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CoreSite Realty Corp 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2011.
     
o   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)
  27-1925611
(IRS Employer
Identification Number)
     
1050 17th Street, Suite 800    
Denver, CO   80265
(Address and zip code of principal executive offices)   (Zip Code)
(866) 777-2673
(Registrant’s telephone number, including area code)
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 þ No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of common stock outstanding at May 4, 2011 was 19,866,760
 
 

 

 


 

CORESITE REALTY CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2011
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 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

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PART I — FINANCIAL INFORMATION
ITEM 1.  
FINANCIAL STATEMENTS
CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
                 
    March 31,     December 31,  
    2011     2010  
    (unaudited)          
ASSETS                
Investments in real estate:
               
Land
  $ 84,738     $ 84,738  
Building and building improvements
    454,018       450,097  
Leasehold improvements
    76,803       75,800  
 
           
 
    615,559       610,635  
Less: Accumulated depreciation and amortization
    (41,365 )     (32,943 )
 
           
Net investment in operating properties
    574,194       577,692  
Construction in progress
    34,913       11,987  
 
           
Net investments in real estate
    609,107       589,679  
Cash and cash equivalents
    73,210       86,246  
Restricted cash
    14,967       14,968  
Accounts and other receivables, net of allowance for doubtful accounts of $375 and $305 as of March 31, 2011 and December 31, 2010, respectively
    6,185       5,332  
Lease intangibles, net of accumulated amortization of $21,748 and $17,105 as of March 31, 2011 and December 31, 2010, respectively
    60,880       71,704  
Goodwill
    41,191       41,191  
Other assets
    25,132       23,906  
 
           
Total assets
  $ 830,672     $ 833,026  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
Mortgage loans payable
  $ 125,560     $ 124,873  
Accounts payable and accrued expenses
    37,488       26,393  
Deferred rent payable
    2,643       2,277  
Acquired below-market lease contracts, net of accumulated amortization of $6,111 and $4,989 as of March 31, 2011 and December 31, 2010, respectively
    15,293       16,415  
Prepaid rent and other liabilities
    8,683       8,603  
 
           
Total liabilities
    189,667       178,561  
Stockholders’ equity:
               
Common stock, par value $0.01, 100,000,000 shares authorized and 19,870,508 and 19,644,042 shares issued and outstanding at March 31, 2011 and December 31, 2010
    194       194  
Additional paid-in capital
    239,933       239,453  
Accumulated other comprehensive income
    41       52  
Accumulated deficit
    (13,416 )     (7,460 )
 
           
Total stockholders’ equity
    226,752       232,239  
Noncontrolling interests
    414,253       422,226  
 
           
Total equity
    641,005       654,465  
 
           
Total liabilities and equity
  $ 830,672     $ 833,026  
 
           
See accompanying notes to condensed consolidated financial statements

 

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CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except share and per share data)
                 
    The Company     The Predecessor  
    Three Months Ended     Three Months Ended  
    March 31, 2011     March 31, 2010  
Operating revenues:
               
Rental revenue
  $ 25,210     $ 6,253  
Power revenue
    9,781       2,157  
Tenant reimbursement
    1,720       264  
Other revenue
    3,255       356  
 
           
Total operating revenues
    39,966       9,030  
Operating expenses:
               
Property operating and maintenance
    12,023       3,981  
Real estate taxes and insurance
    2,743       447  
Management fees to related party
          1,058  
Depreciation and amortization
    19,473       3,158  
Sales and marketing
    1,377       2  
General and administrative
    5,617       84  
Rent
    4,547       697  
 
           
Total operating expenses
    45,780       9,427  
 
           
Operating loss
    (5,814 )     (397 )
Interest income
    66        
Interest expense
    (2,252 )     (509 )
 
           
Loss before income taxes
    (8,000 )     (906 )
Income taxes
    84        
 
           
Net loss
  $ (7,916 )   $ (906 )
Net loss attributable to noncontrolling interests
    (4,544 )      
 
           
Net loss attributable to common shares
  $ (3,372 )   $ (906 )
 
           
Basic and diluted loss per common share
               
Net loss per share attributable to common shares
  $ (0.17 )     N/A  
 
           
Weighted average common shares outstanding
    19,458,605       N/A  
 
           
See accompanying notes to condensed consolidated financial statements

 

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CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(unaudited and in thousands except share data)
                                                                 
                                    Accumulated                    
                    Additional             Other     Total              
    Common Shares     Paid-in     Accumulated     Comprehensive     Stockholders’     Noncontrolling     Total  
    Number     Amount     Capital     Deficit     Income     Equity     Interests     Equity  
Balance at January 1, 2011
    19,644,042     $ 194     $ 239,453     $ (7,460 )   $ 52     $ 232,239     $ 422,226     $ 654,465  
Offering costs
                (17 )                 (17 )           (17 )
Issuance of restricted stock awards, net of forfeitures
    226,466                                            
Amortization of deferred compensation
                497                   497             497  
Dividends and distributions
                      (2,584 )           (2,584 )     (3,413 )     (5,997 )
Comprehensive income:
                                                               
Net loss
                      (3,372 )           (3,372 )     (4,544 )     (7,916 )
Unrealized gain on derivative contracts
                            (11 )     (11 )     (16 )     (27 )
 
                                                         
Comprehensive loss
                                            (3,383 )     (4,560 )     (7,943 )
 
                                               
Balance at March 31, 2011
    19,870,508     $ 194     $ 239,933     $ (13,416 )   $ 41     $ 226,752     $ 414,253     $ 641,005  
 
                                               
See accompanying notes to condensed consolidated financial statements

 

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CORESITE REALTY CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
                 
    The Company     The Predecessor  
    Three Months Ended     Three Months Ended  
    March 31, 2011     March 31, 2010  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net loss
  $ (7,916 )   $ (906 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    19,473       3,158  
Amortization of above/below market leases
    (390 )     (220 )
Amortization of deferred financing costs
    427       144  
Amortization of share-based compensation
    497        
Amortization of discount to fair market value of acquired loan
    687        
Bad debt expense
    20       (79 )
Changes in operating assets and liabilities:
               
Restricted cash
    (77 )     (413 )
Accounts receivable
    (873 )     (230 )
Due to and due from related parties
    2       2,707  
Deferred rent receivable
    (859 )     (393 )
Deferred leasing costs
    (2,038 )     (3,526 )
Other assets
    658       (408 )
Accounts payable and accrued expenses
    2,941       1,352  
Prepaid rent and other liabilities
    241       477  
Deferred rent payable
    366       56  
 
           
Net cash provided by operating activities
    13,159       1,719  
 
           
CASH FLOWS FROM INVESTING ACTIVITIES
               
Real estate improvements
    (20,310 )     (16,858 )
Changes in reserves for capital improvements
    78       292  
 
           
Net cash used in investing activities
    (20,232 )     (16,566 )
 
           
CASH FLOWS FROM FINANCING ACTIVITIES
               
Offering costs
    (17 )      
Proceeds from mortgages payable
          5,076  
Payments of loan fees and costs
    (6 )     (51 )
Contributions
          16,861  
Dividends and distributions
    (5,940 )      
 
           
Net cash provided by (used in) financing activities
    (5,963 )     21,886  
 
           
Net change in cash and cash equivalents
    (13,036 )     7,039  
Cash and cash equivalents, beginning of period
    86,246       7,466  
 
           
Cash and cash equivalents, end of period
  $ 73,210     $ 14,505  
 
           
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid for interest
  $ 1,100     $ 524  
NON-CASH INVESTING AND FINANCING ACTIVITY
               
Construction costs payable capitalized to real estate
  $ 10,987     $ 9,810  
Accrual of dividends and distributions
  $ 5,997     $  
See accompanying notes to condensed consolidated financial statements

 

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CORESITE REALTY CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2011
(unaudited)
1. Organization
CoreSite Realty Corporation, (the “Company,” “we,” 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 managing technology-related real estate.
On September 28, 2010 we completed our initial public offering (the “IPO”) which resulted in the sale of 19,435,000 shares of our common stock, including 2,535,000 shares as a result of the underwriters exercising their over-allotment option, at a price per share of $16.00, generating gross proceeds to the Company of $311.0 million. The proceeds to the Company, net of underwriters’ discounts, commissions and other offering costs were $285.6 million.
Upon completion of the IPO, our Operating Partnership entered into various formation transactions and acquired 100% of the ownership interests in the entities that owned our Predecessor, as defined below, from certain real estate funds (the “Funds”) affiliated with The Carlyle Group. Our Predecessor includes the limited liability companies which were all wholly owned, directly or indirectly, by CRP Fund V Holdings, LLC. We have determined that CRP Fund V Holdings, LLC is the acquirer for accounting purposes and therefore, interests contributed by CRP Fund V Holdings, LLC in the formation transactions (the Predecessor entities and properties) were recorded at historical cost.
Additionally, our Operating Partnership acquired 100% of the ownership interests in the entities that owned the CoreSite Acquired Properties, as defined below, from the Funds and their affiliates. The contribution or acquisition of interests in the CoreSite Acquired Properties was accounted for as an acquisition under the acquisition method of accounting and recognized at the estimated fair value of acquired assets and assumed liabilities on the date of the contribution.
Accordingly, the results of operations for the three months ended March 31, 2010 reflect the financial condition and operating results of our Predecessor only. The results of operations for the three months ended March 31, 2011 reflect the financial condition and results of operations of our Predecessor, together with the CoreSite Acquired Properties which we acquired upon completion of our initial public offering and the formation transactions on September 28, 2010, the date of acquisition. The accompanying condensed consolidated financial statements include the following entities and properties:
     
CoreSite Predecessor   Coresite Acquired Properties
CRP Fund V Holdings, LLC
   One Wilshire
1656 McCarthy
   900 N. Alameda
2901 Coronado
   55 S. Market
Coronado-Stender Properties
   427 S. LaSalle
70 Innerbelt
   1275 K Street
32 Avenue of the Americas
   2115 NW 22nd Street
12100 Sunrise Valley
   CoreSite, LLC
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in compliance with the rules and regulations of the United States Securities and Exchange Commission. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the expected results for the year ending December 31, 2011. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2010. Intercompany balances and transactions have been eliminated.

 

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Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates, including those related to assessing the carrying values of our real estate properties, accrued liabilities, performance-based equity compensation plans, and qualification as a REIT based on estimates of historical experience, current market conditions, and various other assumptions that are believed 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 the property and leasehold improvements. Expenditures for maintenance and repairs are expensed as incurred. Significant renovations and betterments that extend the economic useful lives of assets are capitalized. During the development of the properties, the capitalization of costs, which include interest, real estate taxes and other direct and indirect costs, begins upon commencement of development efforts and ceases when the property is ready for its intended use. 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 $0.1 million and $0.2 million for the three months ended March 31, 2011 and 2010, 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 15 years
Leasehold improvements
  The shorter of the lease term or useful life of the asset
Depreciation expense was $8.6 million and $2.6 million for the three months ended March 31, 2011 and 2010, respectively.
Acquisition of Investment in Real Estate
Purchase accounting is applied to the assets and liabilities related to all real estate investments acquired. The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting primarily of land, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases and the value of customer relationships.
The fair value of the land and building of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” 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 fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. Lease origination costs include estimates of costs avoided associated with leasing the property, including tenant allowances and improvements and leasing commissions. Customer relationship intangibles relate to the additional revenue opportunities expected to be generated through interconnection services and utility services to be provided to the in-place lease tenants.
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. Amortization related to above-market and below-market leases where the Company is the lessor is recorded as either an increase to or a reduction of rental income, amortization related to above-market and below-market leases where the Company is the lessee is recorded as either an increase to or a reduction of rent expense and amortization for lease origination costs and customer relationships are recorded as amortization expense. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease are written off. The carrying value of intangible assets is reviewed for impairment in connection with its respective asset group whenever events or changes in circumstances indicate that the asset group may not be recoverable. An impairment loss is recognized if the carrying amount of the asset group is not recoverable and its carrying amount exceeds its estimated fair value.

