sv11za
As filed with the Securities and Exchange
Commission on August 10, 2010
Registration
No. 333-166810
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 3
to
Form S-11
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF 1933
OF SECURITIES OF CERTAIN REAL ESTATE COMPANIES
CoreSite Realty
Corporation
(Exact name of registrant as
specified in governing instruments)
1050 17th Street, Suite 800
Denver, CO 80265
(866) 777-2673
(Address, including zip code,
and telephone number, including area code, of registrants
principal executive offices)
Thomas M.
Ray
President & Chief Executive Officer
CoreSite Realty Corporation
1050 17th Street, Suite 800
Denver, CO 80265
(866) 777-2673
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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Raymond Y. Lin
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Edward J. Schneidman
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Patrick H. Shannon
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John P. Berkery
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Latham & Watkins LLP
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Mayer Brown LLP
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885 Third Avenue
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1675 Broadway
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New York, New York 10022
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New York, New York 10019
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(212) 906-1200
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(212) 506-2500
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the Securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act, check the following
box: o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, check the following
box. 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. (Check one):
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller reporting
company)
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information contained in this preliminary prospectus is not
complete and may be changed. We may not sell these securities
until the registration statement filed with the Securities and
Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and we are not soliciting
offers to buy these securities in any state where the offer or
sale is not permitted.
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SUBJECT TO COMPLETION, DATED
AUGUST 10, 2010
PROSPECTUS
Shares
CoreSite Realty
Corporation
Common Stock
$
per share
This is our initial public offering of our common stock. We are
selling shares
of our common stock. We currently expect the initial public
offering price to be between $ and
$ per share.
We have granted the underwriters an option to purchase up
to
additional shares of common stock to cover over-allotments.
We intend to apply to have our common stock listed on the New
York Stock Exchange under the symbol COR.
We intend to elect to be taxed and to operate in a manner that
will allow us to qualify as a real estate investment trust, or
REIT, for U.S. federal income tax purposes commencing with our
tax year ending December 31, 2010. Shares of our common
stock are subject to ownership limitations that are intended to
assist us in qualifying and maintaining our qualification as a
REIT, including, subject to certain exceptions, a 9.8% ownership
limit. See Description of Securities.
Investing in our common stock involves risks. See Risk
Factors beginning on page 18 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
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Per Share
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Total
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Public Offering Price
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$
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$
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Underwriting Discounts and Commissions
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$
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$
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Proceeds to CoreSite (before expenses)
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$
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$
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The underwriters expect to deliver the shares to purchasers on
or
about ,
2010 through the book-entry facilities of The Depository
Trust Company.
Joint
Book-Running Managers
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Citi
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BofA Merrill Lynch
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RBC
Capital Markets
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KeyBanc
Capital Markets
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Credit Suisse
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,
2010
TABLE OF
CONTENTS
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18
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50
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70
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74
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105
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126
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130
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134
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136
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142
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144
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149
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153
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156
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176
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177
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183
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183
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183
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184
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A-1
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B-1
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F-1
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EX-10.7 |
EX-21.1 |
EX-23.1 |
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
different information. If anyone provides you with different or
inconsistent information, you should not rely on it. You should
not assume that the information in this prospectus is accurate
as of any date other than the date on the front cover of this
prospectus.
This prospectus contains third-party estimates and data
regarding growth in the Internet and data center industries.
This data was obtained from reports by and publications of Tier1
Research, LLC, Cisco Systems, Inc., Nemertes Research and
Gartner, Inc. Although we have not independently verified the
data and estimates contained in these reports and publications,
we believe that this information is reliable. However, there can
be no guarantee that the markets discussed in these reports will
grow at the estimated rates or at all, and actual results may
differ from the projections and estimates contained in these
reports. Any failure of the markets to grow at projected rates
could have an adverse impact on our business. See
Appendix B: Citations for a complete list of
these reports and publications.
i
[THIS
PAGE LEFT INTENTIONALLY BLANK]
ii
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. Because this is only a summary, it does not
contain all of the information that may be important to you.
Before making your investment decision, you should read this
entire prospectus and should consider, among other things, the
matters set forth under Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our unaudited pro
forma financial statements and our historical consolidated and
combined financial statements and related notes included
elsewhere in this prospectus. Unless the context requires
otherwise, references in this prospectus to we,
our, us and our company
refer to CoreSite Realty Corporation, a Maryland corporation,
together with its consolidated subsidiaries after giving effect
to the Restructuring Transactions described in this prospectus,
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 prospectus as our operating
partnership and CoreSite Services, Inc., a Delaware
corporation, our taxable REIT subsidiary, or TRS. Our promoters
are our President, Chief Executive Officer and Director,
Thomas M. Ray and CoreSite, L.L.C. References to pro
forma revenues, pro forma net loss and
pro forma funds from operations refer to our
revenues, net loss and funds from operations as described in
Summary of Historical and Pro Forma Financial Data
and the unaudited pro forma financial statements included
elsewhere in this prospectus. Unless otherwise indicated, the
information contained in this prospectus is as of June 30,
2010 and assumes that the transactions described under the
caption Structure and Formation of Our Company have
been consummated. For a list of certain industry terms and
sources cited herein, see Appendix A: Glossary of
Terms and Appendix B: Citations,
respectively.
Our
Company
We are an owner, developer and operator 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 data centers feature advanced power, cooling
and security systems, including twenty-four hours a day, seven
days a week security staffing, and many are points of dense
network interconnection. We are able to satisfy the full
spectrum of our customers data center requirements by
providing data center space ranging in size from an entire
building or large dedicated suite to a cage or cabinet. We lease
our space to a broad and growing customer base ranging from
enterprise customers to less space-intensive, more
network-centric customers. Our operational flexibility allows us
to selectively lease data center space to its highest and best
use depending on customer demand, regional economies and
property characteristics.
As of June 30, 2010, 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, or
NRSF, of which over 1.0 million NRSF is existing data
center space. These properties include 277,126 NRSF of space
readily available for lease, of which 190,788 NRSF is available
for lease as data center space. We expect that our redevelopment
and development potential will enable us to accommodate existing
and future customer demand and positions us to significantly
increase our cash flows.
Our data center acquisitions have been historically funded and
held through real estate funds affiliated with The Carlyle
Group, or Carlyle, a global private equity firm. The first data
center in our portfolio was purchased in 2000 and since then we
have continued to acquire, redevelop, develop and operate these
types of facilities.
1
Our
Portfolio
The following table provides an overview of our properties as of
June 30, 2010 after giving effect to the Restructuring
Transactions.
