CORESITE REALTY CORPORATION Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report"), together with
other statements and information publicly disseminated by our company, contains
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 ("PSLRA"), namely Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). We intend such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the PSLRA and include this statement for purposes of complying with these
safe harbor provisions.
In particular, statements pertaining to our capital resources, portfolio
performance, business strategies and results of operations contain
forward-looking statements. You can identify forward-looking statements by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "intends," "plans," "pro forma" or "anticipates" or the
negative of these words and phrases or similar words or phrases that are
predictions of or indicate future events or trends and that do not relate solely
to historical matters. You can also identify forward-looking statements by
discussions of strategy, plans or intentions. Such statements are subject to
risks, uncertainties and assumptions and are not guarantees of future
performance, which may be affected by known and unknown risks, trends,
uncertainties and factors that are beyond our control. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated
or projected. The following factors, among others, could cause actual results
and future events to differ materially from those set forth or contemplated in
the forward-looking statements: (i) the geographic concentration of our data
centers in certain markets and any adverse developments in local economic
conditions or the amount of supply of or demand for data center space in these
markets; (ii) fluctuations in interest rates and increased operating costs;
(iii) difficulties in identifying properties to acquire and completing
acquisitions; (iv) the significant competition in our industry, including
indirect competition from cloud service providers, and an inability to lease
vacant space, renew existing leases or release space as leases expire; (v) lack
of sufficient customer demand to realize expected returns on our investments to
expand our property portfolio; (vi) decreased revenue from costs and disruptions
associated with any failure of our physical infrastructure or services;
(vii) our ability to develop and lease available space to existing or new
customers; (viii) our failure to obtain necessary outside financing; (ix) our
ability to service existing debt; (x) our failure to qualify or maintain our
status as a real estate investment trust ("REIT"); (xi) financial market
fluctuations; (xii) changes in real estate and zoning laws and increases in real
estate taxes; (xiii) the effects on our business operations, demand for our
services and general economic conditions resulting from the "COVID-19" pandemic
in our markets, as well as orders, directives and legislative action by local,
state and federal governments in response to the COVID-19 pandemic; (xiv) delays
or disruptions in third-party network connectivity; (xv) service failures or
price increases by third party power suppliers; (xvi) inability to renew net
leases on the data center properties we lease; and (xvii) other factors
affecting the real estate or technology industries 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, except as required by applicable law. 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, including in Item 1A. "Risk Factors" 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 ("SEC") pursuant to the Exchange Act. We
discussed a number of material risks in Item 1A. "Risk Factors" of our Annual
Report on Form 10-K for the year ended December 31, 2020. Those risks
continue to be relevant to our performance and financial condition. Given these
risks and uncertainties, investors should not place undue reliance on
forward-looking statements as a prediction of actual results.
Overview
Unless the context requires otherwise, references in this Quarterly Report to "we," "our," "us" and "our company" refer toCoreSite Realty Corporation , aMaryland corporation, together with our consolidated subsidiaries, includingCoreSite, L.P. , aDelaware limited partnership of which we are the sole general partner and to which we refer in this Quarterly Report as our "Operating Partnership." 24 Table of Contents
We are engaged in the business of ownership, acquisition, construction and
operation of strategically located data centers in some of the largest and
fastest growing data center markets in
We deliver secure, reliable, high-performance data center, cloud access and interconnection solutions to a growing customer ecosystem across eight key North American communication markets. More than 1,370 customers, including many of the world's leading enterprises, network operators, cloud providers, and supporting service providers, choose us to connect, protect and optimize their performance-sensitive data, applications and computing workloads. Our focus is to bring together a network and cloud community to support the needs of enterprises, and create a diverse customer ecosystem. Our growth strategy includes (i) increasing cash flow from in-place data center space, (ii) capitalizing on embedded expansion opportunities within existing data centers, (iii) selectively pursuing acquisition and development opportunities in existing and new markets, (iv) expanding existing customer relationships, and (v) attracting new customers. Our Portfolio
As ofSeptember 30, 2021 , our property portfolio included 25 operating data center facilities, office and light-industrial space and multiple potential development projects that collectively comprise over 4.6 million net rentable square feet ("NRSF"), of which over 2.7 million NRSF is existing data center space. The approximately 1.5 million NRSF of development projects includes space available for development and construction of new data center facilities. We expect that this development potential plus any incremental investment into existing or new markets will enable us to accommodate existing and future customer demand and position us to continue to increase our operating cash flows. The following table provides an overview of our property portfolio as ofSeptember 30, 2021 : Data Center Operating Portfolio(1) Stabilized Pre-Stabilized (2) Total Total Total Annualized Total Percent Total Percent Percent Development Portfolio Market Rent ($000 )(3) NRSF Occupied(4) NRSF Occupied(4) NRSF Occupied(4) NRSF (5) NRSF San Francisco Bay$ 103,035 940,309 83.4 % - - % 940,309 83.4 % 240,000 1,180,309 Los Angeles(6) 96,168 631,557 90.7 - - 631,557 90.7 119,128 750,685 Northern Virginia(7) 63,003 567,269 85.6 - - 567,269 85.6 809,742 1,377,011 New York 25,037 168,267 89.0 34,589 35.8 202,856 79.9 81,799 284,655 Chicago 17,396 178,407 83.9 54,798 3.9 233,205 65.1 112,368 345,573 Boston 15,288 122,730 85.8 19,961 9.3 142,691 75.1 110,985 253,676 Denver 6,519 34,924 86.7 - - 34,924 86.7 - 34,924 Miami 1,870 30,176 86.3 - - 30,176 86.3 13,154 43,330
Total Data Center Facilities
15.0 % 2,782,987 83.4 % 1,487,176 4,270,163
Office and Light-Industrial(8) 9,154 418,110 83.0 - - 418,110 83.0 (49,799) 368,311 Total Portfolio$ 337,470 3,091,749 85.7 % 109,348 15.0 % 3,201,097 83.3 % 1,437,377 4,638,474
This table presents NRSF at each market that is currently occupied or readily
available for lease as data center space and pre-stabilized data center
space. Both occupied and available data center NRSF includes a factor based
on management's estimate to account for a customer's proportionate share of (1) the required data center support space (such as the mechanical,
telecommunications and utility rooms) and building common areas, which may be
updated on a periodic basis to reflect the most current build-out of our
properties. Operating data center NRSF may require investment of Deferred
Pre-stabilized NRSF represents projects or facilities that recently have been (2) developed and are in the initial lease-up phase. Pre-stabilized projects or
facilities become stabilized operating properties at the earlier of
achievement of 85% occupancy or 24 months after development completion.
