Amended and Restated Credit Agreement is so
deleted, removed, amended or otherwise modified. These covenants are subject to a number of exceptions and
qualifications set forth in the 2024 Note Purchase Agreement. As of December 31, 2019, we were in compliance with all
of the financial covenants under the 2024 Note Purchase Agreement.
2026 Senior Unsecured Notes
On April 17, 2019, our Operating Partnership issued an aggregate principal amount of $200 million, 4.11%
Series A senior unsecured notes due April 17, 2026 (the “2026 Notes”), in a private placement to certain accredited
investors. After giving effect to cancellation costs incurred in connection with the termination of an interest rate swap
agreement entered into in anticipation of the issuance of the Notes, the 2026 Notes bear an effective interest rate of
4.52% per annum. The terms of the 2026 Notes are governed by a note purchase agreement, dated April 17, 2019 (the
“2026 Note Purchase Agreement”), by and among our Operating Partnership, the Company and the purchasers of the
2026 Notes.
Interest is payable semiannually, on the 15th day of February and August of each year, commencing on
February 15, 2020. The 2026 Notes are senior unsecured obligations of our Operating Partnership and are jointly and
severally guaranteed by the Company and each of the Subsidiary Guarantors.
Our Operating Partnership may prepay all or a portion of the 2026 Notes upon notice to the holders for 100% of
the principal amount plus a make-whole premium as set forth in the 2026 Note Purchase Agreement. Upon the
occurrence of certain change of control events, holders of the 2026 Notes would have the right to require our Operating
Partnership to purchase 100% of such holders’ 2026 Notes in cash at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The 2026 Notes rank pari passu with the 2022 Term Loan, the 2024 Term Loan, the 2025 Term Loan, the 2023
Notes, the 2024 Notes, the 2029 Notes and the Amended and Restated Credit Agreement. The 2026 Note Purchase
Agreement conforms to the same financial covenants as the Amended and Restated Credit Agreement, as described
above. In addition, on the date of the 2026 Note Purchase Agreement and from time to time, certain additional financial
covenants in the Amended and Restated Credit Agreement will be automatically incorporated into the 2026 Note
Purchase Agreement and, subject to certain conditions, will be deleted, removed, amended or otherwise modified to be
more or less restrictive if the analogous covenant in the Amended and Restated Credit Agreement is so deleted,
removed, amended or otherwise modified. These covenants are subject to a number of exceptions and qualifications set
forth in the 2026 Note Purchase Agreement. As of December 31, 2019, we were in compliance with all of the financial
covenants under the 2026 Note Purchase Agreement.
2029 Senior Unsecured Notes
As mentioned above, on April 17, 2019, our Operating Partnership entered into the 2026 Note Purchase
Agreement to issue the 2026 Notes and an additional aggregate principal amount of $200 million, 4.31% Series B senior
76
unsecured notes due April 17, 2029 (the “2029 Notes”), in a private placement to certain accredited investors. An
aggregate principal amount of $125 million of the 2029 Notes was issued on April 17, 2019. The remaining $75 million
of the 2029 Notes was issued on July 17, 2019. The terms of the 2029 Notes are governed by the 2026 Note Purchase
Agreement, by and among our Operating Partnership, the Company and the purchasers of the 2029 Notes.
Interest is payable semiannually, on the 15th day of February and August of each year, commencing on
February 15, 2020. The 2029 Notes are senior unsecured obligations of our Operating Partnership and are jointly and
severally guaranteed by the Company and each of the Subsidiary Guarantors.
Our Operating Partnership may prepay all or a portion of the 2029 Notes upon notice to the holders for 100% of
the principal amount plus a make-whole premium as set forth in the 2026 Note Purchase Agreement. Upon the
occurrence of certain change of control events, holders of the 2029 Notes would have the right to require our Operating
Partnership to purchase 100% of such holders’ 2029 Notes in cash at a purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The 2029 Notes rank pari passu with the 2022 Term Loan, the 2024 Term Loan, the 2025 Term Loan, the 2023
Notes, the 2024 Notes, the 2026 Notes, and the Amended and Restated Credit Agreement. As of December 31, 2019, we
were in compliance with all of the financial covenants under the 2026 Note Purchase Agreement.
Debt Maturities
The following table summarizes when our debt currently becomes due (in thousands):
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
—
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,000
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
212,500
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
325,000
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
750,000
Total principal outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,487,500
(9,098)
Unamortized deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,478,402
9. Derivatives and Hedging Activities
The following table summarizes our derivative positions as of the years ended December 31, 2019, and 2018 (in
thousands):
Notional Amount
December 31, December 31,
2019
2018
Type of
Derivative
Strike Rate
as of 12/31/19
Effective
Date
$
$
— $
75,000
75,000
—
100,000
75,000
325,000 $
50,000 Interest Rate Swap
75,000 Interest Rate Swap
75,000 Interest Rate Swap
175,000 Interest Rate Swap
— Interest Rate Swap
— Interest Rate Swap
375,000
— % 2/28/2014
5/5/2015
2.63
5/5/2018
3.92
6/3/2019
—
11/8/2019
2.79
11/8/2019
2.79
Fair Value (Level 2) (1)
Expiration December 31, December 31,
2019
2018
Date
1/31/2019 $
5/5/2020
4/5/2023
4/3/2019
4/1/2025
4/1/2025
$
— $
67
(2,819)
—
55
41
(2,656) $
43
1,099
(897)
(3,183)
—
—
(2,938)
(1) Derivative assets are recorded at fair value in our condensed consolidated balance sheets in other assets and
derivative liabilities are recorded at fair value in our condensed consolidated balance sheets in unearned revenue,
prepaid rent and other liabilities. We do not net our derivative position by counterparty for purposes of balance sheet
presentation and disclosure.