 

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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 March 31, 2011, we had approximately $41.2 million of goodwill. 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.
Cash and Cash Equivalents
Cash and cash equivalents include all non-restricted cash held in financial institutions and other non-restricted highly liquid short-term investments with original maturities at acquisition of three months or less.
Restricted Cash
The Company is required to maintain certain minimum cash balances in escrow by loan agreements to cover various building improvements and obligations related to tax assessments and insurance premiums. The Company is legally restricted by these agreements from using this cash other than for the purposes specified therein.
Deferred Costs
Deferred leasing costs include commissions and other direct and incremental costs incurred to obtain new customer leases, which are capitalized and amortized over the terms of the related leases using the straight-line method. If a lease terminates prior to the expiration of its initial term, any unamortized costs related to the lease are written off to amortization expense.
Deferred financing costs include costs incurred in connection with obtaining debt and extending existing debt. These financing costs are capitalized and amortized on a straight-line basis, which approximates the effective-interest method, over the term of the loan and are included as a component of interest expense.
Impairment of Long-Lived Assets
The Company reviews its 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 assets. To the extent that an impairment has occurred, the excess of the carrying amount of long-lived assets over its estimated fair value would be charged to income. For the three months ended March 31, 2011 and 2010 no impairment was recognized.
Derivative Instruments and Hedging Activities
We reflect all derivative instruments at fair value as either assets or liabilities on the condensed consolidated balance sheets. For those derivative instruments that are designated, and qualify, as hedging instruments, we record the effective portion of the gain or loss on the hedge instruments as a component of accumulated other comprehensive income. Any ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. For derivatives that do not meet the criteria for hedge accounting, changes in fair value are immediately recognized in earnings.
Revenue Recognition
All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the non-cancellable term of the agreements. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rent receivable. If a lease terminates prior to its stated expiration, the deferred rent receivable relating to that lease is written off to rental revenue.
When arrangements include both lease and nonlease elements, the revenues associated with separate elements are allocated based on their relative fair values. The revenue associated with each element is then recognized as earned. Interconnection, utility and power services are considered as separate earnings processes that are provided and completed on a month-to-month basis and revenue is recognized in the period that the services are performed. Utility and power services are included in power revenue in the accompanying statements of operations. Interconnection services are included in other revenue in the accompanying statements of operations. Set-up charges and utility installation fees are initially deferred and recognized over the term of the arrangement as other revenue or the expected period of performance unless management determines a separate earnings process exists related to an installation charge.

 

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Tenant reimbursements for real estate taxes, common area maintenance, and other recoverable costs are recognized in the period in which the expenses are incurred.
Above-market and below-market lease intangibles that were acquired are amortized on a straight-line basis as decreases and increases, respectively, to rental revenue over the remaining non-cancellable term of the underlying leases. For the three months ended March 31, 2011 and 2010, the net effect of amortization of acquired above-market and below-market leases resulted in an increase to rental income of $0.4 million and $0.2 million, respectively. Balances, net of accumulated amortization, at March 31, 2011 and December 31, 2010, are as follows (in thousands):
                 
    March 31,     December 31,  
    2011     2010  
Lease contracts above-market value
  $ 8,668     $ 8,668  
Accumulated amortization
    (2,092 )     (1,360 )
 
           
Lease contracts above-market value, net
  $ 6,576     $ 7,308  
 
           
 
               
Lease contracts below-market value
  $ 21,404     $ 21,404  
Accumulated amortization
    (6,111 )     (4,989 )
 
           
Lease contracts below-market value, net
  $ 15,293     $ 16,415  
 
           
A provision for uncollectible accounts is recorded if a receivable balance relating to contractual rent, rent recorded on a straight-line basis, and tenant reimbursements is considered by management to be uncollectible. At March 31, 2011 and December 31, 2010 the allowance for doubtful accounts totaled $0.4 million and $0.3 million, respectively. Additions (reductions) to the allowance for doubtful accounts were $0.1 million and $(0.1) million for the three months ended March 31, 2011 and 2010, respectively. Write-offs charged against the allowance were less than $0.1 million and less than $0.1 million for the three months ended March 31, 2011 and 2010, respectively.
Share-Based Compensation
We account for share based compensation using the fair value method of accounting. The estimated fair value of the stock options granted by us is being amortized on a straight-line basis over the vesting period of the stock options. The fair value of restricted share-based and Operating Partnership unit compensation is based on the market value of our common stock on the date of the grant and is amortized on a straight-line basis over the vesting period.
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and marketing expense. Advertising costs were less than $0.1 million and less than $0.1 million for the three months ended March 31, 2011 and 2010, respectively.
Asset Retirement Obligations
We record accruals for estimated retirement obligations. The asset retirement obligations relate primarily to the removal of asbestos and contaminated soil during development or redevelopment of the properties as well as the estimated equipment removal costs upon termination of a certain lease under which the Company is the lessee. At March 31, 2011 and December 31, 2010, the amount included in other liabilities on the condensed consolidated balance sheets was approximately $2.0 million and $2.1 million, respectively.
Income Taxes
We will elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ending December 31, 2010 upon filing our federal income tax return for such year. To qualify as a REIT, we are required to distribute at least 90% of our taxable income to our stockholders and meet the various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided we qualify for taxation as a REIT, we are generally not subject to corporate level federal income tax on the earnings distributed currently to our stockholders. If we fail to qualify as a REIT in any taxable year, and are unable to avail ourselves of certain savings provisions set forth in the Code, all of our taxable income would be subject to federal income tax at regular corporate rates, including any applicable alternative minimum tax.

 

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To maintain REIT status we will distribute a minimum of 90% of the Company’s taxable income. However, it is our policy and intent, subject to change, to distribute 100% of the Company’s taxable income and therefore no provision is required in the accompanying financial statements for federal income taxes with regards to activities of the REIT and its subsidiary pass-through entities. Any taxable income prior to the completion of the IPO is the responsibility of the Company’s prior members. The allocable share of income is included in the income tax returns of the members. The Company is subject to the statutory requirements of the locations in which it conducts business. State and local income taxes are accrued as deemed required in the best judgment of management based on analysis and interpretation of respective tax laws.
We have elected to treat one of our subsidiaries as a taxable REIT subsidiary (“TRS”). Certain activities that we undertake must be conducted by a TRS, such as services for our tenants that would otherwise be impermissible for us to perform and holding assets that we cannot hold directly. A TRS is subject to corporate level federal and state income taxes. Relative deferred tax assets and liabilities arising from temporary differences in financial reporting versus tax reporting are also established as determined by management.
Deferred income taxes are recognized in certain taxable entities. Deferred income tax is generally 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 had been previously recognized as deferred income tax assets and the reversal of any previously recorded deferred income tax liabilities. A valuation allowance for deferred income tax assets is provided if we believe all or some portion of the deferred income tax asset may 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 March 31, 2011, the deferred income taxes were not material.
We currently have no liabilities for uncertain tax positions. The earliest tax year the Company is subject to examination is 2010. Prior to their contribution to our Operating Partnership, our subsidiaries were treated as pass-through entities for tax purposes and the earliest year for which our subsidiaries are subject to examination is 2007.
Concentration of Credit Risks
The Company’s cash and cash equivalents are maintained in various financial institutions, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts, and management believes that the Company is not exposed to any significant credit risk in this area. The Company has no off-balance-sheet concentrations of credit risk, such as foreign exchange contracts, option contracts, or foreign currency hedging arrangements.
For the three months ended March 31, 2011 and 2010, total operating revenues recognized from one customer accounted for 12.2% and 9.4%, respectively. For the three months ended March 31, 2011 and 2010, total operating revenues recognized from another customer accounted for 3.7%, and 14.3%, respectively. The Company obtains security deposits from most of its tenants.
Segment Information
The Company manages its business as one reportable segment consisting of investments in data centers located in the United States. Although the Company provides services in several markets, these operations have been aggregated into one reportable segment based on the similar economic characteristics amongst all markets, including the nature of the services provided and the type of customers purchasing these services.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-28, Intangibles—Goodwill and Other. This ASU amends ASC Topic 350 and clarifies the requirement to test for impairment of goodwill. ASC Topic 350 has required that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity is required to assess, considering qualitative factors such as those used to determine whether a triggering event would require an interim goodwill impairment test, whether it is more likely than not that a goodwill impairment exists and perform step 2 of the goodwill impairment test if so concluded. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. The new guidance was effective January 1, 2011 for the Company. The adoption of this standard did not have an impact on our condensed consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. The new standard changes the requirements for establishing separate units of accounting in a multiple-element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The new guidance was effective January 1, 2011 for the Company. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

 

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3. Investment in Real Estate
The following is a summary of the properties owned and leased at March 31, 2011 (in thousands):
                                                     
        Acquisition             Buildings and     Leasehold     Construction        
Property Name   Location   Date     Land     Improvements     Improvements     in Progress     Total Cost  
1656 McCarthy
  Milpitas, CA     12/6/2006     $ 5,086     $ 21,626     $     $ 3     $ 26,715  
2901 Coronado
  Santa Clara, CA     2/2/2007       3,972       45,119                   49,091  
Coronado-Stender Properties
  Santa Clara, CA     2/2/2007       15,928       15,817             21,614       53,359  
70 Innerbelt
  Somerville, MA     4/11/2007       6,100       60,601             63       66,764  
32 Avenue of the Americas
  New York, NY     6/30/2007                   30,827       1       30,828  
12100 Sunrise Valley
  Reston, VA     12/28/2007       12,100       61,640             5,652       79,392  
One Wilshire
  Los Angeles, CA     9/28/2010                   40,653       1,842       42,495  
900 N. Alameda
  Los Angeles, CA     9/28/2010       28,467       98,112             90       126,669  
55 S. Market
  San Jose, CA     9/28/2010       6,863       92,003             1,110       99,976  
427 S. LaSalle
  Chicago, IL     9/28/2010       5,493       49,679             4,318       59,490  
1275 K Street
  Washington, DC     9/28/2010                   5,323       220       5,543  
2115 NW 22nd Street
  Miami, FL     9/28/2010       729       9,421                   10,150  
 
                                         
Total
              $ 84,738     $ 454,018     $ 76,803     $ 34,913     $ 650,472  
 
                                         
4. Other Assets
Our other assets consisted of the following, net of amortization and depreciation, if applicable, as of March 31, 2011 and December 31, 2010 (in thousands):
                 
    March 31,     December 31,  
    2011     2010  
Deferred leasing costs
  $ 9,434     $ 7,954  
Deferred rent receivable
    6,924       6,065  
Deferred financing costs
    3,006       3,426  
Leasehold interests in corporate headquarters
    2,964       2,959  
Other
    2,804       3,502  
 
           
Total
  $ 25,132     $ 23,906  
 
           
5. Debt
A summary of outstanding indebtedness as of March 31, 2011 and December 31, 2010 is as follows (in thousands):
                             
        Maturity     March 31,     December 31,  
    Interest Rate   Date     2011     2010  
Senior secured credit facility
  (1)     September 28, 2013     $     $  
 
               
427 S. LaSalle —
Senior mortgage loan
  LIBOR plus 0.60% (0.86% and 0.86% at March
31, 2011 and December 31, 2010)
    March 9, 2012       25,000       25,000  
427 S. LaSalle —
Subordinate mortgage loan
  LIBOR plus 2.95% (3.21% and 3.21% at March
31, 2011 and December 31, 2010)
    March 9, 2012       5,000     5,000  
 
               
427 S. LaSalle —
Mezzanine loan
  LIBOR plus 4.83% (5.09% and 5.09% at March 31, 2011 and December 31, 2010)     March 9, 2012       10,000 (2)     10,000  
55 S. Market
  LIBOR plus 3.50% (3.76% and 3.76% at March 31, 2011 and December 31, 2010)(3)     October 9, 2012 (4)     60,000       60,000  
 
               
12100 Sunrise Valley
  LIBOR plus 2.75% (3.01% and 3.01% at March 31, 2011 and December 31, 2010)(3)     June 1, 2013       25,560       25,560  
 
                       
 
               
Total principal outstanding
                125,560       125,560  
 
                       
Unamortized acquired below-market debt adjustment on 427 S. LaSalle mortgage loans                   (687 )
 
                       
Total indebtedness
              $ 125,560     $ 124,873  
 
                       
     
(1)  
The Company can elect to have borrowings under the credit facility bear interest at a rate per annum equal to (i) LIBOR plus 350 basis points to 400 basis points, or (ii) a base rate plus 250 basis points to 300 basis points, depending on our leverage
 
(2)  
On April 29, 2011, the Company repaid the $10.0 million mezzanine loan on the 427 S. LaSalle property which was scheduled to mature on March 9, 2012.
 
(3)  
In October 2010, we entered into an interest rate swap agreement and an interest rate cap agreement, each as a cash flow hedge for interest incurred by these LIBOR based loans.
 
(4)  
The mortgage contains one two-year extension option subject to the Company meeting certain financial and other customary conditions and the payment of an extension fee equal to 60 basis points.