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NRSF
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Operating(1)
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Office and Light-
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Redevelopment and
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Annualized
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Data
Center(2)
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Industrial(3)
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Total
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Development(4)
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Metropolitan
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Acquisition
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Rent
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Percent
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Percent
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Percent
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Under
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Total
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Facilities
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Area
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Date(5)
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($000)(6)
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Total
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Leased(7)
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Total
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Leased(7)
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Total(8)
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Leased(7)
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Construction(9)
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Vacant
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Total
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Portfolio
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One Wilshire*
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Los Angeles
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Aug. 2007
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$
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20,391
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156,521
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74.1
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%
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7,500
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62.2
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%
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164,021
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73.6
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%
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164,021
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900 N. Alameda
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Los Angeles
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Oct. 2006
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11,044
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256,690
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91.1
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16,622
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7.1
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273,312
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86.0
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16,126
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144,721
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160,847
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434,159
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55 S. Market
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San Francisco Bay
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Feb. 2000
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11,003
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84,045
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86.5
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205,846
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77.9
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289,891
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80.4
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289,891
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12100 Sunrise Valley
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Northern Virginia
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Dec. 2007
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8,838
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116,498
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70.5
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38,350
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99.2
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154,848
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77.6
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107,921
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107,921
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262,769
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1656 McCarthy
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San Francisco Bay
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Dec. 2006
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6,507
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71,847
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85.7
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71,847
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85.7
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4,829
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4,829
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76,676
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427 S. LaSalle
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Chicago
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Feb. 2007
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5,950
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129,790
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74.5
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45,283
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100.0
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175,073
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81.1
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5,309
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5,309
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180,382
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70 Innerbelt
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Boston
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Apr. 2007
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5,506
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118,991
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94.0
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2,600
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57.1
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121,591
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93.2
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25,118
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129,897
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155,015
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276,606
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32 Avenue of the Americas*
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New York
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June 2007
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3,730
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48,404
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68.8
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48,404
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58.8
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48,404
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1275 K Street*
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Northern Virginia
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June 2006
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1,914
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22,137
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96.6
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22,137
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96.6
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22,137
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2115 NW 22nd Street
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Miami
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June 2006
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1,314
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30,176
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49.4
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1,641
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40.2
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31,817
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49.0
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13,447
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13,447
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45,264
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Coronado-Stender Business Park:
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2901 Coronado
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San Francisco Bay
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Feb. 2007
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8,820
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50,000
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100.0
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50,000
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100.0
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50,000
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Coronado-Stender
Properties(10)
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San Francisco Bay
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Feb. 2007
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678
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78,800
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74.3
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78,800
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74.3
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50,400
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50,400
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129,200
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2972
Stender(11)
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San Francisco Bay
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Feb. 2007
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50,400
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50,400
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50,400
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Total Facilities
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$
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85,695
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1,085,099
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82.4
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%
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396,642
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78.2
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%
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1,481,741
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81.3
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%
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96,473
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451,695
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548,168
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2,029,909
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*
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Indicates properties in which we
hold a leasehold interest.
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(1)
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Represents the square feet at a
building under lease as specified in existing customer lease
agreements plus managements 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.
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(2)
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Represents the NRSF at an operating
facility that is currently leased or readily available for lease
as data center space. Both leased and available data center NRSF
include a customers proportionate share of the required
data center support space (such as the mechanical,
telecommunications and utility rooms) and building common areas.
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(3)
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Represents the NRSF at an 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 use.
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(4)
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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.
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(5)
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Represents the date a property was
acquired by a Carlyle real estate fund or, in the case of a
property under lease, the date the initial lease commenced for
the property.
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(6)
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Represents the monthly contractual
rent under existing customer leases as of June 30, 2010
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. Total abatements for leases in effect as of
June 30, 2010 for the 12 months ending June 30, 2011
were $26,303. On a gross basis, our annualized rent was
approximately $90,792,000 as of June 30, 2010, which
reflects the addition of $4,341,014 in operating expense
reimbursements to contractual net rent under modified gross and
triple-net leases.
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(7)
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Includes customer leases in effect
as of June 30, 2010. The percent leased is determined based
on leased square feet as a proportion of total operating NRSF.
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(8)
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Represents the NRSF at an operating
facility currently leased or readily available for lease. This
excludes existing vacant space held for redevelopment or
development.
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(9)
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Reflects NRSF for which substantial
activities are ongoing to prepare the property for its intended
use following redevelopment or development, as applicable. Of
the 96,473 NRSF under construction as of June 30, 2010, 85,434
NRSF was data center space and 11,039 NRSF was ancillary data
center support space.
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(10)
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We currently have the ability to
develop 129,200 NRSF of data center space at the
Coronado-Stender Properties and, subject to our obtaining a
negative declaration from the City of Santa Clara, we
believe that we will be able to develop an additional 216,050
NRSF, or up to 345,250 NRSF in the aggregate, of data center
space at this property. See Business and
PropertiesDescription of Our
PortfolioCoronado-Stender Business Park, Santa Clara,
California.
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(11)
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We currently have the ability to
develop 50,400 NRSF of data center space at 2972 Stender. We
have submitted a request for a negative declaration from the
City of Santa Clara to enable us to construct up to an
additional 50,600 NRSF at this building, for a total of up to
101,000 NRSF of data center space. We are under construction on
the currently entitled 50,400 NRSF of data center space. Should
we obtain entitlements to construct the additional 50,600 NRSF
and, provided we then believe market demand warrants and that it
would be the best use of our capital available for expansion, we
may elect to construct the entire 101,000 NRSF of space,
comprised of the initial 50,400 NRSF of data center space plus
the incremental 50,600 NRSF of unconditioned core and shell
space held for potential future development into data center
space. See Business and PropertiesDescription of Our
PortfolioCoronado-Stender Business Park, Santa Clara,
California.
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2
Industry
Overview
Data centers are highly specialized and secure buildings that
house networking, storage and communications technology
infrastructure, including servers, storage devices, switches,
routers and fiber optic transmission equipment. These buildings
are designed to provide the power, cooling and network
connectivity necessary to efficiently operate this
mission-critical IT equipment. This infrastructure requires an
uninterruptible power supply, backup generators, cooling
equipment, fire suppression systems and physical security. Data
centers located at points where many communications networks
converge can also function as interconnection hubs where
customers are able to connect to multiple networks and exchange
traffic with each other.
According to the Cisco Visual Networking Index, global IP
traffic, including Internet, non-Internet and mobile data, is
expected to quadruple from 2009 to 2014, representing a compound
annual growth rate of
34%.(a)
We believe that the data center industry enjoys strong demand
dynamics principally driven by the continued growth of Internet
traffic, the corresponding increase in processing and storage
equipment and the increased need for network interconnection
capabilities. Additionally, companies are increasingly
outsourcing their data center needs due to the high cost of
operating and maintaining in-house data center facilities,
increasing power and cooling requirements for data centers and
the growing focus on business and disaster recovery planning.
We believe that sufficiently capitalized operators with space
and land available for redevelopment and development, as well as
a proven track record and reputation for operating high-quality
data center facilities, will enjoy a significant competitive
advantage and be best-positioned to accommodate market demand.
Our
Competitive Strengths
We believe the following key competitive strengths position us
to efficiently scale our business, capitalize on the growing
demand for data center space and interconnection services, and
thereby grow our cash flow.
High Quality Data Center Portfolio. As
of June 30, 2010, our property portfolio included
11 operating data center facilities, one data center under
construction and one development site. Much of our data center
portfolio has been recently constructed. Specifically, since
January 1, 2006, we have redeveloped or developed 620,586
NRSF into data center space, or approximately 57.2% of our
current data center portfolio. Based upon our portfolio as of
June 30, 2010 and including the completion of the 85,434
NRSF of data center space under construction at that time, 60.3%
of our data center portfolio will have been built since
January 1, 2006.
Significant Network Density. Many of
our data centers are points of dense network interconnection
that provide our customers with valuable networking
opportunities that help us retain existing customers and attract
new ones. We believe that the network connectivity at these data
centers provides us with a significant competitive advantage
because network-dense facilities offering high levels of
connectivity typically take many years to establish. To
facilitate access to these networking opportunities, we provide
services enabling interconnection among our data center
customers including private cross connections and
publicly-switched peering services.
Expansion Capability. Our data center
facilities currently have 190,788 NRSF of space readily
available for lease. We also have the ability to expand our
operating data center square footage by approximately 80%, or
865,621 NRSF, by redeveloping 419,371 NRSF of vacant space and
developing up to 446,250 NRSF of new data center space on land
that we currently own, subject to our obtaining a negative
declaration from the City of Santa Clara. Of this redevelopment
and development space, 85,434 NRSF of data center space was
under construction as of June 30, 2010.