77
Risk Management Objective of Using Derivatives
We are exposed to certain risks arising from both our business operations and economic conditions. We
principally manage our exposures to a wide variety of business and operational risks through management of our core
business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing
the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we
enter into derivative financial instruments to manage exposures that arise from business activities that result in the
receipt or payment of future known or uncertain cash amounts, the value of which are determined by interest rates. Our
derivative financial instruments are used to manage differences in the amount, timing, and duration of our known or
expected cash receipts and our known or expected cash payments principally related to our investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
Our objectives in using interest rate derivatives are to reduce variability in interest expense and to manage our
exposure to adverse interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part
of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of
variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the
agreements without exchange of the underlying notional amount.
The changes in the fair value of derivatives designated and that qualify as effective cash flow hedges is
recorded in accumulated other comprehensive income or loss on the consolidated balance sheets and is subsequently
reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
The following table shows the effect of the derivatives on our consolidated financial statements (in thousands):
Year Ended December 31,
2019
2018
2017
Cash Flow Hedges
Unrealized gain (loss) recognized in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . $ (5,038) $ (3,676) $
Gain (loss) reclassified from other comprehensive income to interest expense . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(326)
35,526
212
41,712
580
623
24,147
Amounts reported in accumulated other comprehensive income or 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, 2020, we estimate that $1.6 million will be reclassified as an increase to interest expense.
10. Stockholders’ Equity
At December 31, 2019, 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.
Common Stock
At December 31, 2019, we had 37.7 million shares of common stock issued and outstanding. Since our IPO, we
have issued common stock under our 2010 Plan (as defined in Note 12, Equity Incentive Award Plan), in which certain
of our employees and outside directors participate to provide compensation in the form of common stock. Under the
2010 Plan, we received proceeds from the exercise of stock options of $0.4 million, $0.3 million, and $4.8 million for
the years ended December 31, 2019, 2018, and 2017, 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 188,741, 206,808 and 329,033 during the years ended December 31, 2019, 2018, and 2017, respectively. See
Note 12, Equity Incentive Award Plan, for additional information on our 2010 Plan.
During the years ended December 31, 2019, 2018, and 2017, 800,000, 2,250,000 and 3,000,000 common
Operating Partnership units held by the Carlyle Group were redeemed on a one-for-one basis for shares of our common
78
stock in connection with the sale by The Carlyle Group of our common stock. During the years ended December 31,
2019, 2018, and 2017, 3,610, 11,068 and 15,011 common Operating Partnership units held by other third parties were
redeemed on a one-for-one basis for shares of our common stock, respectively. See Note 11, Noncontrolling Interests –
Operating Partnership, for additional information.
Preferred Stock
On December 12, 2017, the Company redeemed an aggregate of 4,600,000 shares of its 7.25% Series A
Cumulative Redeemable Preferred Stock, or the Series A Preferred Stock, for $25.00 per share, plus all accrued and
unpaid dividends in an amount equal to $0.292014 per share, for a total payment of $25.292014 per share, or $116.3
million in aggregate. The excess of the redemption price over the carrying value of the Series A Preferred Stock of
approximately $4.3 million relates to the original issuance costs and was recorded as a reduction to net income
attributable to common shares. The Series A Preferred Stock were originally issued on December 12, 2012, for net
proceeds of $110.6 million. Dividends were cumulative on the Series A Preferred Stock from the date of original
issuance in the amount of $1.8125 per share each year, which was equivalent to 7.25% of the $25.00 liquidation
preference per share. Dividends on the Series A Preferred Stock were payable quarterly in arrears.
Dividends
In 2019, 2018, and 2017, 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:
Record Date
Common Stock:
Year Ended December 31,
2018
2017
2019
Ordinary income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Qualified dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total dividend (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.07 $
—
—
1.57
4.64 $
3.09 $
—
—
0.93
4.02 $
2.13
—
—
0.91
3.04
Preferred Stock:
Ordinary income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Qualified dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total dividend (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
—
— $
— $
—
—
— $
1.36
—
—
1.36
(1) All 2018 and 2019 ordinary dividends are eligible for the 20% deduction generally allowable to non-corporate
shareholders under Internal Revenue Code Section 199A. Shareholders are encouraged to consult with their tax
advisors regarding their specific treatment of CoreSite distributions.
(2) A $1.22 per share or unit distribution was paid in January, all of which will apply to tax year 2020. A $1.10 per
share or unit distribution was paid in January 2019, all of which will apply to tax year 2019. A $0.98 per share or
unit distribution was paid in January 2018, all of which applied to tax year 2018. Of the $2.36 taxable dividend in
2016, $0.80 was paid in January 2017, of which $0.44 applied to tax year 2017.