 

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Senior Secured Credit Facility
In conjunction with our IPO and formation transactions, our Operating Partnership entered into a $110.0 million senior secured revolving credit facility with a group of lenders for which KeyBank National Association acts as the administrative agent. The revolving credit facility is unconditionally guaranteed on an unsecured basis by CoreSite Realty Corporation. CoreSite, L.P. acts as the parent borrower and its subsidiaries that own the real estate properties known as 1656 McCarthy, 70 Innerbelt, 2901 Coronado and 900 N. Alameda are co-borrowers under the facility, and such real estate properties provide security for the facility. Each of the parent borrower and the subsidiary borrowers are liable under the facility on a joint and several basis. The facility has an initial maturity date of September 28, 2013 with a one-time extension option, which if exercised, would extend the maturity date to March 28, 2014. The exercise of the extension option is subject to the payment of an extension fee equal to 25 basis points of the facility at initial maturity and certain other customary conditions. As of March 31, 2011, the Company has not drawn any funds under the facility.
The Company can elect to have borrowings under the credit facility bear interest at a rate per annum equal to (i) LIBOR plus 350 basis points to 400 basis points, depending on our leverage ratio, or (ii) a base rate plus 250 basis points to 300 basis points, depending on our leverage ratio. The secured revolving credit facility contains an accordion feature that allows us to increase the total commitment by $90.0 million, to $200.0 million, under specified circumstances.
The total amount available for us to borrow under the facility will be subject to the lesser of a percentage of the appraised value of our properties that form the designated borrowing base properties of the facility, a minimum borrowing base debt service coverage ratio and a minimum borrowing base debt yield. As of March 31, 2011, $100.8 million was available for us to borrow under the facility. Our ability to borrow under the facility is subject to ongoing compliance with a number of customary restrictive covenants, including:
 a maximum leverage ratio (defined as consolidated total indebtedness to total gross asset value) of 55%;
 a minimum fixed charge coverage ratio (defined as adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.75 times;
 a maximum unhedged variable rate debt ratio (defined as unhedged variable rate indebtedness to gross asset value) of 30%;
 a maximum recourse debt ratio (defined as recourse indebtedness other than indebtedness under the revolving credit facility to gross asset value) of 30%; and
 a minimum tangible net worth equal to at least 75% of our tangible net worth at the closing of our IPO plus 80% of the net proceeds of any additional equity issuances.
427 S. LaSalle
As of March 31, 2011, the 427 S. LaSalle property had a senior mortgage loan, subordinate mortgage loan and mezzanine loan payable of $25.0 million, $5.0 million and $10.0 million, respectively, which mature on March 9, 2012. These loans are secured by deeds of trust on the property and require payments of interest only until maturity. The mortgage requires ongoing compliance by us with various nonfinancial covenants. As of March 31, 2011, the Company was in compliance with the covenants.
On April 29, 2011, the Company repaid the $10.0 million mezzanine loan on the 427 S. LaSalle property at a discount. As a result of this discounted payoff, we reduced our debt by $10.0 million, paying $9.5 million in cash and recognizing a $0.5 million gain, net of fees on the transaction.
55 S. Market
As of March 31, 2011, the 55 S. Market property had a $60.0 million mortgage loan, which matures on October 9, 2012. The mortgage payable contains one two-year extension option provided the Company meets certain financial and other customary conditions and subject to the payment of an extension fee equal to 60 basis points. The loan bears interest at LIBOR plus 350 basis points and requires the payment of interest only until maturity. The mortgage requires ongoing compliance by us with various covenants including liquidity and net operating income covenants. As of March 31, 2011, the Company was in compliance with the covenants.

 

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12100 Sunrise Valley
As of March 31, 2011, the 12100 Sunrise Valley property had a mortgage loan payable of $25.6 million. We may make additional draws of up to $6.4 million to fund specified construction under the loan agreement for a maximum total borrowing of $32.0 million. The mortgage loan payable is secured by the 12100 Sunrise Valley property and requires payments of interest only until the “amortization commencement date” on July 1, 2011. The loan matures on June 1, 2013 and we may exercise the one remaining one-year extension option provided the Company meets certain financial and other customary conditions and subject to the payment of an extension fee equal to 50 basis points. The mortgage loan payable contains certain financial and nonfinancial covenants. As of March 31, 2011, the Company was in compliance with the covenants.
Debt Maturities
The following table summarizes our debt maturities as of March 31, 2011 (in thousands):
         
Year        
2011
  $ 132  
2012
    100,277 (1)
2013
    25,151  
 
     
Total
  $ 125,560  
 
     
     
(1)  
On April 29, 2011, the Company repaid the $10.0 million mezzanine loan on the 427 S. LaSalle property which was scheduled to mature on March 9, 2012.
6. Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its 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. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the period, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2011 and 2010, the Company did not record any amount in earnings related to derivatives due to hedge ineffectiveness.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During 2011, the Company estimates that an additional $0.1 million will be reclassified as an increase to interest expense.

 

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As of March 31, 2011, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
Cash Flow Hedge Derivative Summary
                 
    Number of        
    Instruments     Notional  
Derivative type
               
Interest rate swap
    1     $ 60,000,000  
Interest rate cap
    1       25,000,000  
 
           
Total
    2     $ 85,000,000  
 
           
Non-designated Hedges
Additionally, the Company does not use derivatives for trading or speculative purposes. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements but due to immateriality, are not designated for hedge accounting purposes. The Company’s derivatives detailed in the table below are not designated as hedging instruments for accounting purposes and do not have material economic value as of March 31, 2011. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of March 31, 2011, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:
Non-Designated Derivative Summary
                 
    Number of        
    Instruments     Notional  
Derivative type
               
Interest rate caps
    3     $ 73,165,000  
 
           
Total
    3     $ 73,165,000  
 
           
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of March 31, 2011 and December 31, 2010.
                                 
    Fair Values of Derivative Instruments  
    Derivative Assets     Derivative Liabilities  
    As of March 31,     As of December 31,     As of March 31,     As of December 31,  
    2011     2010     2011     2010  
    (In thousands)  
Derivatives designated as hedging instruments
                               
Balance sheet location
  Other Assets     Other Assets     Other Liabilities     Other Liabilities  
Interest rate caps
  $ 18     $ 31     $     $  
Interest rate swap
    103       117              
 
                       
Total
  $ 121     $ 148     $     $  
 
                       
Derivatives not designated as hedging instruments
                               
Balance sheet location
  Other Assets     Other Assets     Other Liabilities     Other Liabilities  
Interest rate caps
  $     $     $     $  
 
                       
Total
  $     $     $     $  
 
                       

 

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Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement
The table below presents the effect of the Company’s derivative financial instruments on the statement of operations for the three months ended March 31, 2011 and 2010 (in thousands).
                                                         
    Income Statement Impact of Derivatives in Cash Flow Hedging Relationships  
                                            Amount of Gain or (Loss) Recognized in  
                        Amount of Gain or (Loss) Reclassified from     Location of Gain or (Loss)   Income on Derivative (Ineffective Portion  
    Amount of Gain or (Loss) Recognized in     Location of Gain or (Loss)   Accumulated OCI into Income (Effective     Recognized in Income on   and Amount Excluded from Effectiveness  
    OCI on Derivative (Effective Portion) for     Reclassified from Accumulated   Portion) for the Three Months Ended     Derivative (Ineffective Portion   Testing) for the Three Months Ended  
    the Three Months Ended March 31,     OCI into Income (Effective   March 31,     and Amount Excluded from   March 31,  
    2011     2010     Portion)   2011     2010     Effectiveness Testing)   2011     2010  
Interest rate derivatives
                                                       
Interest rate caps
  $ (13 )   $     Interest income / (expense)   $     $     Other income / (expense)   $     $  
Interest rate swap
    (52 )         Interest income / (expense)     37           Other income / (expense)            
 
                                           
Total
  $ (65 )   $         $ 37     $         $     $  
 
                                           
Credit-Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision under which if the Company defaults on any of its indebtedness, including default when repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. Such a default may require the Company to settle any outstanding derivatives at their then current fair value. However, as of March 31, 2011, the Company did not have any derivatives with fair values in a net liability position. Accordingly, had the Company breached this provision at March 31, 2011, it would not have been required to make any payments to its counterparties in order to settle its outstanding derivative agreements. The Company has not posted any cash collateral related to these agreements.
7. Noncontrolling Interests — Operating Partnership
Noncontrolling interests represent the limited partnership interests in the Operating Partnership held by individuals and entities other than CoreSite Realty Corporation. Commencing on the first anniversary of the IPO, the Operating Partnership units will be eligible to be redeemed for cash or, at our option, exchangeable into our common stock on a one-for-one basis. We have evaluated whether we control the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement of the Operating Partnership units. Based on the results of this analysis, we concluded that the Operating Partnership units met the criteria to be classified within equity at March 31, 2011.
The following table shows the ownership interest in the Operating Partnership as of March 31, 2011:
                 
    Number of Units     Percentage of Total  
The Company
    19,458,605       42.6 %
Noncontrolling interests consist of:
               
Common units held by third parties
    26,165,000       57.3 %
Incentive units held by employees
    61,065       0.1 %
 
           
Total
    45,684,670       100.0 %
 
           
The redemption value of the noncontrolling interests at March 31, 2011 was $415.4 million based on the closing price of the Company’s stock of $15.84 on that date.
8. Stockholders’ Equity
During the three months ended March 31, 2011, we issued 242,397 shares of restricted stock and 495,804 stock options to certain employees that vest evenly over four years.
On March 15, 2011, we declared a regular cash dividend for the first quarter of 2011 of $0.13 per common share payable on April 15, 2011 to stockholders of record as of March 31, 2011. In addition, holders of Operating Partnership units also received a distribution of $0.13 per unit. We recorded a payable as of March 31, 2011 of $6.0 million for this dividend and distribution.
9. Equity Incentive Plan
In connection with our initial public offering, the Company’s Board of Directors adopted the 2010 equity incentive plan, which we refer to as the 2010 Plan. The 2010 Plan is administered by the Board of Directors, or the plan administrator. Awards issuable under the 2010 Plan include common stock, stock options, restricted stock, stock appreciation rights, dividend equivalents and other incentive awards. We have reserved a total of 3,000,000 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 unexercised shares subject to the award will be available for future grant or sale under the 2010 Plan. Shares of restricted stock which are forfeited or repurchased by us pursuant to the 2010 Plan may again be optioned, granted or awarded under the 2010 Plan. The payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the 2010 Plan.

 

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Stock Options
Stock option awards are granted with an exercise price equal to the closing market price of the Company’s common stock at the date of grant. The fair value of each option granted under the 2010 Plan is estimated on the date of the grant using the Black-Scholes option-pricing model. For the three months ended March 31, 2011, 495,804 stock options were granted. The fair values are being expensed on a straight-line basis over the vesting periods.
The following table sets forth the 2010 Plan’s stock option activity for the three months ended March 31, 2011:
                 
    Number of     Weighted  
    Shares Subject to     Average Exercise  
    Option     Price  
Options outstanding, December 31, 2010
    587,555     $ 16.00  
Granted
    495,804       15.18  
Forfeited
    (31,183 )     16.00  
Exercised
           
 
           
Options outstanding, March 31, 2011
    1,052,176     $ 15.61  
 
           
The following table sets forth the number of shares subject to option that are unvested as of March 31, 2011 and the fair value of these options at the grant date:
                 
        Weighted  
    Number of     Average Fair  
    Shares Subject to     Value at Grant  
    Option     Date  
Unvested balance, December 31, 2010
    587,555     $ 4.95  
Granted
    495,804       4.87  
Forfeited
    (31,183 )     4.95  
Exercised
           
 
           
Unvested balance, March 31, 2011
    1,052,176     $ 4.91  
 
           
As of March 31, 2011, total unearned compensation on options was approximately $4.1 million, and the weighted average vesting period was 3.7 years.
Restricted Awards
During the three months ended March 31, 2011, the Company issued 242,397 shares of restricted stock, which had a value of $3.6 million on the grant date. Additionally, the Company issued 92 restricted stock units, or RSUs. The principal difference between these instruments is that RSUs are not shares of CoreSite Realty Corporation 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 awards will be amortized on a straight-line basis to expense over the vesting period. The following table sets forth the number of unvested restricted awards and the weighted average fair value of these awards at the date of grant:
                 
            Weighted  
            Average Fair  
    Restricted     Value at Grant  
    Awards     Date  
Unvested balance, December 31, 2010
    195,437     $ 15.98  
Granted
    242,489       15.02  
Forfeited
    (15,931 )     15.98  
Vested
           
 
           
Unvested balance, March 31, 2011
    421,995     $ 15.43  
 
           

 

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As of March 31, 2011, total unearned compensation on restricted awards was approximately $5.3 million, and the weighted average vesting period was 3.4 years.
Operating Partnership Units
In connection with the Company’s IPO, we issued 25,883 Operating Partnership units, which were fair valued at $15.98 per unit or $0.4 million in total. The Operating Partnership units will be amortized on a straight-line basis to expense over the vesting period. As of March 31, 2011, total unearned compensation on Operating Partnership units was approximately $0.3 million, and the weighted average vesting period was 2.5 years.
10. Earnings Per Share
Basic loss per share is calculated by dividing the net loss attributable to controlling interests by the weighted average number of common shares outstanding during the period. Diluted loss per share adjusts basic loss per share for the effects of potentially dilutive common shares, if the effect is not antidilutive. Potentially dilutive common shares consist of shares issuable under our equity-based compensation plan and Operating Partnership units. For the three months ended March 31, 2011, 1,052,176 stock options and 421,995 restricted shares have been excluded from the calculation of diluted earnings per share as their effect would have been antidilutive.
11. Estimated Fair Value of Financial Instruments
Authoritative guidance issued by the Financial Accounting Standards Board 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 — Inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 — Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and market-corroborated inputs which are derived principally from or corroborated by observable market data.
Level 3 — Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
Our financial instruments consist of cash and cash equivalents, restricted cash, accounts and other receivables, interest rate caps, interest rate swaps, mortgage loans payable, interest payable and accounts payable. The carrying values of cash and cash equivalents, restricted cash, accounts and other receivables, interest payable and accounts payable approximate fair values due to the short-term nature of these accounts. The interest rate caps and interest rate swap are carried at fair value.
The combined balance of our mortgage loans payable was $125.6 million and $125.6 million (excluding a $0.7 million fair value of acquired debt adjustment) as of March 31, 2011 and December 31, 2010, respectively, with a fair value of $124.6 million and $123.8 million, respectively, based on Level 3 inputs from the fair value hierarchy. The fair values of mortgage notes payable are based on the Company’s assumptions of interest rates and terms available incorporating the Company’s credit risk.
Measurements of asset retirement obligations upon initial recognition are based on Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of remediation costs, inflation rate, market risk premium and the expected timing of development or redevelopment. The inputs are derived based on historical data as well as management’s best estimate of current costs.
Derivative financial instruments
Currently, the Company uses interest rate swaps to manage interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on the expectation of future interest rates (forward curves) derived from observed market interest rate curves. In addition, to comply with the provisions of FASB ASC 820, credit valuation adjustments, which consider the impact of any credit risk to the contracts, are incorporated in the fair values to account for potential nonperformance risk. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements such as collateral postings, thresholds, mutual puts, and guarantees.