"Annualized Rent" represents the monthly contractual rent under existing
commenced customer leases as of
amount reflects total annualized base rent before any one-time or
non-recurring rent abatements and excludes power revenue, interconnection
revenue and operating expense reimbursement. We use annualized rent as a (3) supplemental performance measure because, when compared quarter over quarter
or year over year, it captures profitability of our assets. We offer this
measure because we recognize that annualized base rent will be used by
investors to compare our profitability with that of other REITs. On a gross
basis, our total portfolio annualized rent was approximately
as of
reimbursements under modified gross and triple-net leases.
25
Table of Contents
"Percent Occupied" represents customer leases that have commenced and are
occupied as of
on occupied square feet as a proportion of total operating NRSF as of
measure because, when compared year-over-year, it captures trends in market
demand for our assets. We offer this measure because we recognize that (4) percent occupied will be used by investors as a basis to compare our
operating performance with that of other REITs. The percent occupied for
stabilized data center space would have been 88.4%, rather than 86.2%, if all
leases signed in the current and prior periods had commenced. The percent
occupied for our total portfolio, including stabilized data center space,
pre-stabilized space and office and light-industrial space, would have been
85.3%, rather than 83.3%, if all leases signed in current and prior periods
had commenced.
Represents incremental data center capacity currently vacant in existing
facilities in our portfolio that requires significant capital investment in
order to develop into data center facilities. Includes NRSF under (5) construction for which substantial activities are ongoing to prepare the
property for its intended use following development and NRSF in
pre-construction, which are projects in the design and permitting stages. The
NRSF reflects management's estimate of engineering drawings and required
support space and is subject to change based on final demising of space.
Due to our decision to exit and vacate our leased data center space at LA4 (6) and two computer rooms at LA1 by the end of 2021, we have excluded these
leased spaces from the reported
portfolio.
(7) Included within our
49,799 NRSF that is currently operating as office and light-industrial space.
Represents space that is currently occupied or readily available for lease as (8) space other than data center space, which typically is offered for office or
light-industrial uses.
"Same-Store" statistics are based on space within each data center facility that was leased or available to be leased as ofDecember 31, 2019 , excluding space for which development was completed and became available to be leased afterDecember 31, 2019 . We track Same-Store space leased or available to be leased at the computer room level within each data center facility. We use Same-Store statistics as a supplemental performance measure because they provide a performance comparison for the computer rooms that have been operating for two years or longer. We offer this measure because we recognize that Same-Store statistics will be used by investors as a basis to compare operating performance of our established computer rooms, excluding the impact of new computer rooms placed into service within the past two years, to that of other REITs. The following table shows theSeptember 30, 2021 , Same-Store operating statistics. For comparison purposes, the operating activity totals as ofDecember 31, 2020 , and 2019, for this space are provided at the bottom of this table. Same-Store Property Portfolio Data Center Office and Light-Industrial Total Annualized Total Percent Total Percent Percent Market Rent ($000 ) NRSF Occupied NRSF Occupied NRSF Occupied San Francisco Bay$ 100,533 888,108 82.8 % 233,095 88.6 % 1,121,203 84.0 % Los Angeles 88,504 581,182 90.9 11,790 71.6 592,972 90.5 Northern Virginia 65,050 567,269 85.6 122,011 85.4 689,280 85.6 New York 23,768 168,266 89.0 20,944 65.4 189,210 86.4 Chicago 17,120 178,408 83.9 4,946 37.2 183,354 82.6 Boston 15,513 142,691 75.1 19,495 52.1 162,186 72.3 Denver 6,519 34,924 86.7 - - 34,924 86.7 Miami 1,885 30,176 86.3 1,934 37.2 32,110 83.3 Total Facilities at September 30, 2021(1)$ 318,892 2,591,024 85.4 % 414,215 83.5 % 3,005,239 85.1 % Total Facilities at December 31, 2020$ 314,709 84.8 % 80.2 % 84.1 % Total Facilities at December 31, 2019$ 295,753 83.5 % 80.9 % 83.2 %
The percent occupied for data center space, office and light-industrial (1) space, and total space would have been 87.1%, 83.6% and 86.7%, respectively,
if all leases signed in the current and prior periods had commenced.
Same-Store annualized rent increased to $318.9 million at September 30, 2021 ,
compared to $314.7 million at December 31, 2020 . The increase of $4.2 million is
primarily due to the commencement of new and expansion leases at SV8 and LA2.
26
Table of Contents
Development space is unoccupied space or land that requires significant capital
investment in order to develop data center facilities that are ready for use.