Facilities in Key Markets. Our
portfolio is concentrated in some of the largest and most
important U.S. metropolitan markets. As of June 30,
2010, over 70% of our leased operating NRSF, accounting for over
90% of our annualized rent, was located in five of the six North
American markets identified by Tier1 Research, LLC as markets of
high data center
demand.(b)
Diversified Customer Base. We have a
diverse, global base of over 600 customers, which we believe is
a reflection of our strong reputation and proven track record,
as well as our customers trust in our ability to
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house their mission-critical applications and vital
communications technology. As of June 30, 2010, no one
customer represented more than 13.5% of our annualized rent and
our top ten customers represented 36.7% of our annualized rent.
Our diverse customer base spans many industries and includes:
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Global Telecommunications Carriers and Internet Service
Providers: AT&T Inc., British Telecom (BT
Group Plc.), China Netcom Group Corp., China Unicom (Hong Kong)
Limited, France Telecom SA, Internap Network Services Corp.,
Japan Telecom Co., Ltd., Korea Telecom Corporation, Singapore
Telecom Ltd., Sprint Nextel Corporation, Tata Communications
Ltd., Telmex U.S.A., L.L.C. and Verizon Communications Inc;
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Enterprise Companies, Financial and Educational Institutions
and Government Agencies: Computer Science
Corporation, the Government of the District of Columbia,
Macmillan Inc., Microsoft Corporation, The NASDAQ OMX Group,
Inc., NYSE Euronext and the University of Southern California;
and
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Media and Content Providers: Akamai
Technologies, Inc., CDNetworks Co. Ltd., DreamWorks Animation
SKG, Inc., Facebook, Inc., Google Inc., NBC Universal Inc., Sony
Pictures Imageworks Inc. and Warner Brothers Entertainment, Inc.
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Experienced Management Team. Our
management team has significant experience in the real estate,
communications and technology industries. Notably, our Chief
Executive Officer has over 22 years of experience in the
acquisition, financing and operation of commercial real estate,
which includes over 11 years in the data center industry
and five years at publicly traded REITs. Additionally, our Chief
Financial Officer has approximately 16 years of financial
experience, including nearly ten years with a publicly traded
REIT. We believe our management teams significant
expertise in acquiring, redeveloping, developing and operating
efficient data center properties has enabled us to develop a
high-quality data center portfolio and offer customer-focused
solutions.
Balance Sheet Positioned to Fund Continued
Growth. Following completion of this
offering, we believe we will be conservatively capitalized with
sufficient funds and available capacity to pursue our
anticipated redevelopment and development plans. After giving
effect to the Restructuring Transactions, the Financing
Transactions and the use of proceeds therefrom as described more
fully below, as of June 30, 2010, we would have had
approximately $124.9 million in principal amount of total
long-term debt outstanding (excluding a $2.0 million fair
value of debt adjustment resulting from the Restructuring
Transactions) equal to approximately 12.7% of the undepreciated
book value of our total assets. See The
Restructuring Transactions and The Financing
Transactions. In addition, we expect to have
$ million of cash available
on our balance sheet and the ability to borrow up to an
additional $ million under a
new $110.0 million revolving credit facility, subject to
satisfying certain financial tests. We may also incur additional
indebtedness to pursue our redevelopment and development plans.
Upon completion of this offering, there will be no limits on the
amount of indebtedness we may incur other than limits contained
in our revolving credit facility, mortgage loans or future
agreements that we may enter into or as may be set forth in any
policy limiting the amount of indebtedness we may incur adopted
by our Board of Directors. See Policies with Respect to
Certain ActivitiesFinancing Policies and Risk
FactorsOur level of indebtedness and debt service
obligations could have adverse effects on our business. We
believe this available capital will be sufficient to fund our
general corporate needs, including the completion of 85,434 NRSF
of data center space under construction as of June 30, 2010
and the redevelopment or development of an additional 99,578
NRSF of space prior to December 31, 2011, of which
82,620 NRSF is planned data center space and 16,958 NRSF is
ancillary data center support space.
4
Business
and Growth Strategies
Our business objective is to continue growing our position as a
provider of strategically located data center space in North
America. The key elements of our strategy are as follows:
Increase Cash Flow of Our In-Place Data Center
Space. We actively manage and lease our
properties to increase cash flow by:
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Increasing Rents. Approximately 90% of our
annualized rent as of June 30, 2010 was derived from data
center leases. Additionally, the occupancy rate of our data
centers has remained strong with over 81% of our data center
operating space under lease as of June 30, 2010 and
December 31, 2009. We believe that the average rental rate
for our in-place data center leases is substantially below
market and that our ability to renew these leases at market
rates provides us with an opportunity to increase our cash
flows. We renewed approximately 75% of our data center leases
that expired during the year ended December 31, 2009, while
increasing rents under data center leases renewed or
newly-leased
during the year. The dollar-weighted average rental rate per
NRSF of the leases for our data center space renewed or
newly-leased
during 2009 was approximately 25% greater than that of the data
center leases expiring in the same facilities during the year.
We also believe that many of our data center leases that are
contractually scheduled to expire during 2010 are at rental
rates meaningfully below current market rates. Specifically, the
dollar-weighted average rental rate per NRSF of data center
leases we renewed or
newly-leased
in 2009 was over 25% greater than that of the data center leases
contractually scheduled to expire in the same facilities during
2010. Additionally, the dollar-weighted average rental rate per
NRSF of our data center leases renewed during the six months
ended June 30, 2010 was approximately 25% greater than that
of the data center leases expiring in the same facilities during
that period.
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Leasing up Available Space and Power. We have
the ability to increase both our revenue and our revenue per
square foot by leasing additional space and power to new and
existing data center customers. As of June 30, 2010,
substantially all of our data center facilities offered our
customers the ability to increase their square footage under
lease as well as the amount of power they use per square foot.
In total, our existing data center facilities have 190,788 NRSF
of space available for lease. We believe this space, together
with available power, enables us to generate incremental revenue
within our existing data center footprint without necessitating
extensive capital expenditures.
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Capitalize on Embedded Expansion
Opportunities. Our portfolio includes 419,371
NRSF of vacant space that can be redeveloped into data center
space. In addition to our redevelopment space, as of
June 30, 2010, our portfolio included a 15.75-acre property
housing seven buildings in Santa Clara, California, which
we refer to as the Coronado-Stender Business Park. The
Coronado-Stender Business Park currently includes:
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2901 Coronado, a 50,000 NRSF data center on 3.14 acres,
representing the first phase of our development at the
Coronado-Stender Business Park, which we completed during the
second quarter of 2010. During March 2010, we fully leased this
space to a leading online social networking company pursuant to
a six-year lease;
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2972 Stender, a 50,400 NRSF data center under construction on
3.51 acres, which represents the second phase of our development
at the Coronado-Stender Business Park. We have submitted a
request for a negative declaration from the City of
Santa Clara to enable us to construct up to an additional
50,600 NRSF at this building, for a total of up to 101,000 NRSF
of data center space. Should we obtain entitlements to construct
the additional 50,600 NRSF and, provided we then believe market
demand warrants and that it would be the best use of our capital
available for expansion, we may elect to construct the entire
101,000 NRSF of space, comprised of the initial 50,400 NRSF of
data center space plus the incremental 50,600 NRSF of
unconditioned core and shell space held for potential future
development into data center space; and
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the Coronado-Stender Properties, a 9.1 acre development
site with five buildings consisting of 78,800 NRSF of
office and light-industrial operating space and 50,400 NRSF of
vacant space in land held for development, portions of which
generate revenue under short-term leases. This development site
currently provides us with the ability to develop additional
data center space in one of the fastest growing
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and most important data center markets in North America. We
currently have the ability to develop 129,200 NRSF of data
center space at the Coronado-Stender Properties and, subject to
our obtaining a negative declaration from the City of
Santa Clara, we believe that we will be able to develop an
additional 216,050 NRSF, or up to 345,250 NRSF in the
aggregate, of data center space at this property.