 

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Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2011, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustment is not significant to the overall valuation of its derivative portfolios. As a result, the Company classifies its derivative valuations in Level 2 of the fair value hierarchy.
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.
                                                                 
    Recurring Fair Value Measurements  
    Quoted Prices in Active Markets for                    
    Identical Assets and Liabilities     Significant Other Observable Inputs     Significant Unobservable Inputs        
    (Level 1)     (Level 2)     (Level 3)     Total Fair Value  
    As of March 31,     As of December 31,     As of March 31,     As of December 31,     As of March 31,     As of December 31,     As of March 31,     As of December 31,  
    2011     2010     2011     2010     2011     2010     2011     2010  
    (In thousands)  
Assets
                                                               
Derivative Financial Instruments
  $     $     $ 121     $ 148     $     $     $ 121     $ 148  
 
                                               
 
                                                               
Liabilities
                                                               
Derivative Financial Instruments
  $     $     $     $     $     $     $     $  
 
                                               
12. Related Party Transactions
Prior to the closing of the IPO on September 28, 2010, CoreSite, LLC was engaged to act as the Company’s agent for the purpose of coordinating the activities of the property manager, for leasing and servicing the properties, and for overseeing property build-out activities. Subsequent to our Predecessor’s acquisition of CoreSite, LLC as part of the IPO on September 28, 2010, all related party revenue and expenses incurred in connection with CoreSite, LLC’s activities have been eliminated in consolidation. For the three months ended March 31, 2010, CoreSite, LLC earned management fees from the Predecessor of $1.1 million. For the three months ended March 31, 2010, CoreSite, LLC earned lease commissions from our Predecessor of $2.5 million. These commissions are included in deferred leasing costs. For the three months ended March 31, 2010, CoreSite, LLC earned construction management fees from our Predecessor of $0.5 million. The construction management fees are included in building improvements and construction in progress. For the three months ended March 31, 2010, CoreSite, LLC was reimbursed for payroll related expenses from our Predecessor of $0.4 million. At March 31, 2011 and December 31, 2010, no such fees were payable to CoreSite, LLC.
We lease 1,515 net rentable square feet of space at our 12100 Sunrise Valley property to an affiliate of The Carlyle Group. The lease commenced on July 1, 2008 and expires on June 30, 2013. Rental revenue was less than $0.1 million and $0.3 million for the three months ended March 31, 2011 and 2010, respectively.
13. Commitments and Contingencies
The Company currently leases the data center space under noncancelable operating lease agreements at 32 Avenue of the Americas, One Wilshire and 1275 K Street, and the Company leases its headquarters located in Denver, Colorado under a noncancelable operating lease agreement. The lease agreements provide for base rental rate increases at defined intervals during the term of the lease. In addition, the Company has negotiated rent abatement periods to better match the phased build-out of the data center space. The Company accounts for such abatements and increasing base rentals using the straight-line method over the noncancelable term of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent payable.
Additionally, the Company has commitments related to telecommunications capacity used to connect data centers located within the same market or geographical area and power usage.
The future minimum payments to be made under noncancelable leases, telecommunications capacity commitments and power usage commitments as of March 31, 2011 are as follows (in thousands):
                                                         
    Remainder of                                      
    2011     2012     2013     2014     2015     Thereafter     Total  
Operating leases
  $ 12,513     $ 17,044     $ 17,457     $ 17,742     $ 17,620     $ 44,255     $ 126,631  
Other(1)
    2,209       2,181       278       151       104       189       5,112  
 
                                         
Total
  $ 14,722     $ 19,225     $ 17,735     $ 17,893     $ 17,724     $ 44,444     $ 131,743  
 
                                         
     
(1)  
Obligations for tenant improvement work at 55 S. Market Street, power contracts and telecommunications leases.

 

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Rent expense for the three months ended March 31, 2011 and 2010 was $4.5 million and $0.7 million, respectively.
Our properties require periodic investments of capital for general capital improvements and for tenant related capital expenditures. Additionally, the Company enters into various construction contracts with third parties for the development and redevelopment of our properties. At March 31, 2011, we had open commitments related to construction contracts of approximately $21.0 million.
As previously disclosed, the Company is involved in litigation in Colorado District Court in Denver with Ari Brumer, the former general counsel of its affiliate CoreSite, LLC, arising out of the termination of Mr. Brumer’s employment. Mr. Brumer alleges that he was fraudulently induced to accept employment with CoreSite, LLC, and that his employment was terminated in retaliation for his assertions of illegal or improper acts by the Company or its affiliates. The Company has filed counterclaims against Mr. Brumer based on his intentional disruption of the Company’s initial public offering for personal advantage after his employment was terminated. The court previously dismissed one of Mr. Brumer’s claims as legally insufficient and, on April 27, 2011, confirmed the dismissal with prejudice of all his claims against the Company’s chief executive officer individually.
Because the case is still in the preliminary stages, the cost of the litigation and its ultimate resolution are not estimable at this time. The Company believes that it has valid defenses to Mr. Brumer’s remaining claims and that there is significant merit to its counterclaims against Mr. Brumer. The Company intends to vigorously defend the case and pursue its counterclaims against Mr. Brumer. Based on the claims and damages asserted and the probability of an unfavorable outcome, the Company believes that the litigation will not have a material adverse effect on its business, financial position or liquidity.
From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. Management believes that the resolution of such matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

 

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ITEM 2.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This Quarterly Report on Form 10-Q, (this “Quarterly Report”), together with other statements and information publicly disseminated by our company contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and includes this statement for purposes of complying with these safe harbor provisions.
In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma” or “anticipates” or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) the geographic concentration of our data centers in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets; (ii) fluctuations in interest rates and increased operating costs; (iii) difficulties in identifying properties to acquire and completing acquisitions; (iv) the significant competition in our industry and an inability to lease vacant space, renew existing leases or release space as leases expire; (v) lack of sufficient customer demand to realize expected returns on our investments to expand our property portfolio; (vi) decreased revenue from costs and disruptions associated with any failure of our physical infrastructure or services; (vii) our ability to lease available space to existing or new customers; (viii) our failure to obtain necessary outside financing; (ix) our failure to qualify or maintain our status as a REIT; (x) financial market fluctuations; (xi) changes in real estate and zoning laws and increases in real property tax rates; (xii delays or disruptions in third-party network connectivity; (xiii) inability to renew net leases on the data center properties we lease and (xiv) other factors affecting the real estate industry generally.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Quarterly Report. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the United States Securities and Exchange Commission, or SEC, pursuant to the Exchange Act. In addition, we discussed a number of material risks in our annual report on Form 10-K for the year ended December 31, 2010. Those risks continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
Overview
Unless the context requires otherwise, references in this Quarterly Report to “we,” “our,” “us” and “our company” refer to CoreSite Realty Corporation, a Maryland corporation, together with its consolidated subsidiaries, including CoreSite, L.P., a Delaware limited partnership of which CoreSite Realty Corporation is the sole general partner and which we refer to in this Quarterly Report as our “Operating Partnership”, and CoreSite Services, Inc., a Delaware corporation, our taxable REIT subsidiary, or TRS.
We formed CoreSite Realty Corporation as a Maryland corporation on February 17, 2010, with perpetual existence. Through our controlling interest in our Operating Partnership, we are engaged in the business of ownership, acquisition, construction and management of strategically located data centers in some of the largest and fastest growing data center markets in the United States, including Los Angeles, the San Francisco Bay and Northern Virginia areas, Chicago and New York City. Our high-quality data centers feature ample and redundant power, advanced cooling and security systems and many are points of dense network interconnection. We will elect to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with our taxable year ending December 31, 2010 upon filing our federal income tax return for such year.

 

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On September 28, 2010, we completed our initial public offering (the “IPO”), which resulted in the sale of 19,435,000 shares of our common stock, including 2,535,000 shares as a result of the underwriters exercising their over-allotment option, at a price per share of $16.00, generating gross proceeds to the Company of $311.0 million. The proceeds to the Company, net of underwriters’ discounts, commissions and other offering costs were $285.6 million. Upon completion of the IPO, our Operating Partnership used the proceeds to enter into various formation transactions and acquire 100% of the ownership interests in the entities that owned our Predecessor and the CoreSite Acquired Properties from certain real estate funds (the “Funds”) affiliated with The Carlyle Group (“Carlyle”).
Our Portfolio
As of March 31, 2011, our property portfolio included 11 operating data center facilities, one data center under construction and one development site, which collectively comprise over 2.0 million net rentable square feet (“NRSF”), of which approximately 1.1 million NRSF is existing data center space. These properties include 278,459 NRSF of space readily available for lease, of which 185,388 NRSF is available for lease as data center space. As of March 31, 2011, we had the ability to expand our operating data center square footage by 973,590 NRSF, or 86.2%, through the development or redevelopment of (1) 102,686 NRSF of data center space currently under construction, (2) 326,820 NRSF of office and industrial space currently available for redevelopment, (3) 148,234 NRSF of currently operating space targeted for future redevelopment, comprised of 45,283 NRSF of office space and 102,951 NRSF of data center space targeted for upgrade to more robust specifications, and (4) 395,850 NRSF of new data center space that can be developed on land that the Company currently owns at its Coronado-Stender properties. We expect that this redevelopment and development potential plus any potential expansion into new markets will enable us to accommodate existing and future customer demand and positions us to significantly increase our cash flows. We will pursue redevelopment and development projects and expansion into new markets when we believe those opportunities support the additional supply in those markets.
The following table provides an overview of our data center leasing activity during the three months ended March 31, 2011:
         
    NRSF  
Total leases signed but not yet commenced as of January 1, 2011
    39,266  
Leases signed during the three months ended March 31, 2011
    42,583  
New leases signed during the three months ended March 31, 2011 which have commenced
    (22,649 )
Leases signed in previous periods which commenced during the three months ended March 31, 2011
    (19,163 )
 
     
Total leases signed but not yet commenced as of March 31, 2011
    40,037  
 
     

 

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The following table provides an overview of our properties as of March 31, 2011:
                                                                                             
                NRSF  
                Operating(1)              
                                Office and Light-                    
                Data Center(2)     Industrial(3)     Total     Redevelopment and Development(4)        
    Acquisition   Annualized             Percent             Percent             Percent     Under                     Total  
Market/Facilities   Date(5)   Rent ($000)(6)     Total     Leased(7)     Total     Leased(7)     Total(8)     Leased(7)     Construction(9)     Vacant     Total     Portfolio  
Los Angeles
                                                                                           
One Wilshire*
  Aug. 2007   $ 20,109       156,521       64.2 %     7,500       54.6 %     164,021       63.8 %                       164,021  
900 N. Alameda
  Oct. 2006     12,884       281,078       90.8       8,360       14.9       289,438       88.6             144,721       144,721       434,159  
 
                                                                     
Los Angeles Total
        32,993       437,599       81.3       15,860       33.7       453,459       79.6             144,721       144,721       598,180  
San Francisco Bay
                                                                                           