The following table summarizes the NRSF under construction and NRSF held for
development throughout our portfolio, each as of September 30, 2021 :
Development Opportunities (in NRSF)
Under Held for
Facilities Construction(1) Development(2) Total
San Francisco Bay
SV9(3) - 240,000 240,000
One Wilshire campus
LA1 - 10,352 10,352
LA3 54,388 54,388 108,776
Los Angeles Total 54,388 64,740 119,128
Northern Virginia
VA3 - 395,997 395,997
Reston Campus Expansion(3) - 413,745 413,745
Northern Virginia Total - 809,742 809,742
New York
NY2 34,587 47,212 81,799
Boston
BO1 - 110,985 110,985
Chicago
CH2 - 112,368 112,368
Miami
MI1 - 13,154 13,154
Total Facilities(4) 88,975 1,398,201 1,487,176
Represents NRSF for which substantial construction activities are ongoing to (1) prepare the property for its intended use following development. The NRSF
reflects management's estimate of engineering drawings and required support
space and is subject to change based on final demising of space.
Represents estimated incremental data center capacity currently vacant in (2) existing facilities or on vacant land in our portfolio that requires
significant capital investment in order to develop into data center
facilities.
The NRSF for these facilities reflect management's estimates based on our (3) current construction plans and expectations regarding entitlements. These
estimates are subject to change based on current economic conditions, final
zoning approvals, and the supply and demand dynamics of the market.
In addition to our development opportunities disclosed within this table, we
have land adjacent to our NY2 facility, in the form of an existing parking (4) lot. By utilizing this land, we believe that we could develop 100,000 NRSF on
our available acreage in
entitlements.
Capital Expenditures
The following table sets forth information regarding capital expenditures during
the nine months ended
Nine Months Ended
September 30, 2021
Data center expansion $ 77,399
Non-recurring investments 1,863
Tenant improvements 7,237Recurring capital expenditures - Data Center
13,202
Recurring capital expenditures - Office and Light-industrial
3,574 Total capital expenditures $ 103,275
During the nine months endedSeptember 30, 2021 , we incurred approximately$103.3 million of capital expenditures, of which approximately$77.4 million related to data center expansion activities, including new data center construction, the development of capacity within existing data centers and other revenue generating investments. As we construct data center capacity, we work to optimize both the amount of capital we deploy on power and cooling infrastructure and the 27 Table of Contents timing of that capital deployment. As such, we generally construct our power and cooling infrastructure supporting our data center NRSF based on our estimate of customer utilization. This practice can result in our investment at a later time in "Deferred Expansion Capital ". We defineDeferred Expansion Capital as our estimate of the incremental capital we may invest in the future to add power or cooling infrastructure to support existing or anticipated future customer utilization of NRSF within our operating data centers. The following table sets forth capital expenditures spent during the nine months endedSeptember 30, 2021 for data center expansion activities, including NRSF under construction as ofSeptember 30, 2021 . NRSF Data Center Placed into Under Property Expansion Service Construction(1) LA3$ 36,986 - 54,388 CH1(2) 6,280 - - NY2 6,209 - 34,587 SV9 4,997 - - VA3 4,423 - - BO1 4,290 - - VA1 2,892 - - Other 11,322 - - Total$ 77,399 - 88,975
(1) Represents NRSF under construction for which substantial activities are
ongoing to prepare the property for its intended use following development.
Of the
(2) months ended
parking lot adjacent to the data center property.
During the nine months ended
During the nine months endedSeptember 30, 2021 , we incurred approximately$7.2 million in tenant improvements, which related to tenant-specific space build-out and power installations at various properties. During the nine months endedSeptember 30, 2021 , we incurred approximately$16.8 million of recurring capital expenditures within our portfolio, which includes required equipment upgrades at our various facilities that have a future economic benefit. We incurred approximately$13.2 million of recurring capital related to various data center spaces within our portfolio and another$3.6 million related to an office and light-industrial customer lease that commenced in the second quarter of 2021.
Factors that May Influence our Results of Operations
A complete discussion of factors that may influence our results of operations can be found in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with theSEC onFebruary 5, 2021 , which is accessible on theSEC's website at www.sec.gov. The ongoing COVID-19 pandemic has caused severe disruption in theU.S. and global economies, and we, our customers and vendors have been impacted to varying degrees. As of the date of this Quarterly Report, we have not seen a significantly adverse overall impact on the demand for data center space or on our ability to operate our business. See Item 1A. "Risk Factors-General Risks - Pandemics or disease outbreaks, such as the novel coronavirus ("COVID-19"), may disrupt our business, as a result of, among other things, increased customer defaults, increased customer bankruptcies or insolvencies, delays in the development and lease-up of our properties, and severe disruption in theU.S. and global economies, which may further disrupt financial markets and could materially adversely impact our financial condition, operations, and liquidity" in our Annual Report on Form 10-K for the year ended December 31, 2020. Our ability to re-lease expiring space at rental rates equal to or in excess of current rental rates will impact our results of operations. We have 279 and 1,236 data center leases representing approximately 7.2% and 17.8% of the NRSF in our 28 Table of Contents operating property portfolio which are scheduled to expire during the remainder of 2021 and the year endingDecember 31, 2022 , respectively. These leases represent current annualized rent of$30.8 million , or 9.2% of total annualized rent, and$88.2 million , or 26.1% of total annualized rent, with annualized rental rates of$135 per NRSF and$157 per NRSF at expiration during the remainder of 2021 and the year endingDecember 31, 2022 , respectively. Results of operations may be affected by the amount of pre-stabilized properties in our portfolio. As we placed new development projects into service, such as LA3, SV8, CH2, and VA3 during 2020, the initial investment returns may be lower compared to stabilized properties due to operating expenses being less dependent on occupancy levels than revenues. We expect property operating expenses to increase as we place new data center NRSF into service and as projects become stabilized, we expect the investment returns to increase. During the nine months endedSeptember 30, 2021 , we did not place additional pre-stabilized data center space into service.