(3) All outstanding shares and dividends of the 7.25% Series A Cumulative Redeemable Preferred Stock were
redeemed at $25.292014 per share at December 12, 2017. Of the $1.81 taxable dividend in 2016, $0.45 was paid in
January 2017.
In order to comply with the REIT 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, at a minimum, a percentage of our cash flow to ensure we will meet the
distribution requirements of the Code, while allowing us to retain cash to meet other needs, such as capital
79
improvements and other investment activities. Any subsequent increases and/or anticipated increases are generally
correlated to increases in our growth of cash flow.
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 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. Following passage of
the Tax Cuts and Jobs Act in late 2017, beginning with tax year 2018 REIT, ordinary dividends are eligible for a 20%
deduction generally allowable to non-corporate shareholders.
Pursuant to the terms of our preferred stock, we were 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 had been paid
and sufficient funds had been set aside for dividends that had been declared for the relevant dividend period with respect
to the preferred stock. On December 12, 2017, we redeemed our preferred stock in its entirety.
Our federal tax return for the year ended December 31, 2019 has not been filed. The taxability information
presented for our dividends paid in 2019 is based upon management’s estimates.
11. Noncontrolling Interests — Operating Partnership
Noncontrolling interests represent the limited partnership interests in our 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.
The following table shows the common ownership interest in our Operating Partnership as of December 31,
2019, and December 31, 2018:
CoreSite Realty Corporation . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
37,244,987
10,771,658
48,016,645
77.6 %
22.4
100.0 %
36,256,032
11,575,268
47,831,300
75.8 %
24.2
100.0 %
December 31, 2019
Number of Units Percentage of Total
December 31, 2018
Number of Units Percentage of Total
For each share of common stock issued by us, our Operating Partnership issues to us an equivalent common
Operating Partnership unit. During the year ended December 31, 2019, we issued 185,345 shares of common stock
related to employee compensation arrangements and therefore an equivalent number of common Operating Partnership
units were issued to us by our Operating Partnership.
Holders of common Operating Partnership units of record as of March 29, 2019, June 28, 2019, September 30,
2019, and December 31, 2019, received quarterly distributions of $1.10 per unit, $1.22 per unit, $1.22 per unit, and
$1.22 per unit, respectively, payable in correlation with declared dividends on shares of our common stock.
During the years ended December 31, 2019, 2018, and 2017, 803,610, 2,261,068, and 15,011, common
Operating Partnership units held by The Carlyle Group and other third parties were redeemed on a one-for-one basis for
shares of our common stock in connection with the sale by The Carlyle Group and other third parties of shares of our
common stock, respectively. These redemptions were recorded as $5.2 million, $21.0 million, and $0.2 million
reductions to noncontrolling interests in our Operating Partnership and a corresponding increase to total stockholder’s
equity in the consolidated balance sheets for the years ended December 31, 2019, 2018, and 2017, respectively.
The redemption value of the noncontrolling interests at December 31, 2019, was $1.2 billion based on the
closing price of the Company’s common stock of $112.12 on the last trading day prior to that date.
80
12. Equity Incentive Plan
Our Board of Directors adopted and, with the approval of our stockholders, amended the 2010 Equity Incentive
Plan (as amended, the “2010 Plan”) in 2013. The 2010 Plan is administered by the Compensation Committee of our
Board of 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 6,000,000 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 unvested shares
subject to the award will be available for future grant or sale under the 2010 Plan. Shares of restricted stock that are
forfeited or repurchased by us pursuant to the 2010 Plan may again be 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, 2019, 2,674,745 shares of our common stock were 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’s
common stock on the date of grant. The fair value of each option granted under the 2010 Plan is estimated on the date of
grant using the Black-Scholes option-pricing model. The fair values are amortized on a straight-line basis over the
vesting periods. Stock options have not been granted since the year ended December 31, 2013. The following table sets
forth stock option activity under the 2010 Plan for the years ended December 31, 2019, 2018, and 2017
Options outstanding, December 31, 2016 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding, December 31, 2017 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding, December 31, 2018 . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding, December 31, 2019 . . . . . . . . . . . . . . .
Number of
Shares
Subject
to Option
265,550 $
—
(197,761)
—
—
67,789 $
—
(18,656)
—
—
49,133 $
—
(17,387)
—
—
31,746 $
Weighted
Average
Remaining
Contractual
Term
5.0 years
Aggregate
Intrinsic
Value
$ 15.0 million
$ 13.3 million
3.4 years
$ 6.4 million
$ 1.6 million
2.6 years
$ 3.3 million
$ 1.7 million
Weighted
Average
Exercise
Price
22.96
—
24.37
—
—
19.12
—
16.63
—
—
20.06
—
20.94
—
—
19.57 1.4 years
$ 2.9 million
As of December 31, 2017, all stock option awards were fully vested and exercisable.