55 S. Market
  Feb. 2000     11,091       84,045       88.7       205,846       85.0       289,891       86.1                         289,891  
2901 Coronado
  Feb. 2007     8,820       50,000       100.0                   50,000       100.0                         50,000  
1656 McCarthy
  Dec. 2006     7,083       76,676       82.7                   76,676       82.7                         76,676  
Coronado-Stender Properties(10)
  Feb. 2007     681                   78,800       74.3       78,800       74.3             50,400       50,400       129,200  
2972 Stender(11)
  Feb. 2007                                               50,400             50,400       50,400  
 
                                                                     
San Francisco Bay Total
        27,675       210,721       89.2       284,646       82.1       495,367       85.1       50,400       50,400       100,800       596,167  
Northern Virginia
                                                                                           
12100 Sunrise Valley
  Dec. 2007     11,421       116,498       96.8       60,539       66.2       177,037       86.3       52,286       33,446       85,732       262,769  
1275 K Street*
  June 2006     1,875       22,137       85.1                   22,137       85.1                         22,137  
 
                                                                     
Northern Virginia Total
        13,296       138,635       94.9       60,539       66.2       199,174       86.2       52,286       33,446       85,732       284,906  
Chicago
                                                                                           
427 S. LaSalle
  Feb. 2007     6,631       129,790       78.3       45,283       100.0       175,073       83.9             5,309       5,309       180,382  
Boston
                                                                                           
70 Innerbelt
  Apr. 2007     6,580       133,646       85.5       13,063       15.4       146,709       79.2             129,897       129,897       276,606  
New York
                                                                                           
32 Avenue of the Americas*
  June 2007     4,291       48,404       76.1                   48,404       76.1                         48,404  
Miami
                                                                                           
2115 NW 22nd Street
  June 2006     1,334       30,176       51.9       1,641       100.0       31,817       54.4             13,447       13,447       45,264  
 
                                                                     
Total Facilities
      $ 92,800       1,128,971       83.6 %     421,032       77.9 %     1,550,003       82.0 %     102,686       377,220       479,906       2,029,909  
 
                                                                     
*  
Indicates properties in which we hold a leasehold interest.
 
(1)  
Represents the square feet at each building under lease as specified in existing customer lease agreements plus management’s estimate of space available for lease to customers based on engineers’ drawings and other factors, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas. Total NRSF at a given facility includes the total operating NRSF and total redevelopment and development NRSF, but excludes our office space at a facility and our corporate headquarters.
 
(2)  
Represents the NRSF at each operating facility that is currently leased or readily available for lease as data center space. Both leased and available data center NRSF include a customer’s proportionate share of the required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.
 
(3)  
Represents the NRSF at each operating facility that is currently leased or readily available for lease as space other than data center space, which is typically space offered for office or light-industrial uses.
 
(4)  
Represents vacant space in our portfolio that requires significant capital investment in order to redevelop or develop into data center facilities. Total redevelopment and development NRSF and total operating NRSF represent the total NRSF at a given facility.
 
(5)  
Reflects date property was acquired by the Funds or their affiliates and not the date of our acquisition upon consummation of our initial public offering. In the case of a leased property, indicates the date the initial lease commenced.
 
(6)  
Represents the monthly contractual rent under existing customer leases as of March 31, 2011 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to such lease. On a gross basis, our annualized rent was approximately $99,371,000 as of March 31, 2011, which reflects the addition of $6,571,000 in operating expense reimbursements to contractual net rent under modified gross and triple-net leases.
 
(7)  
Includes customer leases that have commenced as of March 31, 2011. The percent leased is determined based on leased square feet as a proportion of total operating NRSF.
 
(8)  
Represents the NRSF at an operating facility currently leased or readily available for lease. This excludes existing vacant space held for redevelopment or development.
 
(9)  
Reflects NRSF for which substantial activities are ongoing to prepare the property for its intended use following redevelopment or development, as applicable. The entire 102,686 NRSF under construction as of March 31, 2011 was data center space.
 
(10)  
The Coronado-Stender properties became entitled for our proposed data center development upon receipt of the mitigated negative declaration from the city of Santa Clara in the first quarter of 2011. We have the ability to develop 345,250 NRSF of data center space at this property, which is in addition to the 50,400 NRSF of data center space and 50,600 NRSF of unconditioned core and shell space under construction at 2972 Stender.
 
(11)  
We are under construction on 50,400 NRSF of data center space at this property. We are also developing an incremental 50,600 NRSF of unconditioned core and shell space held for potential future development into data center space, subject to our assessment of market demand and alternative uses of our capital.

 

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The following table shows the March 31, 2011 operating statistics for space that was leased and available to be leased as of June 30, 2010 at each of our properties, and excludes space for which development or redevelopment was completed and became available to be leased after June 30, 2010. For comparison purposes, the operating activity totals at December 31, 2010 and June 30, 2010 for this space is provided at the bottom of this table.
                                                             
                Operating NRSF  
                                Office and Light-        
                Data Center     Industrial     Total  
        Annualized             Percent             Percent             Percent  
Market/Facilities   Acquisition Date   Rent ($000)     Total     Leased     Total     Leased     Total     Leased  
Los Angeles
                                                           
One Wilshire*
  Aug. 2007   $ 20,109       156,521       64.2 %     7,500       54.6 %     164,021       63.8 %
900 N. Alameda
  Oct. 2006     12,689       264,952       95.3       8,360       14.9       273,312       92.9  
 
                                             
Los Angeles Total
        32,798       421,473       83.8       15,860       33.7       437,333       81.9  
San Francisco Bay
                                                           
55 S. Market
  Feb. 2000     11,091       84,045       88.7       205,846       85.0       289,891       86.1  
2901 Coronado
  Feb. 2007     8,820       50,000       100.0                   50,000       100.0  
1656 McCarthy
  Dec. 2006     7,083       71,847       88.2                   71,847       88.2  
Coronado-Stender Properties
  Feb. 2007     681                   78,800       74.3       78,800       74.3  
2972 Stender
  Feb. 2007                                          
 
                                             
San Francisco Bay Total
        27,675       205,892       91.3       284,646       82.1       490,538       85.9  
Northern Virginia
                                                           
12100 Sunrise Valley
  Dec. 2007     11,265       116,498       96.6       38,350       90.5       154,848       95.1  
1275 K Street*
  June 2006     1,875       22,137       85.1                   22,137       85.1  
 
                                             
Northern Virginia Total
        13,140       138,635       94.8       38,350       90.5       176,985       93.9  
Chicago
                                                           
427 S. LaSalle
  Feb. 2007     6,631       129,790       78.3       45,283       100.0       175,073       83.9  
Boston
                                                           
70 Innerbelt
  Apr. 2007     6,305       119,567       94.7       2,024       63.5       121,591       94.1  
New York
                                                           
32 Avenue of the Americas*
  June 2007     4,291       48,404       76.1                   48,404       76.1  
Miami
                                                           
2115 NW 22nd Street
  June 2006     1,334       30,176       51.9       1,641       100.0       31,817       54.4  
 
                                             
Total Facilities at March 31, 2011 (1)   $ 92,174       1,093,937       85.9 %     387,804       83.0 %     1,481,741       85.1 %
 
                                             
Total Facilities at December 31, 2010   $ 89,225               83.1 %             83.1 %             83.1 %
 
                                                   
Total Facilities at June 30, 2010   $ 85,695               82.4 %             78.2 %             81.3 %
 
                                                   
*  
Indicates properties in which we hold a leasehold interest.

(1) The percent leased for data center space, office and light industrial space, and space in total would have been 88.2%, 85.4%, and 87.5%, respectively, if all leases signed in current and prior periods had commenced.

 

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The following table summarizes the redevelopment and development opportunities throughout our portfolio as of March 31, 2011:
                                                                         
    Redevelopment NRSF  
    Currently Vacant     Currently Operating              
    Under     Near-     Long-             Near-     Long-             Incremental        
Facilities   Construction(1)     Term(2)     Term     Total     Term(2)     Term     Total     Entitled     Total  
Los Angeles
                                                                       
One Wilshire*
                                                     
900 N. Alameda(3)
          25,000       119,721       144,721             102,951       102,951             247,672  
 
                                                     
Los Angeles Total
          25,000       119,721       144,721             102,951       102,951             247,672  
San Francisco Bay
                                                                       
55 S. Market
                                                     
2901 Coronado
                                                     
1656 McCarthy
                                                     
 
                                                     
San Francisco Bay Total
                                                     
Northern Virginia
                                                                       
12100 Sunrise Valley(4)
    52,286       33,446             85,732                               85,732  
1275 K Street*
                                                     
 
                                                     
Northern Virginia Total
    52,286       33,446             85,732                               85,732  
Chicago
                                                                       
427 S. LaSalle(5)
                5,309       5,309       22,000       23,283       45,283             50,592  
Boston
                                                                       
70 Innerbelt(3)
          17,500       112,397       129,897                               129,897  
New York
                                                                       
32 Avenue of the Americas*
                                                     
Miami
                                                                       
2115 NW 22nd Street
                13,447       13,447                               13,447  
 
                                                     
Total Redevelopment
    52,286       75,946       250,874       379,106       22,000       126,234       148,234             527,340  
 
                                                     
 
    Development NRSF  
    Currently Vacant     Currently Operating              
    Under     Near-     Long-             Near-     Long-             Incremental        
Facilities   Construction(1)     Term(2)     Term     Total     Term(2)     Term     Total     Entitled     Total  
San Francisco Bay
                                                                       
Coronado-Stender Properties(6)
                50,400       50,400             78,800       78,800       216,050       345,250  
2972 Stender(7)
    50,400                   50,400                         50,600       101,000  
 
                                                     
Total Development
    50,400             50,400       100,800             78,800       78,800       266,650       446,250  
 
                                                     
 
                                                                       
Total Facilities
    102,686       75,946       301,274       479,906       22,000       205,034       227,034       266,650       973,590  
 
                                                     
*  
Indicates properties in which we hold a leasehold interest.
 
(1)  
Reflects NRSF at a facility for which the initiation of substantial activities to prepare the property for its intended use following redevelopment or development, as applicable, has commenced prior to the applicable period.
 
(2)  
Reflects NRSF at a facility for which the initiation of substantial activities to prepare the property for its intended use following redevelopment or development, as applicable, is planned to commence after March 31, 2011 but prior to March 31, 2012.
 
(3)  
The NRSF shown is our current estimate based on engineering drawings and required support space and is subject to change based on final demising of the space.
 
(4)  
The remaining 85,732 NRSF of vacant space will be redeveloped into data center space in two phases. The first phase commenced in the fourth quarter of 2010 and is expected to cost approximately $30.5 million.
 
(5)  
We plan to redevelop 22,000 NRSF on the fifth floor to data center space immediately following the expiration of an existing office lease for that space which expires April 30, 2011.
 
(6)  
We are entitled to develop up to 345,250 NRSF of data center space at this property, or an incremental 216,050 NRSF, which is in addition to the leased and vacant NRSF existing at the property. This is in addition to the 50,400 NRSF of data center space and 50,600 NRSF of unconditioned core and shell space under construction at 2972 Stender.
 
(7)  
As of March 31, 2011, we were under construction on 50,400 NRSF of data center space. We are also developing an incremental 50,600 NRSF of unconditioned core and shell space that we intend to hold for potential future development into data center space, subject to our assessment of market demand and alternative uses of our capital.

 

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Customer Diversification
As of March 31, 2011, our portfolio was leased to over 650 customers, many of which are nationally recognized firms. The following table sets forth information regarding the ten largest customers in our portfolio based on annualized rent as of March 31, 2011:
                                                 
                                            Weighted  
                                            Average  
                    Percentage             Percentage     Remaining  
        Number   Total     of Total     Annualized     of     Lease  
        of   Leased     Operating     Rent     Annualized     Term in  
    Customer   Locations   NRSF(1)     NRSF(2)     ($000)(3)     Rent(4)     Months(5)  
1  
Facebook, Inc.
  3     74,112       4.8 %   $ 11,554       12.5 %     54  
2  
General Services Administration-IRS*(6)
  1     132,370       8.5       3,427       3.7       14  
3  
Sprint Communications Corporation(7)
  3     104,785       6.8       3,260       3.5       10  
4  
Nuance Communications(8)
  1     20,251       1.3       2,540       2.7       87  
5  
Verizon Communications
  7     73,962       4.8       2,454       2.6       47  
6  
Computer Sciences Corporation
  1     35,812       2.3       2,162       2.3       83  
7  
Gov’t of District of Columbia
  2     16,646       1.1       2,158       2.3       28  
8  
Tata Communications
  2     52,973       3.4       2,149       2.3       11  
9  
Akamai Technologies(9)
  4     19,052       1.2       2,111       2.3       11  
10  
NBC Universal
  1     17,901       1.2       1,669       1.8       16  
   
 
                                 
   
Total/Weighted Average
        547,864       35.4 %   $ 33,484       36.0 %     36  
   
 
                                 
*  
Denotes customer using space for general office purposes.
 