The amount of revenue generated by the properties in our portfolio depends on several factors, including our ability to lease available unoccupied and under construction space at attractive rental rates. As ofSeptember 30, 2021 , we had approximately 550,000 NRSF of unoccupied or under construction data center space of which approximately 49,000 NRSF is leased with a future commencement date. The loss of multiple significant customers could have a material adverse effect on our results of operations because our top ten customers in the aggregate account for 32.6% of our total operating NRSF and 40.5% of our total annualized rent as ofSeptember 30, 2021 . One of our previously reported top ten customers had$5.1 million of annualized rent that expired at the end of the third quarter and an additional$1.7 million will expire early in the fourth quarter of 2021, neither of which will be renewed. We are actively working to re-lease this space; however, there may be a period of time between the expiration of the current customer lease and a future customer backfill during which we will not earn revenue on this particular data center space. The following table summarizes our leasing activity during the nine months endedSeptember 30, 2021 : GAAP Total GAAP Number of Annualized Leased Rental GAAP Rent Three Months Ended Leases(1) Rent ($000 )(2) NRSF(3) Rates(4) Growth(5)
New / expansion leases commenced March 31, 2021 130 $
5,926 28,776 $ 206
June 30, 2021 133 8,395 59,174 142
September 30, 2021 122 7,094 29,308 242
Total 385 $ 21,415 117,258 $ 183
New / expansion leases signed March 31, 2021 134 $ 6,975 33,306 $ 209
June 30, 2021 112 7,798 33,135 235
September 30, 2021(6) 122 7,225 50,341 144
Total 368 $ 21,998 116,782 $ 188
Renewal leases signed March 31, 2021 276 $ 15,870 91,605 $ 173 6.1 %
June 30, 2021 330 20,397 136,564 149 7.1
September 30, 2021 296 18,660 118,887 157 5.7
Total 902 $ 54,927 347,056 $ 158 6.3 %
(1) Number of leases represents each agreement with a customer; a lease agreement
could include multiple spaces and a customer could have multiple leases.
GAAP annualized rent represents the monthly average contractual rent as (2) stated on customer contracts, multiplied by 12. This amount is inclusive of
any one-time or non-recurring rent abatements and excludes power revenue,
interconnection revenue and operating reimbursement.
Total leased NRSF is determined based on contractually leased square feet, (3) including required data center support space (such as the mechanical,
telecommunications and utility rooms) and building common areas.
GAAP rental rates represent GAAP annualized rent divided by leased NRSF. We
use GAAP annualized rent and GAAP rental rates as supplemental performance (4) measures because, when compared quarter over quarter or year over year, they
provide a performance measure that captures sales volume and pricing trends.
We offer these measures because we recognize they will be used by investors
to compare our sales volume and pricing trends to those of other REITs.
GAAP rent growth represents the increase in rental rates on renewed leases (5) commencing during the period, as compared with the previous period's rental
rates for the same space.
29
Table of Contents
(6) On
rent of $1.7 million and approximately 11,800 NRSF.
Results of Operations
Three Months Ended
The discussion below relates to our financial condition and results of operations for the three months endedSeptember 30, 2021 , and 2020. A summary of our operating results for the three months endedSeptember 30, 2021 , and 2020, is as follows (in thousands): Three Months Ended September 30, 2021 2020 $ Change % Change Operating revenue$ 163,858 $ 153,981 $ 9,877 6.4 % Operating expense 127,841 118,455 9,386 7.9 Operating income 36,017 35,526 491 1.4 Interest expense 11,894 11,384 510 4.5 Net income 24,118 24,132 (14) (0.1) Operating Revenue
Operating revenue during the three months ended
Three Months Ended September 30,
2021 2020 $ Change % Change
Data center revenue:
Rental, power, and related revenue $ 138,095 $ 130,300 $ 7,795 6.0 %
Interconnection revenue 22,994 21,144 1,850 8.7
Total data center revenue 161,089 151,444 9,645 6.4
Office, light-industrial and other 2,769 2,537 232
revenue 9.1
Total operating revenues $ 163,858 $ 153,981 $ 9,877 6.4 %
The increase in operating revenues was primarily due to a$7.8 million , or 6.0%, increase in data center rental, power, and related revenue during the three months endedSeptember 30, 2021 , compared to the 2020 period. Data center rental, power, and related revenue increased due to the organic growth of our customer revenue base through favorable renewals, new customer leases and lease expansions into new and existing space, and increased power consumption by our customers within their deployments. Most notably, data center rental, power, and related revenue at SV8, LA3, NY2, and VA1, where we have placed into service large contiguous data center NRSF within the last two years, has increased$3.5 million ,$2.6 million ,$1.6 million , and$0.8 million , respectively, compared to the three months endedSeptember 30, 2020 . These increases were primarily due to the commencement of large scale and hyperscale customer leases throughout the past twelve months, which generate variable revenue growth as customers deploy their information technology equipment and increase their power consumption. This activity was offset partially by a customer move-out of 39,950 NRSF at SV7 during the fourth quarter of 2020 and customer service-level agreement payments of approximately$1.1 million during the three months endedSeptember 30, 2021 , as well as, other customer move-outs across various properties. In addition, interconnection revenue increased$1.9 million , or 8.7%, during the three months endedSeptember 30, 2021 , compared to the 2020 period. The increase is primarily a result of a net increase in the volume of cross connects from new and existing customers during the three months endedSeptember 30, 2021 , and revenue increases resulting from customers migrating to our higher priced fiber and logical cross connect products. 30 Table of Contents Operating Expenses
Operating expenses during the three months ended
Three Months Ended September 30,
2021 2020 $ Change % Change
Property operating and maintenance $ 49,940 $ 44,986 $ 4,954 11.0 %
Real estate taxes and insurance 5,184 5,989 (805) (13.4)
Depreciation and amortization 45,072 41,759 3,313 7.9
Sales and marketing 6,186 5,901 285 4.8
General and administrative 12,167 10,854 1,313 12.1
Rent 9,292 8,966 326 3.6
Total operating expenses $ 127,841 $ 118,455 $ 9,386 7.9 %
Property operating and maintenance expense increased $5.0 million , or 11.0%,
during the three months ended September 30, 2021 , compared to the 2020 period,
primarily as a result of an increase in utilities expense due to increased
electricity utilization related to the commencement of new and expansion
customer leases, net of customer move-outs, and new operations at LA3.