81
Restricted Stock Awards and Units
Restricted stock awards and restricted stock units, or RSUs, are granted with a fair value equal to the closing
market price of the Company's common stock on the date of grant. The principal difference between restricted stock
awards and RSUs is that RSUs are not shares of our 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 and RSUs are amortized on a straight-line basis to expense over the vesting
period.
The following table sets forth the number of unvested restricted stock awards and RSUs and the weighted-
average fair value of these awards at the date of grant:
Unvested balance, December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested balance, December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested balance, December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested balance, December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted Stock
Awards and
Units
323,641 $
139,788
(34,020)
(139,566)
289,843 $
155,697
(36,546)
(124,115)
284,879 $
160,361
(21,910)
(130,957)
292,373 $
Weighted
Average Fair
Value at
Grant Date
53.84
85.79
64.00
44.31
70.71
96.47
84.10
64.03
85.98
99.91
94.03
78.32
96.44
As of December 31, 2019, total unearned compensation on restricted stock awards and RSUs was
approximately $19.1 million, and the weighted-average vesting period was 2.4 years.
Performance Stock Awards
We grant long-term incentives to members of management in the form 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 ranges
between 25% and 175% of the target number of shares for PSAs granted in 2017, 2018, and 2019. The PSAs are granted
at the maximum percentage of target and are retired annually to the extent we do not meet the maximum relative TSR
performance threshold versus the MSCI US REIT Index. The PSAs are earned upon TSR achievement measured both
annually and over the full three-year performance period. The PSAs have a service condition and will be released at the
end of the three-year performance period, to the extent earned, provided that the holder continues to be employed or
otherwise in service of the Company at the end of the three-year performance period. The PSAs are amortized on a
straight-line basis to expense over the vesting period. Holders of the PSAs are entitled to dividends on the PSAs, which
are accrued and paid in cash at the end of the three-year performance period.
82
The following table sets forth the number of unvested PSAs and the weighted-average fair value of these
awards at the date of grant:
Unvested balance, December 31, 2018 . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance adjustment (1) . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested balance, December 31, 2019 . . . . . . . . . . . .
Weighted-
Average Fair
Value at Grant
Minimum
Maximum
Performance-Based Restricted Stock Awards
Target
112,385 $
43,703
(5,878)
(3,571)
(43,650)
102,989 $
173,944
76,480
(29,819)
(5,604)
(43,650)
171,351
50,823
10,926
18,063
(1,538)
(43,650)
34,624
Date
96.58
114.55
—
103.26
84.78
107.84
(1) Includes the annual adjustment for the number of PSAs earned based on our achievement of relative TSR measured
versus the MSCI US REIT Index for the applicable performance periods.
As of December 31, 2019, total unearned compensation on PSAs was approximately $5.6 million, and the
weighted-average vesting period was 1.9 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, 2019, 2018, and 2017:
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected annual dividend(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1) The fair value of the PSAs assumes reinvestment of dividends.
13. Earnings Per Share
2019
2018
2017
2.82
24.09 %
—
2.48 %
2.82
24.15 %
—
2.24 %
2.81
23.33 %
—
1.60 %
Basic net income per share is calculated by dividing the net income attributable to common shares by the
weighted-average number of common shares outstanding during the period. Diluted net income per share adjusts basic
net income per share for the effects of potentially dilutive common shares, if the effect is not antidilutive. Potentially
dilutive common stock consists of shares issuable under the 2010 Plan.
The following is a summary of basic and diluted net income per share (in thousands, except share and per share
amounts):
Net income attributable to common shares . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average common shares outstanding - basic . . . . . . . . . . . .
Effect of potentially dilutive common shares:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average common shares outstanding - diluted . . . . . . . .
Net income per share attributable to common shares
2019
75,840 $
Year Ended December 31,
2018
77,922 $
36,766,310
34,957,244
2017
62,605
33,792,759
36,685
140,878
36,943,873
47,338
132,913
35,137,495
88,399
177,791
34,058,949
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.06 $
2.05 $
2.23 $
2.22 $
1.85
1.84
In the calculations above, we have excluded weighted-average potentially dilutive securities of 2,546, 132,749,
and 24,961 for the years ended December 31, 2019, 2018, and 2017, respectively, as their effect would have been
antidilutive.
83
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 eligible to participate on the first of the month following the date of
hire. Additionally, on the first of the month following six months of employment, we provide a safe harbor contribution
equal to 3% of the participant’s annual salary for the year ended December 31, 2018. The safe harbor contribution was
increased to 4% of the participant’s annual salary, effective January 1, 2019. 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, 2019, 2018, and 2017, our contributions were $1.7
million, $1.21 million, and $1.1 million, respectively.
15. Estimated Fair Value of Financial Instruments
Authoritative guidance issued by 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 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the
reporting entity can access at the assessment date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly.
Level 3 — Unobservable inputs for the asset or liability.