(1)  
Total leased NRSF is determined based on contractually leased square feet for leases that have commenced on or before March 31, 2011. We calculate occupancy based on factors in addition to contractually leased 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 leased square feet divided by the total operating NRSF in the portfolio which, as of March 31, 2011, consisted of 1,550,003 NRSF.
 
(3)  
Represents the monthly contractual rent under existing customer leases as of March 31, 2011 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to those leases.
 
(4)  
Represents the customer’s total annualized rent divided by the total annualized rent in the portfolio as of March 31, 2011, which was approximately $92,800,000.
 
(5)  
Weighted average based on percentage of total annualized rent expiring and is as of March 31, 2011.
 
(6)  
The data presented represents an interim lease in place that expires in May 2012. Upon expiration of the interim lease and the substantial completion of tenant improvements by us, a new lease that has already been executed by both parties will commence. That lease includes 119,729 NRSF with a ten year term and a termination option at the end of year eight.
 
(7)  
Sprint’s 102,951 NRSF lease at 900 N. Alameda is scheduled to expire in the fourth quarter of 2011. We do not expect the customer to renew this lease. Upon expiration, Sprint would no longer rank in the top 10 among our customers.
 
(8)  
In the first quarter of 2011, we signed an additional lease with the customer that commences in the second quarter of 2011. Upon stabilization of that lease, Nuance Communications will lease 25,404 NRSF at an annualized rent of $3,153,000.
 
(9)  
In the third quarter of 2010, we signed two additional leases with the customer that commenced in the fourth quarter of 2010. Upon stabilization of those leases, Akamai will be our fifth largest customer in terms of annualized rent, with 28,336 NRSF leased and an annualized rent of $3,124,000.

 

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Lease Distribution
The following table sets forth information relating to the distribution of leases in the properties in our portfolio, based on NRSF (excluding space held for redevelopment or development) under lease as of March 31, 2011:
                                                 
                    Total     Percentage             Percentage  
    Number     Percentage     Operating     of Total     Annualized     of  
    of     of All     NRSF of     Operating     Rent     Annualized  
Square Feet Under Lease(1)   Leases(2)     Leases     Leases(3)     NRSF     ($000)(4)     Rent  
Available(5)
          %     278,459       18.0 %   $       %
1,000 or less
    922       85.8       156,531       10.1       25,323       27.3  
1,001 – 2,000
    69       6.4       98,915       6.4       11,777       12.7  
2,001 – 5,000
    49       4.6       137,967       8.9       11,970       12.9  
5,001 – 10,000
    15       1.4       106,429       6.9       9,460       10.2  
10,001 – 25,000
    11       1.0       197,259       12.7       12,372       13.3  
Greater than 25,000
    9       0.8       574,443       37.0       21,898       23.6  
 
                                   
Portfolio Total
    1,075       100.0 %     1,550,003       100.0 %   $ 92,800       100.0 %
 
                                   
(1)  
Represents all leases in our portfolio, including data center and office and light-industrial leases.
 
(2)  
Includes leases that upon expiration will be automatically renewed, primarily on a month-to-month basis. Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.
 
(3)  
Represents the square feet at a building under lease as specified in the lease agreements plus management’s estimate of space available for lease to third parties based on engineer’s drawings and other factors, including required data center support space (such as the mechanical, telecommunications and utility rooms) and building common areas.
 
(4)  
Represents the monthly contractual rent under existing customer leases as of March 31, 2011 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to those leases.
 
(5)  
Excludes approximately 379,106 vacant NRSF held for redevelopment or under construction at March 31, 2011.
Lease Expirations
The following table sets forth a summary schedule of the expirations for leases in place as of March 31, 2011, plus available space, for the remainder of 2011 and for each of the ten full calendar years beginning January 1, 2012 at the properties in our portfolio. Unless otherwise stated in the footnotes, the information set forth in the table assumes that customers exercise no renewal options and all early termination rights.
                                                                 
            Total                                             Annualized  
    Number     Operating     Percentage             Percentage     Annualized     Annualized     Rent Per  
    of     NRSF of     of Total             of     Rent Per     Rent at     Leased  
    Leases     Expiring     Operating     Annualized     Annualized     Leased     Expiration     NRSF at  
Year of Lease Expiration   Expiring(1)     Leases     NRSF     Rent ($000)(2)     Rent     NRSF(3)     ($000)(4)     Expiration(5)  
Available as of March 31, 2011(6)
          278,459       18.0 %   $       %   $     $     $  
Remainder of 2011(7)
    421       298,228       19.2       20,809       22.4       69.78       21,032       70.52  
2012(8)
    273       388,839       25.1       26,411       28.5       67.92       27,145       69.81  
2013
    203       166,327       10.7       16,472       17.7       99.03       17,707       106.46  
2014
    79       53,777       3.5       5,853       6.3       108.84       6,758       125.67  
2015
    31       60,905       3.9       2,093       2.3       34.36       2,877       47.24  
2016(9)
    30       92,601       6.0       7,066       7.6       76.31       8,576       92.61  
2017
    20       43,978       2.8       7,030       7.6       159.85       8,817       200.49  
2018
    9       66,045       4.3       4,982       5.4       75.43       8,086       122.43  
2019
    1       71,062       4.6       1,234       1.3       17.37       1,445       20.33  
2020
    4       6,293       0.4       322       0.3       51.17       626       99.48  
2021-Thereafter
    4       23,489       1.5       528       0.6       22.48       665       28.31  
 
                                               
Portfolio Total / Weighted Average
    1,075       1,550,003       100.0 %   $ 92,800       100.0 %   $ 72.98     $ 103,734     $ 81.58  
 
                                               
(1)  
Includes leases that upon expiration will be automatically renewed, primarily on a month-to-month basis. Number of leases represents each agreement with a customer; a lease agreement could include multiple spaces and a customer could have multiple leases.
 
(2)  
Represents the monthly contractual rent under existing customer leases as of March 31, 2011 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to those leases.
 
(3)  
Annualized rent as defined above, divided by the square footage of leases expiring in the given year.
 
(4)  
Represents the final monthly contractual rent under existing customer leases as of March 31, 2011 multiplied by 12. This amount reflects total annualized base rent before any one-time or non-recurring rent abatements and, for any customer under a modified gross or triple-net lease, it excludes the operating expense reimbursement attributable to those leases.
 
(5)  
Annualized rent at expiration as defined above, divided by the square footage of leases expiring in the given year. This metric highlights the rent growth inherent in the existing base of lease agreements.
 
(6)  
Excludes approximately 379,106 vacant NRSF held for redevelopment or under construction at March 31, 2011.
 
(7)  
Includes a lease with Sprint at 900 N. Alameda for 102,951 NRSF scheduled to expire in the fourth quarter of 2011 and a lease with a professional services company at 427 S. LaSalle for 45,283 NRSF expiring in the second quarter of 2011. We anticipate redeveloping the subject spaces as data center space upon expiration of those leases.
 
(8)  
Includes an office lease with General Services Administration — IRS, which is an interim lease in place that expires on May 31, 2012. Upon the expiration of the interim lease and the substantial completion of tenant improvements by us, a new lease that has already been executed by both parties will commence. The new lease includes 119,729 NRSF with a ten-year term and a termination option at the end of year eight.
 
(9)  
Total operating NRSF of expiring leases in 2016 reflects the expiration of half of a 50,000 NRSF lease, the other half of which expires in 2017.

 

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Results of Operations
Prior to the formation transactions on September 28, 2010, we had no corporate activity other than issuance of shares of common stock in connection with the initial capitalization of our company. The results of operations for the three months ended March 31, 2010 reflect the financial condition and operating results of our accounting predecessor, or our Predecessor, which was comprised of the real estate activities and holdings of the Funds that contributed properties into our portfolio in connection with the formation transactions. The results of operations for the three months ended March 31, 2011 reflect the financial condition and results of operations of our Predecessor, together with the CoreSite Acquired Properties which we acquired upon completion of our initial public offering and the formation transactions on September 28, 2010, the date of acquisition. Our results of operations may not be indicative of our future results of operations.
Our Predecessor was comprised of the real estate activities and interconnection services of four of our operating properties, 1656 McCarthy, 32 Avenue of the Americas, 12100 Sunrise Valley and 70 Innerbelt, as well as the Coronado-Stender Business Park. The CoreSite Acquired Properties include our continuing real estate operations at 55 S. Market, One Wilshire, 1275 K Street, 900 N. Alameda, 427 S. LaSalle and 2115 NW 22nd Street, as well as 1050 17th Street, a property we lease for our corporate headquarters, which does not generate operating revenue.
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
                 
    The Company     The Predecessor  
    Three Months Ended     Three Months Ended  
    March 31, 2011     March 31, 2010  
    (in thousands)  
Operating revenue
  $ 39,966     $ 9,030  
Operating expense
  $ 45,780     $ 9,427  
Interest Expense
  $ (2,252 )   $ (509 )
Net loss
  $ (7,916 )   $ (906 )
Operating Revenue. Operating revenue for the three months ended March 31, 2011 was $40.0 million. This includes rental revenue of $25.2 million, power revenue of $9.8 million, tenant reimbursements of $1.7 million and other revenue of $3.3 million, primarily from interconnection services. This compares to revenue of $9.0 million for the three months ended March 31, 2010. The increase of $30.9 million was due primarily to the acquisition of the CoreSite Acquired Properties and the placement into service and subsequent leasing of 2901 Coronado during the second quarter of 2010.
Operating Expenses. Operating expenses for the three months ended March 31, 2011 were $45.8 million compared to $9.4 million for the three months ended March 31, 2010. The increase of $36.4 million was primarily due to the acquisition of the CoreSite Acquired Properties, the internalization of the management function through the Predecessor’s acquisition of CoreSite, LLC, our management company, and the placement into service and subsequent leasing of 2901 Coronado during the second quarter of 2010.
Interest Expense. Interest expense, including amortization of deferred financing costs, for the three months ended March 31, 2011 was $2.3 million compared to interest expense of $0.5 million for the three months ended March 31, 2010. The increase in interest expense was due to increased debt balances.
Net Loss. Net loss for the three months ended March 31, 2011 was $7.9 million compared to a net loss of $0.9 million for the three months ended March 31, 2010. The increase of $7.0 million was primarily due to the acquisition of the CoreSite Acquired Properties and the internalization of the management function through the Predecessor’s acquisition of CoreSite, LLC, our management company. These increased costs were partially offset by increased operating revenue from the placement into service and subsequent leasing of 2901 Coronado during the second quarter of 2010 and the acquisition of the CoreSite Acquired Properties.
Factors that May Influence our Results of Operations
A complete discussion of factors that may influence our results of operations can be found in our Annual Report on Form 10-K, filed with the SEC on March 11, 2011 pursuant to Section 15(d) of the Exchange Act, which is accessible on the SEC’s website at www.sec.gov.

 

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Liquidity and Capital Resources
Discussion of Cash Flows
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Net cash provided by operating activities was $13.2 million for the three months ended March 31, 2011, compared to $1.7 million for the prior period. The increased cash provided by operating activities of $11.4 million was primarily due to the increased number of operating properties acquired in connection with our IPO.
Net cash used in investing activities increased by $3.7 million to $20.2 million for the three months ended March 31, 2011, compared to $16.6 million for the three months ended March 31, 2010. This increase was primarily due to an increase in cash paid for capital expenditures related to redevelopment and development of data center space.
Net cash used in financing activities was $5.9 million for the three months ended March 31, 2011 compared to cash provided by financing activities of $21.9 million for the three months ended March 31, 2010. The increase in cash used in financing activities of $27.8 million was primarily due to a decrease in capital contributions received from the member of the Predecessor, a decrease in proceeds received from mortgages payable and the payment of dividends and distributions during the three months ended March 31, 2011.
Analysis of Liquidity and Capital Resources
As of March 31, 2011, we had $73.2 million of cash and equivalents, excluding $15.0 million of restricted cash. Restricted cash primarily consists of interest bearing cash deposits required by the terms of our loans and cash impound accounts for real estate taxes, insurance and anticipated or contractually obligated tenant improvements as required by several of our mortgage loans.
Our short-term liquidity requirements primarily consist of funds needed for future distributions to stockholders and holders of our operating partnership units, interest expense, operating costs including utilities, site maintenance costs, real estate and personal property taxes, insurance, rental expenses and selling, general and administrative expenses and certain recurring and non-recurring capital expenditures, including for the redevelopment and development of data center space during the next 12 months. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established for certain future payments, the net proceeds from our IPO and to the extent necessary, by incurring additional indebtedness, including by drawing on our revolving credit facility.
Our long-term liquidity requirements primarily consist of the costs to fund the development of the Coronado-Stender Properties, our 9.1 acre development site that houses five buildings in Santa Clara, California, future redevelopment or development of other space in our portfolio not currently scheduled, property acquisitions, scheduled debt maturities and recurring and non-recurring capital improvements. We expect to meet our long-term liquidity requirements primarily by incurring long-term indebtedness and drawing on our revolving credit facility. We also may raise capital in the future through the issuance of additional equity securities, subject to prevailing market conditions, and/or through the issuance of operating partnership units.
Indebtedness
A summary of outstanding indebtedness as of March 31, 2011 and December 31, 2010 is as follows (in thousands):
                             