Real estate taxes and insurance expense decreased $0.8 million , or 13.4%, during
the three months ended September 30, 2021 as compared with the 2020 period
primarily due to the recognition of a net $1.5 million property tax refund
during the three months ended September 30, 2021 . This decrease was slightly
offset by the completion of LA3 Phase 1 during the three months ended December
31, 2020 , which caused an increase to real estate tax assessments and insurance,
and ceased capitalization of expenses.
Depreciation and amortization expense increased $3.3 million , or 7.9%, during
the three months ended September 30, 2021 , compared to the 2020 period,
primarily as a result of an increase in depreciation expense from placing LA3
Phase 1 into service during the three months ended December 31, 2020 , with
approximately 50,000 NRSF and a cost basis of approximately $72.5 million .
General and administrative expense increased $1.3 million , or 12.1%, compared to
the three months ended September 30, 2020 , primarily related to an increased
headcount, resulting in higher salaries and non-cash compensation, partially
offset by reduced legal expenses in the current quarter as a result of no
operating partnership unit redemptions in the current period as compared to
2020.
Rent expense increased by $0.3 million , or 3.6%, during the three months ended
September 30, 2021 , compared to the 2020 period primarily due to increased
straight-line rent expense as a result of our decision to exit the LA4 property
at the end of 2021 prior to our contractual lease term date of July 2023 .
Interest Expense
Interest expense for the three months ended September 30, 2021 , and 2020, was as
follows (in thousands):
Three Months Ended September 30,
2021 2020 $ Change % Change
Interest expense and fees $ 13,852 $ 13,555 $ 297 2.2 %
Amortization of deferred financing 960 1,028 (68) (6.6)
costs and hedge amortization
Capitalized interest (2,918) (3,199) 281 8.8
Total interest expense $ 11,894 $ 11,384 $ 510 4.5 %
Percent capitalized 19.7 % 21.9 %
Total interest expense increased $0.5 million , or 4.5%, during the three months
ended September 30, 2021 , compared to the 2020 period, primarily as a result of
decreased capitalized interest due to placing LA3 Phase 1 into service during
the twelve months ended September 30, 2021 . In addition, the weighted average
principal debt outstanding was $1.8 billion and $1.7 billion during the three
months ended September 30, 2021 , and 2020, respectively. This increase was
partially
31
Table of Contents
offset by a decrease in our daily weighted average interest rate to 3.04% during
the three months ended September 30, 2021 from 3.19% during the three months
ended September 30, 2020 .
Nine Months Ended
The discussion below relates to our financial condition and results of operations for the nine months endedSeptember 30, 2021 , and 2020. A summary of our operating results for the nine months endedSeptember 30, 2021 , and 2020 is as follows (in thousands): Nine Months Ended September 30, 2021 2020 $ Change % Change Operating revenue$ 483,624 $ 451,886 $ 31,738 7.0 % Operating expense 373,197 346,479 26,718 7.7 Operating income 110,427 105,407 5,020 4.8 Other income 3,098 - 3,098 100.0 Interest expense 35,999 33,153 2,846 8.6 Net income 77,508 72,208 5,300 7.3 Operating Revenue Operating revenue during the nine months endedSeptember 30, 2021 , and 2020, was as follows (in thousands): Nine Months Ended September 30, 2021 2020 $ Change % Change Data center revenue: Rental, power, and related revenue$ 407,864 $ 381,913 $ 25,951 6.8 % Interconnection revenue 67,760 62,126 5,634 9.1 Total data center revenue 475,624 444,039 31,585 7.1 Office, light-industrial and other 8,000 7,847 153 revenue 1.9 Total operating revenues$ 483,624 $ 451,886 $ 31,738 7.0 %
The increase in operating revenues was primarily due to a$26.0 million , or 6.8%, increase in data center rental, power, and related revenue during the nine months endedSeptember 30, 2021 , compared to the 2020 period. Data center rental, power, and related revenue increased due to the organic growth of our customer revenue base through favorable renewals, new customer leases and lease expansions into new and existing space, and increased power consumption by our customers within their deployments. Most notably, data center rental, power, and related revenue at SV8, LA3, LA2, NY2, and VA3, where we have placed into service large contiguous data center NRSF within the last two years, has increased$10.0 million ,$7.3 million ,$4.2 million ,$3.9 million , and$3.0 million , respectively, compared to the nine months endedSeptember 30, 2020 . These increases were primarily due to the commencement of large scale and hyperscale customer leases throughout the past twelve months, which generate variable revenue growth as customers deploy their information technology equipment and increase their power consumption. This activity was offset partially by a customer move-out of 39,950 NRSF at SV7 during the fourth quarter of 2020 and customer service-level agreement payments of approximately$2.0 million during the nine months endedSeptember 30, 2021 , as well as, other customer move-outs across various properties. In addition, interconnection revenue increased$5.6 million , or 9.1%, during the nine months endedSeptember 30, 2021 , compared to the 2020 period. The increase is primarily a result of a net increase in the volume of cross connects from new and existing customers during the nine months endedSeptember 30, 2021 , and revenue increases resulting from customers migrating to our higher priced fiber and logical cross connect products. 32 Table of Contents Operating Expenses