Our financial instruments consist of cash and cash equivalents, accounts and other receivables, interest rate
swaps, the revolving credit facility, the senior unsecured term loans, senior unsecured notes, interest payable and
accounts payable. The carrying values of cash and cash equivalents, accounts and other receivables, interest payable and
accounts payable approximate fair values due to the short-term nature of these 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 our Operating Partnership and its counterparties. As of
December 31, 2019, 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 total principal balance of our revolving credit facility, senior unsecured term loans, and senior unsecured
notes was $1.5 billion and $1.1 billion as of December 31, 2019 and 2018, respectively, which approximates the fair
value based on Level 3 inputs from the fair value hierarchy. Under the discounted cash flow method, the fair values of
the revolving credit facility, the senior unsecured term loans, and the senior unsecured notes are based on our
assumptions of market interest rates and terms available incorporating our credit risk for similar loan maturities.
Our lease liabilities are determined based on the estimated present value of our minimum lease payments under
our lease agreements at least commencement. The discount rate used to determine the lease liabilities is based on our
estimated incremental borrowing rate at lease commencement, based on Level 3 inputs from the fair value hierarchy.
16. Commitments and Contingencies
Our properties require periodic investments of capital for general capital improvements and for tenant related
capital expenditures. We enter into various construction and equipment contracts with third parties for the development
84
of our properties. At December 31, 2019, we had open commitments related to construction contracts of approximately
$189.4 million.
Additionally, we have commitments related to telecommunications capacity used to connect data centers
located within the same market or geographical area and power usage, and company-wide improvements that are
ancillary to revenue generation. At December 31, 2019, we had open commitments related to these contracts of
approximately $74.3 million of which $6.5 million is scheduled to be met during the year ended December 31, 2020.
On April 27, 2018, we filed suit against DGEB Management, LLC and its affiliates, the landlord of our DE1
facility (the “Landlord”), in the District Court, City and County of Denver, State of Colorado (the “District Court”), for
certain claims relating to the building where our DE1 facility is located. The parties asserted various claims and
counterclaims related to three primary areas: (1) a construction project within the DE1 building to house electrical
transformers used to supply power, (2) our usage of images of the DE1 building on our website, and (3) the protocol for
cross-connections within the DE1 building. The Landlord demanded approximately $21 million in damages, which
included approximately $2.8 million related to the construction project, and further sought to hold us in default under the
lease. On August 22, 2019, the jury found in our favor on all claims and counterclaims on which it was asked to decide,
and awarded us nominal damages. Upon unopposed application, the District Court vacated deadlines for post-trial
matters, including our application for reimbursement of legal fees under the lease, to provide time for the parties to
discuss settlement of these post-trial matters. On December 20, 2019, the parties entered into a settlement agreement
pursuant to which, among other matters, the parties agreed to file a joint motion to dismiss the litigation with prejudice
and the Landlord agreed to pay us $3.1 million through delivery of a promissory note bearing interest at a floating rate of
prime plus 2% per annum payable monthly. The promissory note is secured by our lease and other payment obligations,
is fully pre-payable without penalty and is due December 20, 2024.
In the ordinary course of business, we are subject to claims and administrative proceedings. Except as described
above, we are not presently party to any proceeding, which we believe to be material or which we would expect to have,
individually or in the aggregate, a material adverse effect on our business, financial condition, cash flows or results of
operations. The outcome of litigation and administrative proceedings is inherently uncertain. Therefore, if one or more
legal or administrative matters are resolved against us in a reporting period for amounts in excess of management’s
expectations, our financial condition, cash flows or results of operations for that reporting period could be materially
adversely affected.
17. Quarterly Financial Information (unaudited)
The table below reflects the selected quarterly information for the years ended December 31, 2019, and 2018
(in thousands except share data):
Three Months Ended
December 31, September 30, June 30,
2019
2019
2019
March 31,
2019
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 146,035 $ 144,891 $ 142,906 $ 138,895
35,433
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,905
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,661
Net income attributable to common shares . . . . . . . . . . . . . . . . . . . . . . .
0.54
Net income per share attributable to common shares - basic . . . . . $
0.54
Net income per share attributable to common shares - diluted . . . . $
35,684
24,745
19,194
0.51 $
0.51 $
36,056
25,743
19,535
0.54 $
0.53 $
33,643
22,644
17,450
0.47 $
0.47 $
Three Months Ended
December 31, September 30, June 30,
2018
2018
2018
March 31,
2018
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 139,146 $ 139,180 $ 136,447 $ 129,619
36,337
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,566
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20,302
Net income attributable to common shares . . . . . . . . . . . . . . . . . . . . . . .