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Upon completion of the Restructuring Transactions and the
Financing Transactions as described more fully below, we believe
that we will have sufficient capital to execute our
redevelopment and development plans as demand dictates.
Selectively Pursue Acquisition Opportunities in New and
Existing Markets. We intend to seek
opportunities to acquire existing or potential data center space
in key markets with abundant power
and/or dense
points of interconnection that will expand our customer base and
broaden our geographic footprint. We will also continue to
implement our
hub-and-spoke
strategy that we have successfully deployed in our three
largest markets, Los Angeles and the San Francisco Bay and
Northern Virginia areas. In these markets, we have extended our
data center footprint by connecting our newer facilities, the
spokes, to our established data centers, our hubs, which allows
our customers leasing space at the spokes to leverage the
significant interconnection capabilities of our hubs.
Leverage Existing Customer Relationships and Reach New
Customers. Our strong customer and industry
relationships, combined with our national footprint and sales
force, afford us insight into the size, timing and location of
customers planned growth. We have historically been
successful in leveraging this market visibility to expand our
footprint and customer base in existing and new markets. We
intend to continue to strengthen our relationship with existing
customers, including the pursuit of
build-to-suit
opportunities, and to expand and diversify our customer base by
targeting growing enterprise customers and segments, such as
healthcare, financial services, media and entertainment
companies, and local, state and federal governments and agencies.
Summary
Risk Factors
An investment in our common stock involves significant risks.
You should carefully consider the matters discussed in the
section Risk Factors beginning on page 18 prior
to deciding whether to invest in our common stock. These risks
include, but are not limited to, the following:
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Our portfolio of properties consists primarily of data centers
geographically concentrated in certain markets and any adverse
developments in local economic conditions or the demand for data
center space in these markets may negatively impact our
operating results;
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We have experienced significant losses and we cannot assure you
that we will achieve profitability;
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We face significant competition and may be unable to lease
vacant space, renew existing leases or release space as leases
expire, which may have a material adverse effect on our business
and results of operations;
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Our success depends on key personnel whose continued service is
not guaranteed and we may not be able to retain or attract
knowledgeable, experienced and qualified personnel;
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We are continuing to invest in our expansion efforts, but we may
not have sufficient customer demand in the future to realize
expected returns on these investments;
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Any failure of our physical infrastructure or services could
lead to significant costs and disruptions that could reduce our
revenues, harm our business reputation and have a material
adverse effect on our financial results;
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Even if we have additional space available for lease at any one
of our data centers, our ability to lease this space to existing
or new customers could be constrained by our access to
sufficient electrical power;
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To fund our growth strategy and refinance our indebtedness, we
depend on external sources of capital, which may not be
available to us on commercially reasonable terms or at all;
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If our properties do not generate sufficient cash flow, we may
be required to fund distributions from working capital,
borrowings under our new revolving credit facility, proceeds
from this offering, the
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sale of assets or by obtaining other debt or equity financing,
pay dividends in the form of taxable stock dividends or reduce
expected distributions, any of which could have a material
adverse effect on the price of our common stock.
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Our expenses may not decrease if our revenue decreases;
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Illiquidity of real estate investments, particularly our data
centers, could significantly impede our ability to respond to
adverse changes in the performance of our properties, which
could harm our financial condition;
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While the Carlyle real estate funds and their affiliates will
not control our company following the completion of this
offering, they will own a majority of our operating partnership
and have the right initially to nominate two directors, and
their interests may differ from or conflict with the interests
of our stockholders; and
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Failure to qualify as a REIT would have material adverse
consequences to us and the value of our stock.
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The
Financing Transactions
Prior to the completion of this offering, we expect to assume
and, in one case, refinance certain loans currently held by the
entities contributing the 427 S. LaSalle property,
55 S. Market property and 12100 Sunrise Valley
property to our portfolio in connection with the Restructuring
Transactions. We expect to obtain lender consent to assume a
total of $40.0 million of debt under three loans secured by
our 427 S. LaSalle property. These loans on
427 S. LaSalle mature in March 2011. We have one
12-month option to extend each of these loans to March 2012 and
there are no performance tests or conditions outside of our
control to exercise these extension options. We also expect to
obtain lender consent to assume a $32.0 million
construction loan on our 12100 Sunrise Valley property due June
2013, of which $24.9 million was outstanding as of
June 30, 2010. Concurrently with the completion of this
offering, we expect to refinance the existing $73.0 million
of debt secured by the 55 S. Market property with a
new $60.0 million mortgage, which will have a term of not
less than two years. We plan to repay the remaining
$13.0 million of the existing loan with the proceeds from
this offering. Additionally, concurrently with the completion of
this offering, we will enter into a new $110.0 million
revolving credit facility. We refer to these transactions,
together with this offering, as the Financing Transactions. See
Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital
Resources.
The
Restructuring Transactions
Immediately prior to the completion of the initial public
offering of our common stock, we will enter into a series of
transactions with the Carlyle real estate funds or their
affiliates to create our new organizational structure. In
connection with this restructuring, all of the property and
non-cash assets that will be used in the operation of our
companys business will be contributed to our operating
partnership. While all of these properties and assets have been
operated under common management and the CoreSite brand, they
have been owned by different entities affiliated with the
Carlyle real estate funds since they were initially acquired or
developed by the Carlyle real estate funds or their affiliates.
Prior to the Restructuring Transactions, each of the properties
or leasehold interests that will comprise our portfolio, as well
as the other assets used by us to manage the portfolio, were
held in separate partnerships or limited liability companies
each of which was formed by one or more of the Carlyle real
estate funds or their affiliates for the purpose of acquiring,
holding and operating these properties or assets. These
partnerships or limited liability companies were held by the
applicable real estate fund through one or more holding
companies the sole purpose of which was to hold such interest or
to obtain related financing. In order to simplify the
organizational structure of our company following our initial
public offering, certain of the holding companies will be
liquidated or merged prior to the contribution in connection
with the Restructuring Transactions. Although our portfolio has
been owned by various Carlyle real estate funds or their
affiliates, all of our data centers have been managed by our
management team.
In the Restructuring Transactions, and prior to the completion
of the offering, the Carlyle real estate funds or their
affiliates will contribute 100% of their ownership interests in
the entities that, directly or
7
indirectly, own or lease all of the properties that comprise our
portfolio and all the other non-cash assets used in our
business. The aggregate undepreciated book value plus
construction in progress of the contributed properties was
$542.8 million as of December 31, 2009. In exchange for this
contribution, our operating partnership will issue to the
Carlyle real estate funds or their
affiliates operating partnership
units in the aggregate having a total value of
$ million, based upon the
midpoint of the range set forth on the cover of this prospectus
(less underwriting discounts and commissions). Of these
operating partnership units, approximately %, or
$ million in value, will be
issued to our Predecessor and %, or
$ million in value, will be
issued to the entities contributing our Acquired Properties, in
each case, based upon the midpoint of the range set forth on the
cover of this prospectus (less underwriting discounts and
commissions).
Concurrently with the completion of this offering, we will use a
portion of the cash proceeds to purchase from the Carlyle real
estate funds and their
affiliates operating
partnership units in the aggregate, at a price per unit equal to
the initial public offering price per share for our common stock
(less underwriting discounts and commissions) for an aggregate
purchase price of $ , based upon
the midpoint of the range set forth on the cover of this
prospectus (less underwriting discounts and commissions). Our
Predecessor will
sell operating partnership
units to us for an aggregate purchase price of
$ , and the entities that
contributed our Acquired Properties will
sell operating partnership
units to us for an aggregate purchase price of
$ , in each case, based upon the
midpoint of the range set forth on the cover of this prospectus
(less underwriting discounts and commissions). We will also
purchase an
additional newly-issued
operating partnership units from our operating partnership for
$ , based upon the midpoint of the
range set forth on the cover of this prospectus (less
underwriting discounts and commissions). Following our purchase
of the units from the Carlyle real estate funds and their
affiliates and the newly-issued operating partnership units from
our operating partnership, we will own % of the
operating partnership units then outstanding.