Operating expenses during the nine months ended
Nine Months Ended September 30,
2021 2020 $ Change % Change
Property operating and maintenance $ 138,536 $ 126,206 $ 12,330 9.8 %
Real estate taxes and insurance 18,925 17,778 1,147 6.5
Depreciation and amortization 135,067 124,529 10,538 8.5
Sales and marketing 17,852 17,882 (30) (0.2)
General and administrative 35,465 33,724 1,741 5.2
Rent 27,352 26,360 992 3.8
Total operating expenses $ 373,197 $ 346,479 $ 26,718 7.7 %
Property operating and maintenance expense increased $12.3 million , or 9.8%,
during the nine months ended September 30, 2021 , compared to the 2020 period,
primarily as a result of an increase in utilities expense due to increased
customer electricity utilization related to the commencement of new and
expansion leases, net of customer move-outs, and new operations at SV8, CH2, and
LA3, as well as, increased costs related to building out customer requirements
for their data center deployments.
Real estate taxes and insurance expense increased $1.1 million , or 6.5%, during
the nine months ended September 30, 2021 as compared with the 2020 period,
primarily due to the completion of CH2 Phase 1, SV8 Phase 3, and LA3 Phase 1
during the year ended December 31, 2020 , which caused an increase to real estate
tax assessments and insurance, and ceased capitalization of expenses. This
increase was offset by the recognition of a net $1.5 million property tax refund
during the nine months ended September 30, 2021 .
Depreciation and amortization expense increased $10.5 million , or 8.5%, during
the nine months ended September 30, 2021 , compared to the 2020 period, primarily
as a result of recognizing a full nine months of depreciation expense related to
the development projects completed throughout 2020, including CH2 Phase 1, SV8
Phase 3, and LA3 Phase 1. These projects comprised approximately 157,000 NRSF
placed into service with a cost basis of approximately $196.9 million .
General and administrative expense increased $1.7 million , or 5.2%, compared to
the nine months ended September 30, 2020 , primarily related to increased
headcount, resulting in higher salaries and non-cash compensation, partially
offset by savings from reduced legal expenses related to operating partnership
unit redemptions during 2020, and reduced travel and events due to the COVID-19
pandemic.
Rent expense increased by $1.0 million , or 3.8%, during the nine months ended
September 30, 2021 , compared to the 2020 period, primarily due to increased
straight-line rent expense as a result of our decision to exit the LA4 property
at the end of 2021 prior to our contractual lease term date of July 2023 .
Other Income
Other income was $3.1 million during the nine months ended September 30, 2021 as
the result of a one-time benefit recorded due to the release of a tax liability
that is no longer expected to be incurred. There was no other income during
the
2020 period.
33
Table of Contents
Interest Expense
Interest expense for the nine months ended September 30, 2021 , and 2020, was as
follows (in thousands):
Nine Months Ended September 30,
2021 2020 $ Change % Change
Interest expense and fees $ 41,313 $ 39,985 $ 1,328 3.3 %
Amortization of deferred financing 2,907 3,100 (193) (6.2)
costs and hedge amortization
Capitalized interest (8,221) (9,932) 1,711 (17.2)
Total interest expense $ 35,999 $ 33,153 $ 2,846 8.6 %
Percent capitalized 18.6 % 23.1 %
Total interest expense increased $2.8 million , or 8.6%, during the nine months
ended September 30, 2021 , compared to the 2020 period, primarily as a result of
decreased capitalized interest due to placing CH2 Phase 1, SV8 Phase 3, and LA3
Phase 1 into service during the twelve months ended December 31, 2020 . In
addition, the weighted average principal debt outstanding was $1.8 billion and
$1.7 billion during the nine months ended September 30, 2021 , and 2020,
respectively. This increase was partially offset by a decrease in our daily
weighted average interest rate to 3.06% during the nine months ended September
30, 2021 from 3.23% during the nine months ended September 30, 2020 .
Liquidity and Capital Resources
Discussion of Cash Flows
Nine Months Ended
Operating Activities Net cash provided by operating activities was$206.8 million for the nine months endedSeptember 30, 2021 , compared to$194.8 million for the nine months endedSeptember 30, 2020 . The increase of$12.0 million , or 6.2%, was driven by organic growth of our operating cash flows as a result of leasing activity within spaces recently placed into service, including SV8 Phase 3 and LA3 Phase 1, and at our LA2 and VA3 data centers. The increase was partially offset by the timing of vendor payments and customer receipts. Investing Activities Net cash used in investing activities decreased by$133.7 million , or 59.7%, to$90.4 million for the nine months endedSeptember 30, 2021 , compared to$224.1 million for the nine months endedSeptember 30, 2020 . This decrease was primarily due to lower construction expenditures after placing SV8 Phase 3, CH2 Phase 1, and LA3 Phase 1 into service during the year endedDecember 31, 2020 . Financing Activities
Net cash used in financing activities was
During the nine months endedSeptember 30, 2021 , we received cash proceeds, net of payments, of$63.5 million from borrowings under the revolving credit facility. During the nine months endedSeptember 30, 2020 , we received cash proceeds, net of payments, of$57.5 million from borrowings under the revolving credit facility.