0.60
Net income per share attributable to common shares - basic . . . . . $
0.59
Net income per share attributable to common shares - diluted . . . . $
35,366
25,898
19,631
0.54 $
0.54 $
36,103
27,279
19,389
0.57 $
0.57 $
34,473
25,020
18,600
0.52 $
0.52 $
85
CoreSite Realty Corporation
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2019
(in thousands)
Initial Cost
Costs Capitalized
Building and Subsequent to
Improvements
Acquisition
Gross Amount Carried at
December 31, 2019
Building and
Land Improvements
Location
Land
Property Name
BO1 . . . . . . . . . . . . . . . . Somerville, MA $
CH1 . . . . . . . . . . . . . . . . Chicago, IL
CH2 . . . . . . . . . . . . . . . . Chicago, IL
DC1 . . . . . . . . . . . . . . . . Washington, DC
DC2 . . . . . . . . . . . . . . . . Washington, DC
DE1 . . . . . . . . . . . . . . . . . Denver, CO
DE2 . . . . . . . . . . . . . . . . . Denver, CO
LA1 . . . . . . . . . . . . . . . . . Los Angeles, CA
LA2 . . . . . . . . . . . . . . . . . Los Angeles, CA
LA3 . . . . . . . . . . . . . . . . . Los Angeles, CA
LA4 . . . . . . . . . . . . . . . . . Los Angeles, CA
MI1 . . . . . . . . . . . . . . . . . Miami, FL
NY1 . . . . . . . . . . . . . . . . New York, NY
NY2 . . . . . . . . . . . . . . . . Secaucus, NJ
SV1 . . . . . . . . . . . . . . . . . San Jose, CA
SV2 . . . . . . . . . . . . . . . . . Milpitas, CA
SV3 . . . . . . . . . . . . . . . . . Santa Clara, CA
SV4 . . . . . . . . . . . . . . . . . Santa Clara, CA
SV5 . . . . . . . . . . . . . . . . . Santa Clara, CA
SV6 . . . . . . . . . . . . . . . . . Santa Clara, CA
SV7 . . . . . . . . . . . . . . . . . Santa Clara, CA
SV8 . . . . . . . . . . . . . . . . . Santa Clara, CA
SV9 . . . . . . . . . . . . . . . . . Santa Clara, CA
VA1 . . . . . . . . . . . . . . . . Reston, VA
VA2 . . . . . . . . . . . . . . . . Reston, VA
VA3 . . . . . . . . . . . . . . . . Reston, VA
Reston Campus Expansion . Reston, VA
6,100 $
5,493
4,383
—
—
—
—
—
18,672
9,795
—
728
—
4,952
6,863
5,086
4,162
4,632
2,572
4,741
3,793
12,158
25,767
6,903
5,197
8,529
5,671
Total $ 146,197 $
26,748 $
49,522
—
4,797
—
37
4
41,657
94,114
—
2,533
9,325
—
18,408
91,719
5,046
3,482
3,716
—
—
—
—
407
32,939
—
26,411
17,538
428,403 $
92,464 $ 5,154 $
5,493
66,321
—
95,591
—
5,311
—
22,560
—
32,647
2,432
—
—
61,776
177,460 18,672
—
48,986
—
382
728
5,299
—
43,340
2,729
148,046
6,863
44,091
5,086
28,342
3,972
50,985
4,501
99,272
2,544
23,577
4,825
36,758
3,595
246,559
8,575
184,198
—
1,440
6,779
95,345
5,539
135,290
3,866
155,722
5,672
4
1,904,198 $ 94,593 $
Total
125,312 $
121,336
99,974
10,108
22,560
32,684
2,436
103,433
290,246
58,781
2,915
15,352
43,340
171,406
142,673
38,474
58,629
107,620
26,149
41,499
250,352
196,356
27,614
135,187
140,487
190,662
23,213
2,384,205 $ 2,478,798 $
120,158 $
115,843
99,974
10,108
22,560
32,684
2,436
103,433
271,574
58,781
2,915
14,624
43,340
168,677
135,810
33,388
54,657
103,119
23,605
36,674
246,757
187,781
27,614
128,408
134,948
186,796
17,541
Year
Accumulated
Depreciation at
Acquired
December 31, 2019 or Leased
66,223
52,821
—
7,404
2,336
9,238
1,081
57,848
94,256
—
890
4,938
29,633
37,441
49,727
23,578
44,812
53,801
3,844
3,377
44,557
1,989
321
81,567
41,563
5,773
1,479
720,498
2007
2010
2018
2010
2017
2012
2012
2010
2010
2010
2018
2010
2007
2013
2010
2006
2007
2007
2007
2007
2007
2017
2019
2007
2007
2016
2016
None of our properties are encumbered.
The aggregate cost of the total properties for federal income tax purposes was approximately $2,133.9 million
(unaudited) at December 31, 2019.
See accompanying report of independent registered public accounting firm.
86
CoreSite Realty Corporation
Schedule III
Real Estate and Accumulated Depreciation (Continued)
December 31, 2019
(in thousands)
The following table reconciles the historical cost and accumulated depreciation of our properties for the years
ended December 31, 2019, 2018, and 2017:
Property
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions - property acquisitions . . . . . . . . . . . . . . . . . . . . .
Additions - improvements . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,083,205 $
26,174
369,419
2,478,798 $
1,821,217 $
7,474
254,514
2,083,205 $
1,643,576
12,158
165,483
1,821,217
2019
Year Ended December 31,
2018
2017
Accumulated Depreciation
Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions, net of disposals . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
590,784 $
129,714
720,498 $
473,141 $
117,643
590,784 $
369,303
103,838
473,141
See accompanying report of independent registered public accounting firm.
87
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’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, 2019, 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, 2019.
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 three months ended December 31,
2019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Management’s Annual Report on Internal Control over 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, 2019, 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, 2019, that our internal control over financial reporting
was effective in providing reasonable assurance of the fair preparation and presentation of published financial
statements.
KPMG LLP, our independent registered public accounting firm, has audited the effectiveness of our internal
control over financial reporting as of December 31, 2019, as stated in their report which begins on page 57 of this
Annual Report.