        Maturity     March 31,     December 31,  
    Interest Rate   Date     2011     2010  
Senior secured credit facility
  (1)     September 28, 2013     $     $  
 
               
427 S. LaSalle -
  LIBOR plus 0.60% (0.86% and 0.86% at     March 9, 2012       25,000       25,000  
Senior mortgage loan
  March 31, 2011 and December 31, 2010)                        
427 S. LaSalle -
  LIBOR plus 2.95% (3.21% and 3.21% at     March 9, 2012       5,000       5,000  
Subordinate mortgage loan
  March 31, 2011 and December 31, 2010)                        
 
               
427 S. LaSalle -
  LIBOR plus 4.83% (5.09% and 5.09% at     March 9, 2012       10,000 (2)     10,000  
Mezzanine loan
  March 31, 2011 and December 31, 2010)                        
55 S. Market
  LIBOR plus 3.50% (3.76% and 3.76% at     October 9, 2012 (4)     60,000       60,000  
 
  March 31, 2011 and December 31, 2010)(3)                        
 
               
12100 Sunrise Valley
  LIBOR plus 2.75% (3.01% and 3.01% at     June 1, 2013       25,560       25,560  
 
  March 31, 2011 and December 31, 2010)(3)                        
 
                       
 
               
Total principal outstanding
                125,560       125,560  
 
                       
Unamortized acquired below-market debt adjustment on 427 S. LaSalle mortgage loans                   (687 )
 
                       
Total indebtedness
              $ 125,560     $ 124,873  
 
                       
(1)  
The Company can elect to have borrowings under the credit facility bear interest at a rate per annum equal to (i) LIBOR plus 350 basis points to 400 basis points, or (ii) a base rate plus 250 basis points to 300 basis points, depending on our leverage.
 
(2)  
On April 29, 2011, the Company repaid the $10.0 million mezzanine loan on the 427 S. LaSalle property which was scheduled to mature on March 9, 2012.
 
(3)  
In October 2010, we entered into an interest rate swap agreement and an interest rate cap agreement, each as a cash flow hedge for interest incurred by these LIBOR based loans.
 
(4)  
The mortgage contains one two-year extension option subject to the Company meeting certain financial and other customary conditions and the payment of an extension fee equal to 60 basis points.

 

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Senior Secured Credit Facility
In conjunction with our IPO and formation transactions, our Operating Partnership entered into a $110.0 million senior secured revolving credit facility with a group of lenders for which KeyBank National Association acts as the administrative agent. The revolving credit facility is unconditionally guaranteed on an unsecured basis by CoreSite Realty Corporation. CoreSite, L.P. acts as the parent borrower and its subsidiaries that own the real estate properties known as 1656 McCarthy, 70 Innerbelt, 2901 Coronado and 900 N. Alameda are co-borrowers under the facility, and such real estate properties provide security for the facility. Each of the parent borrower and the subsidiary borrowers are liable under the facility on a joint and several basis. The facility has an initial maturity date of September 28, 2013 with a one-time extension option, which if exercised, would extend the maturity date to March 28, 2014. The exercise of the extension option is subject to the payment of an extension fee equal to 25 basis points of the facility at initial maturity and certain other customary conditions. As of March 31, 2011, the Company has not drawn any funds under the facility.
The Company can elect to have borrowings under the credit facility bear interest at a rate per annum equal to (i) LIBOR plus 350 basis points to 400 basis points, depending on our leverage ratio, or (ii) a base rate plus 250 basis points to 300 basis points, depending on our leverage ratio. The secured revolving credit facility contains an accordion feature that allows us to increase the total commitment by $90.0 million, to $200.0 million, under specified circumstances.
The total amount available for us to borrow under the facility will be subject to the lesser of a percentage of the appraised value of our properties that form the designated borrowing base properties of the facility, a minimum borrowing base debt service coverage ratio and a minimum borrowing base debt yield. As of March 31, 2011, $100.8 million was available for us to borrow under the facility. Our ability to borrow under the facility is subject to ongoing compliance with a number of customary restrictive covenants, including:
a maximum leverage ratio (defined as consolidated total indebtedness to total gross asset value) of 55%;
a minimum fixed charge coverage ratio (defined as adjusted consolidated earnings before interest, taxes, depreciation and amortization to consolidated fixed charges) of 1.75 times;
a maximum unhedged variable rate debt ratio (defined as unhedged variable rate indebtedness to gross asset value) of 30%;
a maximum recourse debt ratio (defined as recourse indebtedness other than indebtedness under the revolving credit facility to gross asset value) of 30%; and
a minimum tangible net worth equal to at least 75% of our tangible net worth at the closing of our IPO plus 80% of the net proceeds of any additional equity issuances.
427 S. LaSalle
As of March 31, 2011, the 427 S. LaSalle property had a senior mortgage loan, subordinate mortgage loan and mezzanine loan payable of $25.0 million, $5.0 million and $10.0 million, respectively, which mature on March 9, 2012. These loans are secured by deeds of trust on the property and require payments of interest only until maturity. The mortgage requires ongoing compliance by us with various nonfinancial covenants. As of March 31, 2011, the Company was in compliance with the covenants.
On April 29, 2011, the Company repaid the $10.0 million mezzanine loan on the 427 S. LaSalle property at a discount. As a result of this discounted payoff, we reduced our debt by $10.0 million, paying $9.5 million in cash and recognizing a $0.5 million gain, net of fees on the transaction.
55 S. Market
As of March 31, 2011, the 55 S. Market property had a $60.0 million mortgage loan, which matures on October 9, 2012. The mortgage payable contains one two-year extension option provided the Company meets certain financial and other customary conditions and subject to the payment of an extension fee equal to 60 basis points. The loan bears interest at LIBOR plus 350 basis points and requires the payment of interest only until maturity. The mortgage requires ongoing compliance by us with various covenants including liquidity and net operating income covenants. As of March 31, 2011, the Company was in compliance with the covenants.

 

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12100 Sunrise Valley
As of March 31, 2011, the 12100 Sunrise Valley property had a mortgage loan payable of $25.6 million. We may make additional draws of up to $6.4 million to fund specified construction under the loan agreement for a maximum total borrowing of $32.0 million. The mortgage loan payable is secured by 12100 Sunrise Valley and requires payments of interest only until the “amortization commencement date” on July 1, 2011. The loan matures on June 1, 2013 and we may exercise the one remaining one-year extension option provided the Company meets certain financial and other customary conditions and subject to the payment of an extension fee equal to 50 basis points. The mortgage loan payable contains certain financial and nonfinancial covenants. As of March 31, 2011, the Company was in compliance with all covenants.
Debt Maturities
The following table summarizes our debt maturities as of March 31, 2011 (in thousands):
         
Year        
2011
  $ 132  
2012
    100,277 (1)
2013
    25,151  
 
     
Total
  $ 125,560  
 
     
(1)  
On April 29, 2011, the Company repaid the $10.0 million mezzanine loan on the 427 S. LaSalle property which was scheduled to mature on March 9, 2012.
Commitments and Contingencies
The following table summarizes our contractual obligations as of March 31, 2011, including the maturities and scheduled principal repayments of indebtedness (in thousands):
                                                         
    Remainder of                                      
    2011     2012     2013     2014     2015     Thereafter     Total  
Operating leases
  $ 12,513     $ 17,044     $ 17,457     $ 17,742     $ 17,620     $ 44,255     $ 126,631  
Credit Facility
                                         
Mortgages payable
    132       100,277 (1)     21,151                         121,559  
Construction Contracts
    20,952                                     20,952  
Other (2)
    2,209       2,181       278       151       104       189       5,112  
 
                                         
Total
  $ 35,806     $ 119,502     $ 38,886     $ 17,893     $ 17,724     $ 44,444     $ 274,255  
 
                                         
(1)  
On April 29, 2011, the Company repaid the $10.0 million mezzanine loan on the 427 S. LaSalle property which was scheduled to mature on March 9, 2012.
 
(2)  
Obligations for tenant improvement work at 55 S. Market Street, power contracts and telecommunications leases.
Off-Balance Sheet Arrangements
As of March 31, 2011, our Company did not have any off-balance sheet arrangements.
Related Party Transactions
We lease 1,515 net rentable square feet of space at our 12100 Sunrise Valley property to an affiliate of Carlyle. The lease commenced on July 1, 2008 and expires on June 30, 2013. Rental revenue was less than $0.1 million and $0.3 million for the three months ended March 31, 2011 and 2010, respectively.
Funds From Operations
We consider funds from operations (“FFO”) to be a supplemental measure of our performance which should be considered along with, but not as an alternative to, net income and cash provided by operating activities as a measure of operating performance and liquidity. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”). FFO represents net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures.
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.

 

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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 depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our financial condition and results from operations, the utility of FFO as a measure of our performance is limited. FFO is a non-GAAP measure and should not be considered a measure of liquidity, an alternative to net income, cash provided by operating activities or any other performance measure determined in accordance with GAAP, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions. In addition, our calculations of FFO are not necessarily comparable to FFO as calculated by other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us. Investors in our securities should not rely on these measures as a substitute for any GAAP measure, including net income. The following table is a reconciliation of our net loss to FFO:
                 
    Three Months Ended March 31,  
(in thousands)   2011     2010  
Net loss
  $ (7,916 )   $ (906 )
Real estate depreciation and amortization
    19,237       3,133  
 
           
FFO
  $ 11,321     $ 2,227  
 
           
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 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 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 to our consolidated financial statements included elsewhere in this 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 of this prospectus.
Acquisition of Real Estate. We apply purchase accounting to the assets and liabilities related to all of our real estate investments acquired. Accordingly, we are required to make subjective assessments to allocate the purchase price paid to the acquired tangible assets, consisting primarily of land, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and lease origination costs. These allocation assessments involve significant judgment and complex calculations and have a direct impact on our results of operations.
Capitalization of Costs. We capitalize direct and indirect costs related to leasing, construction, redevelopment and development, including property taxes, insurance and financing costs relating to properties under development. We cease cost capitalization on redevelopment and development space once the space is ready for its intended use and held available for occupancy. All renovations and betterments that extend the economic useful lives of assets are capitalized.
Useful Lives of Assets. We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income. Buildings are depreciated on a straight-line basis over 27 to 40 years. Additionally we depreciate building improvements over ten years for owned properties and the remaining term of the original lease for leased properties. Leasehold improvements are depreciated over the shorter of the lease term or useful life of the asset.
Impairment of Long-Lived Assets. We review the carrying value of our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) from an asset are less than the carrying amount of the asset. The estimation of expected future net cash flows is inherently uncertain and relies to a considerable extent on assumptions regarding current and future economic and market conditions and the availability of capital. If, in future periods, there are changes in the estimates or assumptions incorporated into an impairment review analysis, these changes could result in an adjustment to the carrying amount of our assets. To the extent that an impairment has occurred, the excess of the carrying amount of the property over its estimated fair value would be charged to income. No such impairment losses have been recognized to date.
Goodwill. The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. 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.