During the nine months ended
We paid$182.1 million in dividends and distributions on our common stock andOperating Partnership units during the nine months endedSeptember 30, 2021 , compared to$177.6 million during the nine months endedSeptember 30, 2020 , as a result of an increase in our quarterly dividend to$3.73 per share or unit paid during the nine months endedSeptember 30, 2021 , from$3.66 per share or unit paid during the nine months ended 2020. 34
Table of Contents
Analysis of Liquidity and Capital Resources
We have an effective shelf registration statement that allows us to offer for sale various unspecified classes of equity and debt securities. As circumstances warrant, we may issue debt and/or equity securities from time to time on an opportunistic basis, dependent upon market conditions and available pricing. We make no assurance that we can issue and sell such securities on acceptable
terms or at all.
Our short-term liquidity requirements primarily consist of funds needed for interest expense, operating costs, including utilities, site maintenance costs, real estate and personal property taxes, insurance, rental expenses, sales and marketing and general and administrative expenses, certain capital expenditures, including for the development of data center space, discussed below, and future distributions to common stockholders and holders of our commonOperating Partnership units during the next twelve months.
Our anticipated capital investment over the next twelve months includes the
remaining estimated capital expenditures required to fund our current expansion
projects under construction as of
Costs (in thousands)
Metropolitan Estimated Incurred to- Estimated Percent Power Projects / Facilities Market Completion NRSF Date
Total Leased (MW)
Turn-Key Data Center (TKD) expansion
LA3 Phase 2 Los Angeles Q4 2021 54,388 $ 24,136 $ 30,100 7.6 % 6.0
NY2 Phase 4A New York Q1 2022 34,587 4,593 19,400 - 4.0
Total development 88,975 $ 28,729 $ 49,500 7.6 % 10.0
We expect to meet our short-term liquidity requirements, including our
anticipated development activity over the next twelve months, primarily through
net cash on hand, cash provided by operations, and borrowing on our revolving
credit facility. As of September 30, 2021 , we had $231.9 million available for
us to borrow under our revolving credit facility. In addition, we anticipate
addressing our April 2022 Term Loan maturity within the next three to six
months. Timing, pricing, and the type of debt is dependent on market conditions.
We provide no assurances that we can access the debt capital markets on
acceptable terms or at all.
Our long-term liquidity requirements primarily consist of the costs to fund the
Reston Campus Expansion, the ground up construction of new data center
buildings, Deferred Expansion Capital , additional phases of our current projects
held for development, future development of other space in our portfolio not
currently scheduled, property acquisitions, future distributions to common
stockholders and holders of our common Operating Partnership units, scheduled
debt maturities and other capital expenditures. We expect to meet our long-term
liquidity requirements through net cash provided by operations, and by incurring
long-term indebtedness, such as drawing on our revolving credit facility,
exercising our senior unsecured term loan accordion features or entering into
new debt agreements with our bank group or existing and new accredited
investors. We also may raise capital in the future through the issuance of
additional equity or debt securities, subject to prevailing market conditions,
and/or through the issuance of common Operating Partnership units. However,
there is no assurance that we will be able to successfully raise additional
capital on acceptable terms or at all.
On March 5, 2021 , the Financial Conduct Authority ("FCA") announced that USD
LIBOR will no longer be published after June 30, 2023 . This announcement has
several implications, including setting the spread that may be used to
automatically convert contracts from LIBOR to the Secured Overnight Financing
Rate ("SOFR"), which the Alternative Reference Rates Committee ("ARRC") and the
Internal Swaps and Derivatives Association ("ISDA") have both identified as the
preferred alternative rate for USD-LIBOR. Additionally, banking regulators are
encouraging banks to discontinue new LIBOR debt issuances by December 31, 2021 .
While we expect LIBOR to be available in substantially its current form until at
least the end of June 30, 2023 , it is possible that LIBOR will become
unavailable prior to that point. In the event that USD-LIBOR is not available,
each of our financial instrument contracts contain fallback provisions to
determine the applicable replacement base rate. We anticipate managing the
transition to an alternative rate using the language set out in our agreements
and through potentially modifying our debt and derivative instruments. However,
future market conditions may not allow immediate implementation of our desired
modifications and we may incur significant associated costs in doing so. We will
continue to monitor and evaluate the potential impact any such event could have
on our financial results. As of September 30, 2021 , we have $912.0 million of
USD-LIBOR based variable-rate debt and $700.0 million of notional derivative
contracts.