88
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by Item 10 will be included in our definitive proxy statement relating to our 2020
Annual Meeting of Stockholders, to be filed no later than 120 days after December 31, 2019, 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 2020 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 will be included in our definitive proxy statement relating to our 2020
Annual Meeting of Stockholders, to be filed no later than 120 days after December 31, 2019, 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 our definitive proxy statement relating to our 2020
Annual Meeting of Stockholders, to be filed no later than 120 days after December 31, 2019, 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 our definitive proxy statement relating to our 2020
Annual Meeting of Stockholders, to be filed no later than 120 days after December 31, 2019, and is incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by Item 14 will be included in our definitive proxy statement relating to our 2020
Annual Meeting of Stockholders, to be filed no later than 120 days after December 31, 2019, and is incorporated herein
by reference.
89
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Annual Report or incorporated by reference:
PART IV
(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 86. 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
Number
3.1
3.2
4.1
4.3†
10.1
Description
Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)
Amended and Restated Bylaws of CoreSite Realty Corporation.(19)
Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(2)
Description of Securities.
Amended and Restated Agreement of Limited Partnership of CoreSite, L.P., dated as of December 12,
2012.(7)
10.2
10.3
10.4
10.5
10.6
2010 Equity Incentive Award Plan (As Amended and Restated).(11)*
Form of 2010 Equity Incentive Award Plan Restricted Stock Unit Award Agreement.(1)*
Form of 2010 Equity Incentive Award Plan Stock Option Agreement.(1)*
Form of 2010 Equity Incentive Award Plan Restricted Stock Award Agreement.(1)*
Form of 2010 Equity Incentive Award Plan Restricted Stock Unit Agreement for Non-Employee
Directors.(1)*
10.7
10.8
Form of Indemnification Agreement for directors and officers of CoreSite Realty Corporation. (26)*
Registration Rights Agreement among CoreSite Realty Corporation and the holders listed therein, dated as
of September 28, 2010.(3)
10.9
Lease between Hines REIT One Wilshire Services, Inc. and CRG West One Wilshire, L.L.C., dated as of
August 1, 2007.(1)
10.10
First Amendment to Sublease 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.(9)
Second Amendment to Sublease between GI TC One Wilshire Services, LLC and CoreSite One Wilshire,
10.11
L.L.C. (formerly known as CRG West One Wilshire, L.L.C.), dated as of July 30, 2018.(22)
10.12
Lease between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of August 1,
2007.(1)
10.13
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)
10.14
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.(8)
10.15
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(8).
10.16
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.(9)
10.17
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.(12)
10.18
Sixth Amendment to Lease between GI TC One Wilshire, LLC and CoreSite One Wilshire, L.L.C.,
effective as of May 31, 2016 (formerly known as CRG West One Wilshire, L.L.C.).(15)
10.19
Seventh Amendment to Lease, dated as of June 30, 2018, between GI TC One Wilshire, LLC and CoreSite
One Wilshire, LLC (formerly known as CRG West One Wilshire, L.L.C.).(21)
90
10.20
Eighth Amendment to Lease, date July 10, 2019, between GI TC One Wilshire, LLC and CoreSite One
Wilshire L.L.C (formerly known as CRG West One Wilshire, L.L.C.) (24)
10.21
10.22
10.23
10.24
Form of Restricted Stock Agreement.(3)*
Form of Restricted Unit Agreement.(1)*
Form of Management Rights Agreement.(1)*
CoreSite Realty Corporation and CoreSite, L.P. Senior Management Severance and Change in Control
Program.(1)*
10.25
10.26
Employment Agreement between CoreSite L.L.C. and Jeffrey S. Finnin, dated as of January 4, 2011.(4)*
Employment Agreement between CoreSite L.L.C. and Derek McCandless, dated as of February 7,
2011.(5)*
10.27
10.28
Employment Agreement between CoreSite L.L.C. and Steve Smith, dated April 20, 2015.(10)*
Employment Offer Letter between CoreSite L.L.C. and Brian Warren, dated as of September 25,
2011.(14)*
10.29
10.30
Employment Agreement between CoreSite L.L.C. and Paul E. Szurek, dated as of July 27, 2016.(17)*
Fifth Amended and Restated Credit Agreement, among CoreSite, L.P., the subsidiary borrowers party
thereto, KeyBank National Association, as administrative agent and a lender, the other lenders party
thereto, KeyBanc Capital Markets, RBC Capital Markets, Regions Capital Markets, TD Securities (USA)
LLC and Wells Fargo Securities, as revolving credit and term loan III joint lead arrangers and revolving
credit and term loan III co-syndication agents, KeyBanc Capital Markets, RBC Capital Markets, SunTrust
Robinson Humphrey, Inc., TD Securities (USA) LLC and Wells Fargo Securities, as term loan IV joint
lead arrangers and term loan IV co-syndication agents, dated as of November 8, 2019. (23)
10.31
Amended and Restated Term Loan Agreement among CoreSite, L.P., as borrower, Royal Bank of
Colorado, as administrative agent, on behalf of itself and certain other lenders, and other lenders party
thereto, dated as of April 19, 2017.(20)