Upon completion of this offering, the Carlyle real estate funds
and their affiliates will have received aggregate consideration
with a value of $ million,
consisting of $ million in
cash and $ million in
operating partnership units. Following our purchase of these
units, the Carlyle real estate funds or their affiliates will
have an aggregate beneficial ownership interest in our operating
partnership of approximately %, which, if exchanged
for our common stock, would represent an
approximately % interest in our common stock,
with % being held by our Predecessor and %
being held by the entities contributing our Acquired Properties.
In the event that the underwriters of the offering exercise
their over-allotment option in full, we will purchase from the
Carlyle real estate funds or their affiliates an aggregate
of of these operating partnership
units for an aggregate purchase price of
$ , based upon the midpoint of the
range set forth on the cover of this prospectus (less
underwriting discounts and commissions), and we will purchase
from our operating partnership an
additional newly-issued operating
partnership units for $ , at the
same price per unit. Following such purchases, we and the
Carlyle real estate funds and their affiliates would
own % and % of the operating partnership
units then outstanding, respectively.
The Restructuring Transactions are being undertaken in manner
described, instead of simply causing the operating partnership
to deliver a combination of cash and operating partnership units
to the Carlyle real estate funds or their affiliates in exchange
for their contributions to our operating partnership because
prior to the completion of this offering, neither we nor our
operating partnership will have cash available to fund such a
transaction. As a result, we determined that undertaking the
Restructuring Transactions in the manner described is the
simplest and most direct way to accomplish our desired
post-offering structure.
Additionally, concurrently with the completion of this offering,
we will
issue shares
to certain members of our management and our operating
partnership will
issue operating
partnership units to certain other members of our management, in
each case, in exchange for previously issued profits interests
under our profits interest incentive program, or PIP. All
previously issued profits interest awards under the PIP will be
exchanged for operating partnership units or shares of our
common stock in connection with the completion of the
Restructuring Transactions and our initial public offering.
Following the completion of our initial public offering, all
future equity incentive awards will be granted under our 2010
Equity Incentive Plan. See ManagementExecutive
Officer CompensationCompensation Discussion and
AnalysisElements of 2009 Compensation.
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As a result of the Restructuring Transactions, after the
completion of this offering, substantially all of our assets
will be held by, and our operations conducted through, CoreSite,
L.P. and its subsidiaries. We intend to elect to be taxed and to
operate in a manner that will allow us to qualify as a REIT for
federal income tax purposes beginning with our tax year ending
December 31, 2010. Substantially all of our interconnection
services will be provided by CoreSite Services, Inc., our
taxable REIT subsidiary, a wholly owned subsidiary of our
operating partnership. We will control CoreSite, L.P. as general
partner and as the owner of
approximately % of the interests in
our operating partnership. Our primary asset will be our general
and limited partner interests in our operating partnership.
Our
Structure
The following diagram summarizes our ownership structure upon
completion of this offering and the completion of the
Restructuring Transactions (assuming no exercise by the
underwriters of their over-allotment option). Our operating
partnership will indirectly own 100% of the various properties
depicted below.
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(1)
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Reflects the issuance
of shares
of our common stock to employees (none of whom are executive
officers) concurrently with the completion of this offering in
exchange for profits interests previously granted under our
profits interest incentive plan. Also reflects awards
of shares
of restricted stock in the aggregate under our 2010 Equity
Incentive Plan to each of our executive officers and other
employees in connection with the completion of this offering,
based on an initial public offering price of
$ per share, the midpoint of the
range set forth on the cover of this prospectus.
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(2)
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Reflects the purchase by us
of operating partnership
units from our operating partnership
and operating partnership
units from the Carlyle real estate funds and their affiliates
concurrently with the completion of this offering and the
Restructuring Transactions.
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(3)
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Reflects operating
partnership units acquired by the Carlyle real estate funds and
their affiliates in consideration of the contributions by such
entities to our operating partnership in the Restructuring
Transactions after giving effect to our purchase
of of such operating
partnership units as described in note (2) concurrently
with the completion of this offering.
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(4)
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Reflects operating
partnership units issued to each of our executive officers
(other than Messrs. Ray, Bair, Price and Sistek), in
exchange for profits interests previously granted under our
profits interest incentive plan concurrently with the completion
of this offering.
|
Material
Benefits to Related Parties
Upon completion of this offering and the Restructuring
Transactions, the Carlyle real estate funds or their affiliates,
our executive officers and members of our Board of Directors
will receive material financial and other benefits, as described
below. For a more detailed discussion of these benefits see
Management and Certain Relationships and
Related Party Transactions.
Partnership
Agreement
Concurrently with the completion of this offering, we will enter
into a partnership agreement with the various limited partners
of our operating partnership, of which we will be the general
partner. Upon completion of this offering and the Restructuring
Transactions, the Carlyle real estate funds or their affiliates,
will have an aggregate beneficial ownership interest in our
operating partnership of
approximately % which, if exchanged
for our common stock, would represent an
approximate % interest in our
common stock. The operating partnership agreement will initially
grant the Carlyle real estate funds or their affiliates that are
contributing properties to our operating partnership the right
to nominate two of the seven directors to our Board of
Directors. Pursuant to the operating partnership agreement, the
Carlyle real estate funds or their affiliates will only be
entitled to nominate one director once the number of shares of
common stock held by them collectively (assuming all operating
partnership units are exchanged into common stock) falls below
50% and shall have no right to nominate directors below a 10%
ownership threshold. See Description of the Partnership
Agreement of CoreSite, L.P.
Employment
Agreement with Thomas M. Ray
On August 1, 2010, Thomas M. Ray, a member of our Board of
Directors, and formerly a managing director of The Carlyle
Group, resigned from his position at Carlyle and entered into an
employment agreement with us to serve exclusively as our
President and Chief Executive Officer. Mr. Rays
compensation and the salary of his executive assistant have
historically been paid by an affiliate of The Carlyle Group.
However, we paid an affiliate of The Carlyle Group $575,000 as
partial reimbursement for related services rendered to us by
Mr. Ray and his executive assistant during the year ended
December 31, 2009 and have paid $287,500 as partial
reimbursement for such services during the six months ended
June 30, 2010.
Director
Compensation
Upon completion of the offering, each of our directors, other
than Thomas M. Ray and those directors nominated by the Carlyle
real estate funds or their affiliates, will receive, as
compensation for their services, restricted stock units relating
to our common stock, options and other cash compensation as set
forth in ManagementCompensation of Directors.
Registration
Rights
The Carlyle real estate funds or their affiliates will receive
registration rights with respect to shares of our common stock
that may be issued to them upon the redemption of operating
partnership units. See Shares Eligible for Future
SaleRegistration Rights Agreement.
Indemnification
Agreements
Effective upon completion of this offering, we will enter into
an indemnification agreement with each of our executive officers
and directors as described in ManagementLimitation
of Liability and Indemnification.