35
Table of Contents
Indebtedness
A summary of outstanding indebtedness as of
Maturity September 30, December 31,
Interest Rate Date 2021 2020
Revolving credit 1.33% and 1.39% at November 8, 2023 $ 212,000 $ 148,500
facility September 30, 2021, and
December 31, 2020,
respectively
2022 Senior unsecured 1.76% at September 30, April 19, 2022 200,000 200,000
term loan 2021 and December 31,
2020
2023 Senior unsecured 4.19% at September 30, June 15, 2023 150,000 150,000
notes 2021 and December 31,
2020
2024 Senior unsecured 2.86% at September 30, April 19, 2024 150,000 150,000
term loan 2021 and December 31,
2020
2024 Senior unsecured 3.91% at September 30, April 20, 2024 175,000 175,000
notes 2021 and December 31,
2020
2025 Senior unsecured 2.32% at September 30, April 1, 2025 350,000 350,000
term loan 2021 and December 31,
2020
2026 Senior unsecured 4.52% at September 30, April 17, 2026 200,000 200,000
notes 2021 and December 31,
2020
2027 Senior unsecured 3.75% at September 30, May 6, 2027 150,000 150,000
notes 2021 and December 31,
2020
2029 Senior unsecured 4.31% at September 30, April 17, 2029 200,000 200,000
notes 2021 and December 31,
2020
Total principal 1,787,000 1,723,500
outstanding
Unamortized deferred (5,961) (7,589)
financing costs
Total debt $
1,781,039 $ 1,715,911
As of September 30, 2021 , we were in compliance with the financial covenants
under our revolving credit facility, senior unsecured term loans and senior
unsecured notes. For additional information with respect to our outstanding
indebtedness as of September 30, 2021 , and December 31, 2020 , as well as the
available borrowing capacity under our existing revolving credit facility, debt
covenant requirements, and future debt maturities, refer to Note 7 Debt, to the
condensed consolidated financial statements.
Funds From Operations
We consider funds from operations ("FFO"), a non-generally accepted accounting
principles ("GAAP") measure, to be a supplemental measure of our performance
which should be considered along with, but not as an alternative to, net income
and cash provided by operating activities as a measure of operating performance.
We calculate FFO in accordance with the standards established by the National
Association of Real Estate Investment Trusts ("Nareit"). Nareit defined FFO
represents net income (computed in accordance with GAAP), excluding gains (or
losses) from sales of property and undepreciated land and impairment write-downs
of depreciable real estate, plus real estate related depreciation and
amortization (excluding amortization of deferred financing costs) and after
adjustments for unconsolidated partnerships and joint ventures. During the three
and nine months ended September 30, 2021 , we reported FFO, as adjusted, which
excludes from FFO a one-time, non-cash benefit of $3.1 million as a result of
the release of a tax liability during the second quarter of 2021 that is no
longer expected to be incurred.
We use FFO as a supplemental performance measure because, in excluding real
estate related depreciation and amortization and gains and losses from property
dispositions, it provides a performance measure that, when compared year over
year, captures trends in occupancy rates, rental rates and operating costs.
We offer this measure because we recognize that FFO will be used by investors as
a basis to compare our operating performance with that of other REITs. However,
because FFO excludes real estate related depreciation and amortization and
captures neither the changes in the value of our properties that result from use
or market conditions, nor the level of capital expenditures and capitalized
leasing commissions necessary to maintain the operating performance of our
properties, all of which have real economic effect and could materially impact
our financial condition and results from operations, the utility of FFO as a
measure of our performance is limited. FFO is a non-GAAP measure and should not
be considered a measure of liquidity, an alternative to net income, cash
provided by operating activities or any other
36
Table of Contents
performance measure determined in accordance with GAAP, nor is it indicative of
funds available to fund our cash needs, including our ability to pay dividends
or make distributions. In addition, our calculations of FFO are not necessarily
comparable to FFO as calculated by other REITs that do not use the same
definition or implementation guidelines or interpret the Nareit standards
differently from us. Investors in our securities should not rely on these
measures as a substitute for any GAAP measure, including net income. The
following table provides a reconciliation of our net income to FFO (in
thousands, except per share data):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Net income $ 24,118 $ 24,132 $ 77,508 $ 72,208
Real estate depreciation and 43,349 40,136 129,874 119,713
amortization
FFO attributable to common shares and $ 67,467 $ 64,268 $ 207,382 $ 191,921
units
Other income adjustment(1) - - (3,098) -
FFO attributable to common shares and $ 67,467 $ 64,268 $ 204,284 $ 191,921
units, as adjusted(1)
Total weighted average shares and OP 48,647 48,370 48,610 48,388
units outstanding - diluted FFO per common share and OP unit - $ 1.39 $ 1.33 $
4.27 $ 3.97
diluted
FFO per common share and OP unit - $ 1.39 $ 1.33 $
4.20 $ 3.97
diluted, as adjusted(1)
FFO available to shares and units, as adjusted, excludes a one-time benefit
(1) of
tax liability during the second quarter of 2021 that is no longer expected to
be incurred.
Distribution Policy
In order to comply with the REIT requirements of the Code, we generally are
required to make annual distributions to our stockholders of at least 90% of our
net taxable income. Our common stock distribution policy is to distribute as
dividends, at a minimum, a percentage of our cash flow that ensures that we will
meet the distribution requirements of the Code and any subsequent increases
and/or anticipated increases are correlated to increases in our growth of cash
flow.
We have made distributions every quarter since the completion of our initial
public offering in 2010. During the nine months ended September 30, 2021 , we
declared three quarterly dividends totaling $3.77 per share of common stock and
Operating Partnership unit. While we plan to continue to make quarterly
distributions, no assurances can be made as to the frequency or amounts of any
future distributions. The payment of common stock distributions is dependent
upon, among other things, restriction in agreements governing out indebtedness,
our financial condition, operating results and REIT distribution requirements
and may be adjusted at the discretion of our Board of Directors during the year.
The following table summarizes the taxability of our common stock dividends per
share for the years ended
Year Ended December 31,
Record Date 2020 2019
Common Stock:
Ordinary income $ 3.14 $ 3.07
Qualified dividend - -
Capital gains - -
Return of capital 1.74 1.57
Total dividend $ 4.88 $ 4.64
37
Table of Contents© Edgar Online, source