 

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Revenue Recognition. Rental income is recognized on a straight-line basis over the non-cancellable term of customer leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are recorded as deferred rent receivable on our balance sheets. Many of our leases contain provisions under which our customers reimburse us for a portion of direct operating expenses, including power, as well as real estate taxes and insurance. Such reimbursements are recognized in the period that the expenses are recognized. We recognize the amortization of the acquired above-market and below-market leases as decreases and increases, respectively, to rental revenue over the remaining non-cancellable term of the underlying leases. If the value of below-market leases includes renewal option periods, we include such renewal periods in the amortization period utilized.
Interconnection and utility services are considered separate earnings processes that are typically provided and completed on a month-to-month basis and revenue is recognized in the period that the services are performed. Set-up charges and utility installation fees are initially deferred and recognized over the term of the arrangement or the expected period of performance unless management determines a separate earnings process exists related to an installation charge.
We must make subjective estimates as to when our revenue is earned and the collectability of our accounts receivable related to rent, deferred rent, expense reimbursements and other income. We analyze individual accounts receivable and historical bad debts, customer concentrations, customer creditworthiness and current economic trends when evaluating the adequacy of the allowance for bad debts. These estimates have a direct impact on our net income because a higher bad debt allowance would result in lower net income and recognizing rental revenue as earned in one period versus another would result in higher or lower net income for a particular period.
Share-Based Awards. We generally recognize compensation expense related to share-based awards on a straight-line basis over the vesting period of the award. The calculation of the fair value of share-based awards is subjective and requires several assumptions over such items as expected stock volatility, dividend payments and interest rates. These assumptions have a direct impact on our net income because a higher share-based awards amount would result in lower net income for a particular period.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-28, Intangibles—Goodwill and Other. This ASU amends ASC Topic 350 and clarifies the requirement to test for impairment of goodwill. ASC Topic 350 has required that goodwill be tested for impairment if the carrying amount of a reporting unit exceeds its fair value. Under ASU 2010-28, when the carrying amount of a reporting unit is zero or negative an entity is required to assess, considering qualitative factors such as those used to determine whether a triggering event would require an interim goodwill impairment test, whether it is more likely than not that a goodwill impairment exists and perform step 2 of the goodwill impairment test if so concluded. The modifications to ASC Topic 350 resulting from the issuance of ASU 2010-28 are effective for fiscal years beginning after December 15, 2010 and interim periods within those years. The new guidance was effective January 1, 2011 for the Company. The adoption of this standard did not have an impact on our condensed consolidated financial statements.
In October 2009, the FASB issued ASU 2009-13, Multiple-Deliverable Revenue Arrangements. The new standard changes the requirements for establishing separate units of accounting in a multiple-element arrangement and requires the allocation of arrangement consideration to each deliverable based on the relative selling price. ASU 2009-13 is effective for revenue arrangements entered into in fiscal years beginning on or after June 15, 2010. The new guidance was effective January 1, 2011 for the Company. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Distribution Policy
In order to comply with the REIT requirements of the Code, we are generally required to make annual distributions to our shareholders of at least 90% of our taxable net income. Our common share distribution policy is to distribute a percentage of our cash flow that ensures that we will meet the distribution requirements of the Code and that allows us to maximize the cash retained to meet other cash needs, such as capital improvements and other investment activities.
We have made distributions every quarter since our IPO. While we plan to continue to make quarterly distributions, no assurances can be made as to the frequency or amounts of any future distributions. The payment of common share distributions is dependent upon our financial condition, operating results and REIT distribution requirements and may be adjusted at the discretion of the Board during the year.
Inflation
Substantially all of our leases contain annual rent increases. As a result, we believe that we are largely insulated from the effects of inflation. However, any increases in the costs of redevelopment or development of our properties will generally result in a higher cost of the property, which will result in increased cash requirements to develop our properties and increased depreciation expense in future periods, and, in some circumstances, we may not be able to directly pass along the increase in these development costs to our customers in the form of higher rents.

 

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ITEM 3.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevalent market interest rates. 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. 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 March 31, 2011, we had $125.6 million of consolidated indebtedness that bore interest at variable rates. $40.0 million and $25.0 million of our consolidated indebtedness is hedged against LIBOR interest rate increases above 7.24% and 2.0%, respectively. In addition, we entered into a swap agreement that effectively fixed the interest rate on $60.0 million of consolidated indebtedness under our 55 S. Market mortgage at 4.01% through the maturity date of such indebtedness.
We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 1% change in year-end interest rates. If interest rates were to increase by 1%, the increase in interest expense on our variable rate debt (excluding the $60.0 million of consolidated indebtedness under our 55 S. Market mortgage that is hedged through our interest rate swap) would decrease future earnings and cash flows by less than $0.7 million annually. If interest rates were to decrease 1%, the decrease in interest expense (excluding the $60.0 million of consolidated indebtedness under our 55 S. Market mortgage that is hedged through our interest rate swap) on the variable rate debt would be less than $0.7 million annually. Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments.
These analyses do not consider the effect of any change in overall economic activity that could occur in that environment. Further, in the event of a change of that 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.
ITEM 4.  
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 March 31, 2011, the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures at the end of the period covered by this Quarterly Report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
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 our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION
ITEM 1.  
LEGAL PROCEEDINGS
In the ordinary course of our business, we are subject to claims for negligence and other claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
As previously disclosed, we are involved in litigation in Colorado District Court in Denver with Ari Brumer, the former general counsel of our affiliate CoreSite, LLC, arising out of the termination of Mr. Brumer’s employment. Mr. Brumer alleges that he was fraudulently induced to accept employment with CoreSite, LLC, and that his employment was terminated in retaliation for his assertions of illegal or improper acts by the Company or our affiliates. We have filed counterclaims against Mr. Brumer based on his intentional disruption of our initial public offering for personal advantage after his employment was terminated. The court previously dismissed one of Mr. Brumer’s claims as legally insufficient and, on April 27, 2011, confirmed the dismissal with prejudice of all his claims against our chief executive officer individually.
Because the case is still in the preliminary stages, the cost of the litigation and its ultimate resolution are not estimable at this time. We believe that we have valid defenses to Mr. Brumer’s remaining claims and that there is significant merit to our counterclaims against Mr. Brumer. We intend to vigorously defend the case and pursue our counterclaims against Mr. Brumer. Based on the claims and damages asserted and the probability of an unfavorable outcome, we believe that the litigation will not have a material adverse effect on our business, financial position or liquidity.
ITEM 1.A  
RISK FACTORS
There have been no material changes to the risk factors included in the section entitled “Risk Factors” beginning on page 14 of our Annual Report on Form 10-K, filed with the SEC on March 11, 2011 pursuant to Section 15(d) of the Exchange Act, which is accessible on the SEC’s website at www.sec.gov.
ITEM 2.  
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On September 22, 2010, our registration statement on Form S-11 (File No. 333-166810), relating to our initial public offering, was declared effective by the SEC. We intend to use the remainder of the net proceeds from the offering to redevelop and develop additional data center space and for general corporate purposes. During the quarter ended March 31, 2011, we did not issue or sell any shares of our common stock or other equity securities pursuant to unregistered transactions in reliance upon on exception from registration requirements of the Securities Act of 1933, as amended.
ITEM 3.  
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.  
RESERVED
ITEM 5.  
OTHER INFORMATION
None.
ITEM 6.  
EXHIBITS.
         
Exhibit    
No.   Description
  3.1    
Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)
  3.2    
Amended and Restated Bylaws of CoreSite Realty.(1)
  10.1    
Limited Partnership Agreement of CoreSite, L.P.(3)
  10.2    
Form of 2010 Equity Incentive Plan.(1)*
  10.3    
Form of 2010 Equity Incentive Plan Restricted Stock Unit Award Agreement.(1)*
  10.4    
Form of 2010 Equity Incentive Plan Stock Option Agreement.(1)*
  10.5    
Form of 2010 Equity Incentive Plan Restricted Stock Agreement.(1)*
  10.6    
Form of 2010 Equity Incentive Plan Restricted Stock Agreement for Non-Employee Directors.(1)*
  10.7    
Employment Agreement between CoreSite Realty Corporation and Thomas M. Ray.(1)*
  10.8    
Employment Agreement between CoreSite Realty Corporation and Jeffrey S. Finnin.(4)*
  10.9    
Employment Agreement between CoreSite Realty Corporation and Derek McCandless.(5)*
  10.10    
Form of Indemnification Agreement for directors and officers of CoreSite Realty Corporation.(1)*

 

35


Table of Contents

         
Exhibit    
No.   Description
  10.11    
Registration Rights Agreement.(3)
  10.12    
Tax Protection Agreement.(3)
  10.13    
Contribution Agreement.(3)
  10.14    
Lease Agreement between Hines REIT One Wilshire Services, Inc. and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)
  10.15    
Lease Agreement between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)
  10.16    
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)
  10.17    
Form of Restricted Stock Agreement.(1)*
  10.18    
Form of Restricted Unit Agreement.(1)*
  10.19    
Form of Management Rights Agreement.(1)*
  10.20    
CoreSite Realty Corporation and CoreSite, L.P. Senior Management Severance and Change in Control Program.(1)*
  10.21    
CoreSite Realty Corporation Non-Employee Director Compensation Policy.(1)*
  10.22    
Credit Agreement among CoreSite, L.P., as parent borrower, CoreSite Real Estate 70 Innerbelt, L.L.C., CoreSite Real Estate 900 N. Alameda, L.L.C., CoreSite Real Estate 2901 Coronado, L.L.C. and CoreSite Real Estate 1656 McCarthy, L.L.C., as subsidiary borrowers, Keybank National Association, the other lenders party thereto and other lenders that may become parties thereto, Keybank National Association, as agent, and Keybanc Capital Markets and RBC Capital Markets Corporation, as joint lead arrangers and joint book managers, dated as of September 28, 2010.(3)
  10.23    
Form of Restricted Stock Agreement.(3)*
  31.1    
Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002.
  31.2    
Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002.
  32.1    
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*  
Represents management contract or compensatory plan or agreement.
 
(1)  
Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.
 
(2)  
Incorporated by reference to our Post-Effective Amendment to the company’s Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.
 
(3)  
Incorporated by reference to our Current Report on Form 8-K filed on October 1, 2010.
 
(4)  
Incorporated by reference to our Current Report on Form 8-K filed January 6, 2011.
 
(5)  
Incorporated by reference to our Current Report on Form 8-K filed February 11, 2011.

 

36


Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  CORESITE REALTY CORPORATION
 
 
Date: May 5, 2011  By:   /s/ Thomas M. Ray    
    Thomas M. Ray   
    President and Chief Executive Officer
(Principal Executive Officer) 
 

 

37


Table of Contents

Exhibit Index
         
Exhibit    
No.   Description
  3.1    
Articles of Amendment and Restatement of CoreSite Realty Corporation.(1)
  3.2    
Amended and Restated Bylaws of CoreSite Realty Corporation.(1)
  4.1    
Specimen certificate representing the Common Stock of CoreSite Realty Corporation.(2)
  10.1    
Limited Partnership Agreement of CoreSite, L.P.(3)
  10.2    
Form of 2010 Equity Incentive Plan.(1)*
  10.3    
Form of 2010 Equity Incentive Plan Restricted Stock Unit Award Agreement.(1)*
  10.4    
Form of 2010 Equity Incentive Plan Stock Option Agreement.(1)*
  10.5    
Form of 2010 Equity Incentive Plan Restricted Stock Agreement.(1)*
  10.6    
Form of 2010 Equity Incentive Plan Restricted Stock Agreement for Non-Employee Directors.(1)*
  10.7    
Employment Agreement between CoreSite Realty Corporation and Thomas M. Ray.(1)*
  10.8    
Employment Agreement between CoreSite Realty Corporation and Jeffrey S. Finnin.(4)*
  10.9    
Employment Agreement between CoreSite Realty Corporation and Derek McCandless.(5)*
  10.10    
Form of Indemnification Agreement for directors and officers of CoreSite Realty Corporation.(1)*
  10.11    
Registration Rights Agreement.(3)
  10.12    
Tax Protection Agreement.(3)
  10.13    
Contribution Agreement.(3)
  10.14    
Lease Agreement between Hines REIT One Wilshire Services, Inc. and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)
  10.15    
Lease Agreement between Hines REIT One Wilshire, LP and CRG West One Wilshire, L.L.C., dated as of August 1, 2007.(1)
  10.16    
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)
  10.17    
Form of Restricted Stock Agreement.(1)*
  10.18    
Form of Restricted Unit Agreement.(1)*
  10.19    
Form of Management Rights Agreement.(1)*
  10.20    
CoreSite Realty Corporation and CoreSite, L.P. Senior Management Severance and Change in Control Program.(1)*
  10.21    
CoreSite Realty Corporation Non-Employee Director Compensation Policy.(1)*
  10.22    
Credit Agreement among CoreSite, L.P., as parent borrower, CoreSite Real Estate 70 Innerbelt, L.L.C., CoreSite Real Estate 900 N. Alameda, L.L.C., CoreSite Real Estate 2901 Coronado, L.L.C. and CoreSite Real Estate 1656 McCarthy, L.L.C., as subsidiary borrowers, Keybank National Association, the other lenders party thereto and other lenders that may become parties thereto, Keybank National Association, as agent, and Keybanc Capital Markets and RBC Capital Markets Corporation, as joint lead arrangers and joint book managers, dated as of September 28, 2010.(3)
  10.23    
Form of Restricted Stock Agreement.(3)*
  31.1    
Certification of Principal Executive Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002.
  31.2    
Certification of Principal Financial Officer Pursuant To Section 302 Of The Sarbanes—Oxley Act Of 2002.
  32.1    
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    
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.
*  
Represents management contract or compensatory plan or agreement.
 
(1)  
Incorporated by reference to our Registration Statement (Amendment No. 7) on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.
 
(2)  
Incorporated by reference to our Post-Effective Amendment to the company’s Registration Statement on Form S-11 (Registration No. 333-166810) filed on September 22, 2010.
 
(3)  
Incorporated by reference to our Current Report on Form 8-K filed on October 1, 2010.
 
(4)  
Incorporated by reference to our Current Report on Form 8-K filed January 6, 2011.
 
(5)  
Incorporated by reference to our Current Report on Form 8-K filed February 11, 2011. Incorporated by reference to our Annual Report on Form 8-K filed February 11, 2011.

 

38

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