10.32
First Amendment to Amended and Restated Term Loan Agreements among CoreSite, L.P., as borrower,
Royal Bank of Canada, as administrative agent, on behalf of itself and certain other lenders, the other
lenders party thereto and the guarantors party thereto, dated as of April 19, 2018.(6)
10.33
Second Amendment to Amended and Restated Term Loan Agreement, among CoreSite, L.P., as borrower,
Royal Bank of Canada, as administrative agent, on behalf of itself and certain other lenders, the other
lenders party thereto and the guarantors party thereto, dated as of November 9, 2019. (23)
10.34
Note Purchase Agreement among CoreSite, L.P., CoreSite Realty Corporation, and the purchasers listed on
the Purchaser Schedule thereto, dated as of June 15, 2016.(16)
10.35
First Amendment to Note Purchase Agreement dated June 15, 2016 among CoreSite, L.P., CoreSite Realty
Corporation and the noteholders party thereto, dated as of June 12, 2018.(13)
10.36
Note Purchase Agreement among CoreSite, L.P., CoreSite Realty Corporation and the purchasers listed on
the Purchasers Schedule thereto, dated as of April 20, 2017.(20)
10.37
First Amendment to Note Purchase Agreement dated April 20, 2017 among CoreSite, L.P., CoreSite
Realty Corporation and the noteholders party thereto, dated as of June 12, 2018.(13)
10.38
10.39
10.40
Amended and Restated Non-Employee Director Compensation Policy.(18)*
2019 Executive Short-Term Incentive Plan. (18)*
Note Purchase Agreement, dated as of April 17, 2019, by and among CoreSite Realty Corporation,
CoreSite, L.P. and the purchasers listed on the Purchaser Schedule thereto. (25)
21.1†
23.1†
31.1†
31.2†
32.1+
Subsidiaries of CoreSite Realty Corporation.
Consent of KPMG LLP.
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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+
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 – the instance document does not appear in the Interactive Data File because its XBRL
tags are imbedded within the Inline XBRL document.
101.SCH† XBRL Taxonomy Extension Schema Document.
101.CAL† XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB† XBRL Taxonomy Extension Label Linkbase Document.
91
101.PRE† XBRL Taxonomy Extension Presentation Linkbase Document.
101.DEF†
104
XBRL Taxonomy Extension Definition Linkbase Document.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Represents management contract or compensatory plan or agreement.
† Filed herewith.
+ Furnished herewith.
(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 Exhibit 99.2 to our Current Report on Form 8-K filed on January 6, 2011.
(5) Incorporated by reference to Exhibit 99.2 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 April 20, 2018.
(7) Incorporated by reference to Exhibit 3.2 to our Current Report on Form 8-K filed on December 18, 2012.
(8) Incorporated by reference to our Quarterly Report on Form 10-Q filed on November 2, 2012.
(9) Incorporated by reference to our Current Report on Form 8-K filed on January 14, 2013.
(10) Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed on April 24, 2015.
(11) Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on May 24, 2013.
(12) Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 4, 2015.
(13) Incorporated by reference to our Current Report on Form 8-K filed on June 13, 2018.
(14) Incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q filed on April 29, 2016.
(15) Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 2, 2016.
(16) Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 16, 2016.
(17) Incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed July 28, 2016.
(18) Incorporated by reference to Exhibit 10.32 to our Quarterly Report on Form 10-Q filed on April 26, 2019.
(19) Incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on March 9, 2017.
(20) Incorporated by reference to our Current Report on Form 8-K filed on April 20, 2017.
(21) Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on July 2, 2018.
(22) Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on October 26, 2018.
(23) Incorporated by reference to our Current Report on Form 8-K filed on November 8, 2019.
(24) Incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed on November 1, 2019.
92
(25) Incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 17, 2019.
(26) Incorporated by reference to Exhibit 10.7 to our Annual Report on Form 10-K filed on February 8, 2019.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
93
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 7, 2020
CORESITE REALTY CORPORATION
By:
/s/ Paul E. Szurek
Paul E. Szurek
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/ Paul E. Szurek
Paul E. Szurek
President and Chief Executive Officer
(Principal Executive Officer) and Director
February 7, 2020
/s/ Jeffrey S. Finnin
Jeffrey S. Finnin
Chief Financial Officer (Principal Financial
Officer)
February 7, 2020
/s/ Mark R. Jones
Mark R. Jones
Chief Accounting Officer (Principal
Accounting Officer)
February 7, 2020
/s/ Robert G. Stuckey
Robert G. Stuckey
/s/ James A. Attwood, Jr.
James A. Attwood, Jr.
/s/ Jean A. Bua
Jean A. Bua
/s/ Kelly C. Chambliss
Kelly C. Chambliss
/s/ Michael R. Koehler
Michael R. Koehler
/s/ J. David Thompson
J. David Thompson
/s/ David A. Wilson
David A. Wilson
Chairman of the Board of Directors
February 7, 2020
February 7, 2020
February 7, 2020
February 7, 2020
February 7, 2020
February 7, 2020
February 7, 2020
Director
Director
Director
Director
Director
Director
94