10
Tax
Protection Agreements
We have agreed with each of the Carlyle real estate funds or
their affiliates, which have directly or indirectly contributed
their interests in the properties in our portfolio to our
operating partnership, that if we directly or indirectly sell,
convey, transfer or otherwise dispose of all or any portion of
these interests in a taxable transaction, we will make an
interest-free loan to the contributors in an amount equal to the
contributors tax liabilities, based on an assumed tax
rate. Any such loan would be repayable out of the after- tax
proceeds (based on an assumed tax rate) of any distribution from
the operating partnership to, or any sale of operating
partnership units (or common stock issued by us in exchange for
such units) by, the recipient of such loan, and would be
non-recourse to the borrower other than with respect to such
proceeds. These tax protection provisions apply for a period
expiring on the earlier of (i) the seventh anniversary of
the completion of this offering and (ii) the date on which
these contributors (or certain transferees) dispose in certain
taxable transactions of 90% of the operating partnership units
that were issued to them in connection with the contribution of
these properties. See Certain Relationships and Related
Party TransactionsTax Protection Agreement.
Letters
of Credit
Affiliates of The Carlyle Group caused $19.9 million of
letters of credit to be issued under certain of their credit
facilities to guarantee payments under mortgages, lease
commitments, payments to vendors and construction redevelopment
at certain properties in our portfolio. At the completion of the
Financing Transactions, these letters of credit will be
cancelled.
Distribution
Policy and Payment of Distributions
We intend to pay regular quarterly dividends to our
stockholders, beginning with a dividend for the period
commencing on the completion of this offering and ending
on , .
To obtain the favorable tax treatment associated with our
qualification as a REIT, commencing with our taxable year ending
on December 31, 2010, we will be required to distribute to
our stockholders at least 90% of our net taxable income
(excluding net capital gains) each year. To the extent that we
distribute at least 90% but less than 100% of our net taxable
income, we will be subject to tax at ordinary corporate tax
rates on the retained portion. As such, commencing with our
taxable year ending on December 31, 2010, we intend to
distribute to our stockholders each year all or substantially
all of our REIT net taxable income. We will not have any
substantial REIT net taxable income prior to the closing of this
offering. The actual amount, timing and frequency of
distributions will be determined by our Board of Directors based
upon a variety of factors deemed relevant by our directors,
including our results of operations and our debt service
obligations. See Dividend Policy.
Restrictions
on Transfer
Under the partnership agreement of our operating partnership,
holders of operating partnership units will not have the right
to tender their units for redemption prior to the first
anniversary of the completion of this offering. In addition,
subject to certain exceptions, we, our operating partnership and
our officers and directors have agreed that for a period of
180 days from the date of this prospectus, and the Carlyle
real estate funds or their affiliates that are contributing
properties to our operating partnership have agreed for a period
of 365 days from the date of this prospectus, that we and
they will not, without the prior written consent of the joint
book-running managers in this offering, sell, transfer, dispose
of, or enter into any transaction that is designed to transfer
the economic ownership of, any shares of our common stock,
operating partnership units or any other securities that are
convertible into or exchangeable for our common stock. See
Underwriting. The foregoing restrictions will not
apply to our purchase of operating partnership units from the
Carlyle real estate funds or their affiliates in connection with
the Restructuring Transactions.
11
Conflicts
of Interest
Following completion of this offering, there will be conflicts
of interest with respect to certain transactions between the
holders of operating partnership units and our stockholders. In
particular, the consummation of certain business combinations,
the sale of any properties or a reduction of indebtedness may
have different tax consequences to holders of operating
partnership units as compared to holders of our common stock,
which could make those transactions more or less desirable to
the holders of such units. For more information regarding these
conflicts of interests, see Certain Relationships and
Related Party Transactions and Policies with Respect
to Certain Activities.
Restrictions
on Ownership of our Stock
Due to limitations on the concentration of ownership of REIT
stock imposed by the Internal Revenue Code of 1986, as amended,
or the Code, our charter generally prohibits any person or
entity (other than a person who or entity that has been granted
an exception as described below) from actually or constructively
owning more than 9.8% (by value or by number of shares,
whichever is more restrictive) of our common stock or more than
9.8% (by value) of our capital stock. We refer to these
restrictions as the ownership limits. Our charter permits our
Board of Directors to make certain exceptions to these ownership
limits, unless it would cause us to fail to qualify as a REIT.
We expect that our Board of Directors will grant some or all of
the Carlyle real estate funds or their affiliates exceptions
from the ownership limits applicable to other holders of our
common stock.
Corporate
Information
We formed CoreSite Realty Corporation as a Maryland corporation
on February 17, 2010, with perpetual existence. We elected
to be treated as an S corporation for federal income tax
purposes effective as of the date of our incorporation. We will
terminate our S corporate status shortly before completion of
this offering (ending the S corporation tax year) and
intend to qualify as a REIT for federal income tax purposes
commencing with our taxable year ending on December 31,
2010. Our corporate offices are located at
1050 17th Street, Suite 800, Denver, CO 80265.
Our telephone number is
(866) 777-2673.
Our website is www.coresite.com. The information contained on,
or accessible through, our website is not incorporated by
reference into this prospectus and should not be considered a
part of this prospectus.
12
THE
OFFERING
|
|
|
Common stock offered by us |
|
shares |
Common stock to be outstanding after the offering |
|
shares(x) |
Common stock and operating partnership units to be outstanding
after the offering |
|
shares
and operating partnership
units(x)(y) |
Option to purchase additional shares |
|
We have granted the underwriters an option exercisable for
30 days after the date of this prospectus to purchase, from
time to time, in whole or in part, up
to
additional shares of our common stock from us at the public
offering price less underwriting discounts and commissions to
cover over-allotments. |
Use of proceeds |
|
Based on an assumed initial public offering price of
$ per share, which is the midpoint
of the range set forth on the cover of this prospectus, we
estimate that we will receive net proceeds from this offering of
approximately $ million after
deducting underwriting discounts and commissions and offering
expenses payable by us. We estimate that we will receive
aggregate net proceeds from this offering of
$ million. We intend to use
the proceeds from the offering (i) to repay approximately
$ million of indebtedness,
including related fees and expenses; (ii) to
purchase operating partnership
units from our operating partnership; (iii) to
purchase operating partnership
units from the Carlyle real estate funds or their affiliates
that are contributing properties to our operating partnership
and (iv) for related transaction expenses. Our operating
partnership intends to use the cash received from our purchase
of its operating partnership units to redevelop and develop
additional data center space and for general corporate purposes.
See Use of Proceeds. |
Distribution policy |
|
To obtain the favorable tax treatment associated with our
qualification as a REIT, commencing with our taxable year ending
on December 31, 2010, we will be required to distribute to
our stockholders at least 90% of our net taxable income
(excluding capital gains) each year. To the extent that we
distribute at least 90% but less than 100% of our net taxable
income, we will be subject to tax at ordinary corporate tax
rates on the retained portion. As such, commencing with our
taxable year ending on December 31, 2010, we intend to
generally distribute to our stockholders each year on a regular
quarterly basis all or substantially all of our REIT net taxable
income. Any payment of cash dividends on our common stock in the
future will be at the discretion of our Board of Directors and
will depend upon our results of operations, economic conditions
and other factors deemed relevant by our Board of Directors. See
Dividend Policy. |
Proposed New York Stock Exchange symbol |
|
We intend to apply to list our common stock on the New York
Stock Exchange, or NYSE, under the symbol COR. |
13
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|
|
Risk factors |
|
Investing in our common stock involves certain risks. See the
risk factors described under the heading Risk
Factors beginning on page 18 of this prospectus and
the other information included in this prospectus for a
discussion of factors you should carefully consider before
deciding to invest in shares of our common stock. |
|
|
|
(x)
|
|
Includes
(i) shares
of common stock to be issued by us to employees (none of whom
are executive officers) in connection with the Restructuring
Transactions in exchange for profits interests previously
granted under our profits interest incentive program and
(ii) shares
of restricted stock in the aggregate to be issued to each of our
executive officers and other employees under our 2010 Equity
Incentive Plan in connection with this offering, based on an
initial public offering price per share of
$ , the midpoint of the range set
forth on the cover of this prospectus, and excludes (a) up
to shares
issuable upon exercise of the underwriters over-allotment
option,
(b) shares
issuable upon conversion of outstanding operating partnership
units issued to the Carlyle real estate funds and their
affiliates in connection with the Restructuring Transactions,
(c) operating partnership
units to be issued by us to each of our executive officers
(other than Messrs. Ray, Bair, Price and Sistek) in
exchange for profits interests previously granted under our
profits interest incentive program in connection with the
Restructuring Transactions and
(d) shares
available for future issuance under our 2010 Equity Incentive
Plan immediately upon completion of this offering.
|
|
|
|
(y)
|
|
Includes
operating partnership units acquired by the Carlyle real estate
funds and their affiliates in consideration of the contributions
by such entities to our operating partnership in the
Restructuring Transactions after giving effect to our purchase
of a portion of such operating partnership units
and operating
partnership units issued to each of our executive officers
(other than Messrs. Ray, Bair, Price and Sistek) concurrently
with the completion of this offering in exchange for profits
interests previously granted under our profits interest
incentive plan, and excludes
(a) operating
partnership units that we will purchase from the Carlyle real
estate funds and their affiliates and
(b) operating
partnership units that we will purchase from our operating
partnership, in each case, concurrently with the completion of
this offering and the Restructuring Transactions.
|
14
SUMMARY
HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary selected financial data
on a historical basis for our accounting predecessor, or our
Predecessor. Our Predecessor is 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, all wholly owned by CRP Fund V Holdings,
LLC. As part of our Restructuring Transactions, we will acquire
other data center properties and buildings housing office and
other space under common management, which we refer to in this
prospectus as our Acquired Properties. Our 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. For accounting purposes, our Predecessor is
considered to be the acquiring entity in the Restructuring
Transactions and, accordingly, the acquisition of our Acquired
Properties will be recorded at fair value. For more information
regarding the Restructuring Transactions, please see
Structure and Formation of Our Company.
The summary historical financial information as of
December 31, 2009 and 2008 and for each of the years ended
December 31, 2009, 2008 and 2007 has been derived from our
Predecessors audited financial statements included
elsewhere in this prospectus. The summary historical financial
data as of June 30, 2010 and for each of the six months
ended June 30, 2010 and 2009 has been derived from our
Predecessors unaudited financial statements included
elsewhere in this prospectus. In the opinion of the management
of our company, the unaudited interim financial information
included herein includes any adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the
information set forth herein.
The unaudited pro forma condensed consolidated financial data
for the year ended December 31, 2009 and the six months
ended June 30, 2010 are presented as if the Restructuring
Transactions and Financing Transactions had all occurred on
June 30, 2010 for the pro forma condensed consolidated
balance sheet data and as of January 1, 2009 for the pro
forma condensed consolidated statement of operations data. Our
pro forma condensed consolidated financial information is not
necessarily indicative of what our actual financial position and
results of operations would have been as of the date and for the
periods indicated, nor does it purport to represent our future
financial position or results of operations.
You should read the following summary selected financial data in
conjunction with our pro forma financial statements, our
Predecessors historical consolidated and combined
financial statements and the related notes thereto, and our
Acquired Properties historical combined financial
statements and the related notes thereto, along with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, which are included
elsewhere in this prospectus.
15
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Historical Predecessor
|
|
|
Consolidated
|
|
|
Historical Predecessor
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share
data)
|
|
|
(In thousands, except per share
data)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
66,567
|
|
|
$
|
21,419
|
|
|
$
|
12,362
|
|
|
$
|
114,011
|
|
|
$
|
28,831
|
|
|
$
|
15,581
|
|
|
$
|
10,349
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
|
20,742
|
|
|
|
8,465
|
|
|
|
6,586
|
|
|
|
37,466
|
|
|
|
13,954
|
|
|
|
11,258
|
|
|
|
4,451
|
|
Management fees to related party
|
|
|
|
|
|
|
2,295
|
|
|
|
914
|
|
|
|
|
|
|
|
2,244
|
|
|
|
1,523
|
|
|
|
363
|
|
Real estate taxes and insurance
|
|
|
2,836
|
|
|
|
812
|
|
|
|
903
|
|
|
|
5,730
|
|
|
|
1,787
|
|
|
|
2,125
|
|
|
|
1,015
|
|
Depreciation and amortization
|
|
|
18,661
|
|
|
|
6,948
|
|
|
|
5,279
|
|
|
|
41,330
|
|
|
|
11,193
|
|
|
|
7,966
|
|
|
|
3,528
|
|
Sales and marketing
|
|
|
1,178
|
|
|
|
59
|
|
|
|
63
|
|
|
|
2,650
|
|
|
|
135
|
|
|
|
170
|
|
|
|
60
|
|
General and administrative
|
|
|
12,308
|
|
|
|
501
|
|
|
|
633
|
|
|
|
22,042
|
|
|
|
1,401
|
|
|
|
1,325
|
|
|
|
267
|
|
Rent expense
|
|
|
9,411
|
|
|
|
1,389
|
|
|
|
1,438
|
|
|
|
19,206
|
|
|
|
2,816
|
|
|
|
2,624
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,136
|
|
|
|
20,469
|
|
|
|
15,816
|
|
|
|
128,424
|
|
|
|
33,530
|
|
|
|
26,991
|
|
|
|
10,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,431
|
|
|
|
950
|
|
|
|
(3,454
|
)
|
|
|
(14,413
|
)
|
|
|
(4,699
|
)
|
|
|
(11,410
|
)
|
|
|
156
|
|
Other income and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
79
|
|
|
|
3
|
|
|
|
17
|
|
|
|
38
|
|
Interest expense
|
|
|
(3,841
|
)
|
|
|
(911
|
)
|
|
|
(1,178
|
)
|
|
|
(7,460
|
)
|
|
|
(2,343
|
)
|
|
|
(2,495
|
)
|
|
|
(2,123
|
)
|
Gain on sale of real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,406
|
)
|
|
|
39
|
|
|
|
(4,630
|
)
|
|
|
(21,794
|
)
|
|
|
(7,039
|
)
|
|
|
(13,888
|
)
|
|
|
2,571
|
|
Net loss attributable to redeemable noncontrolling interests in
operating partnership
|
|
|
(1,521
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interests
|
|
$
|
(885
|
)
|
|
$
|
39
|
|
|
$
|
(4,630
|
)
|
|
$
|
(8,020
|
)
|
|
$
|
(7,039
|
)
|
|
$
|
(13,888
|
)
|
|
$
|
2,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma (earning/loss) per sharebasic and diluted
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares - basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
|
|
Pro Forma
|
|
|
Historical
|
|
|
As of December 31,
|
|
|
|
Consolidated
|
|
|
Predecessor
|
|
|
Historical Predecessor
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate
|
|
$
|
632,848
|
|
|
$
|
250,838
|
|
|
$
|
218,055
|
|
|
$
|
197,493
|
|
|
$
|
151,044
|
|
Total assets
|
|
|
961,471
|
|
|
|
275,896
|
|
|
|
239,420
|
|
|
|
213,846
|
|
|
|
164,762
|
|
Mortgages payable
|
|
|
122,919
|
|
|
|
72,054
|
|
|
|
62,387
|
|
|
|
52,530
|
|
|
|
44,332
|
|
Redeemable noncontrolling interests in operating partnership
|
|
|
500,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders and members equity
|
|
|
289,881
|
|
|
|
188,450
|
|
|
|
162,338
|
|
|
|
149,103
|
|
|
|
107,228
|
|
16
We consider funds from operations, or FFO, to be a supplemental
measure of our performance, which should be considered along
with, but not as an alternative to, net income or cash provided
by operating activities as a measure of our operating
performance. We calculate FFO in accordance with the standards
established by the National Association of Real Estate
Investment Trusts, or NAREIT. FFO represents net income (loss)
(computed in accordance with U.S. generally accepted
accounting principles, or GAAP), excluding gains (or losses)
from sales of property, 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.
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 (loss).
The following table is a reconciliation of our pro forma net
income (loss) to FFO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Historical Predecessor
|
|
|
Consolidated
|
|
|
Historical Predecessor
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Funds from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(2,406
|
)
|
|
$
|
39
|
|
|
$
|
(4,630
|
)
|
|
$
|
(21,794
|
)
|
|
$
|
(7,039
|
)
|
|
$
|
(13,888
|
)
|
|
$
|
2,571
|
|
Real estate depreciation and amortization
|
|
|
18,488
|
|
|
|
6,948
|
|
|
|
5,279
|
|
|
|
40,985
|
|
|
|
11,193
|
|
|
|
7,966
|
|
|
|
3,528
|
|
Gain on sale of real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO
|
|
$
|
16,082
|
|
|
$
|
6,987
|
|
|
$
|
649
|
|
|
$
|
19,191
|
|
|
$
|
4,154
|
|
|
$
|
(5,922
|
)
|
|
$
|
1,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
RISK
FACTORS
Investment in our common stock involves risks. In addition to
other information contained in this prospectus, you should
carefully consider the following risk factors before acquiring
shares of our common stock offered by this prospectus. The
occurrence of any of the following risks might cause you to lose
all or a part of your investment. Some statements in this
prospectus, including statements in the following risk factors,
constitute forward looking statements. Please refer to the
section entitled Forward-Looking Statements.
Risks
Related to Our Business and Operations
Our
portfolio of properties consists primarily of data centers
geographically concentrated in certain markets and any adverse
developments in local economic conditions or the demand for data
center space in these markets may negatively impact our
operating results.
Our portfolio of properties consists primarily of data centers
geographically concentrated in Los Angeles, the
San Francisco Bay and Northern Virginia areas, Chicago,
Boston, New York City and Miami. These markets comprised 36.7%,
31.5%, 12.5%, 7.0%, 6.4%, 4.4% and 1.5%, respectively, of our
annualized rent as of June 30, 2010. As such, we are
susceptible to local economic conditions and the supply of and
demand for data center space in these markets. If there is a
downturn in the economy or an oversupply of or decrease in
demand for data centers in these markets, our business could be
materially adversely affected to a greater extent than if we
owned a real estate portfolio that was more diversified in terms
of both geography and industry focus.
We have
experienced significant losses and we cannot assure you that we
will achieve profitability.
For fiscal years 2008 and 2009, our Predecessor on a
consolidated and combined basis had net losses of
$13.9 million and $7.0 million, respectively. For the
six months ended June 30, 2010 our Predecessor had a net
income of less than $0.1 million. For the last three fiscal
years, the Acquired Properties on a combined basis were only
profitable during the six months ended June 30, 2010 and
2009 and for the year ended December 31, 2009, with net
income of $4.8 million, $2.7 million and
$4.9 million, respectively, and net losses of
$7.4 million and $3.7 million for years ended
December 31, 2008 and 2007, respectively. On a pro forma
condensed consolidated basis, our Predecessor and the Acquired
Properties collectively had net loss of $21.8 million and
$2.4 million, respectively for the year ended
December 31, 2009 and the six months ended June 30,
2010, respectively. Our ability to achieve profitability is
dependent upon a number of risks and uncertainties, many of
which are beyond our control. We cannot assure you that we will
be successful in executing our business strategy and become
profitable and our failure to do so could have a material
adverse effect on the price of our common stock and our ability
to satisfy our obligations, including making payments on our
indebtedness. Even if we achieve profitability, given the
competitive nature of the industry in which we operate, we may
not be able to sustain or increase profitability on a quarterly
or annual basis.
We face
significant competition and may be unable to lease vacant space,
renew existing leases or re-lease space as leases expire, which
may have a material adverse effect on our business and results
of operations.
We compete with numerous developers, owners and operators of
technology-related real estate and data centers, many of which
own properties similar to ours in the same markets, including
Digital Realty Trust, Inc., Dupont Fabros Technology, Inc., 365
Main Inc., Equinix, Inc., Terremark Worldwide, Inc., Savvis,
Inc. and Telx Group, Inc. In addition, we may face competition
from new entrants into the data center market. Some of our
competitors have significant advantages over us, including
greater name recognition, longer operating histories, lower
operating costs, pre-existing relationships with current or
potential customers, greater financial, marketing and other
resources, and access to less expensive power. These advantages
could allow our competitors to respond more quickly to strategic
opportunities or changes in our industries or markets. If our
competitors offer data center space that our existing or
potential customers perceive to be superior to ours based on
numerous factors, including power, security considerations,
location or network connectivity, or if they offer rental rates
below our or current market rates, we may lose existing or
potential customers, incur costs to improve our properties or be
forced reduce our rental rates. This risk is compounded by the
fact that a significant percentage of our customer leases expire
every year. For example, as of June 30, 2010, leases
representing 14.4%, 20.4% and 26.0% of our annualized rent will
expire during 2010, 2011 and 2012,
18
respectively. If the rental rates for our properties decrease,
our existing customers do not renew their leases or we are
unable to lease vacant data center space or re-lease data center
space for which leases are scheduled to expire, our business and
results of operations could be materially adversely affected.
Our
success depends on key personnel whose continued service is not
guaranteed and we may not be able to retain or attract
knowledgeable, experienced and qualified personnel.
We depend on the efforts of key personnel, particularly
Mr. Thomas M. Ray, our President and Chief Executive
Officer, and Ms. Deedee Beckman, our Chief Financial
Officer. Our reputation and relationships with existing and
potential customers, industry personnel and key lenders are the
direct result of a significant investment of time and effort by
our key personnel to build credibility in a highly specialized
industry. Many of our senior executives have extensive
experience and strong reputations in the real estate and
technology industries, which aid us in capitalizing on strategic
opportunities and negotiating with customers. While we believe
that we could find replacements for all of these key personnel,
the loss of their services could diminish our business and
investment opportunities and our customer, industry and lender
relationships, which could have a material adverse effect on our
operations.
In addition, our success depends, to a significant degree, on
being able to employ and retain personnel who have the expertise
required to successfully acquire, develop and operate
high-quality data centers. Personnel with these skill sets are
in limited supply and in great demand and competition for such
expertise is intense. We cannot assure you that we will be able
to hire and retain a sufficient number of qualified employees at
reasonable compensation levels to support our growth and
maintain the high level of quality service our customers expect,
and any failure to do so could have a material adverse effect on
our business.
We are
continuing to invest in our expansion efforts, but we may not
have sufficient customer demand in the future to realize
expected returns on these investments.
As part of our growth strategy, we intend to commit substantial
operational and financial resources to develop new data centers
and expand existing ones. However, we typically do not require
pre-leasing commitments from customers before we develop or
expand a data center, and we may not have sufficient customer
demand to support the new data center space when completed. A
lack of customer demand for data center space or excess capacity
in the data center market could impair our ability to achieve
our expected rate of return on our investment, which could have
a material adverse effect on our financial condition, operating
results and the market price of our common stock.
Any
failure of our physical infrastructure or services could lead to
significant costs and disruptions that could reduce our
revenues, harm our business reputation and have a material
adverse effect on our financial results.
Our business depends on providing customers with highly reliable
service. We may fail to provide such service as a result of
numerous factors, including:
|
|
|
|
|
human error;
|
|
|
|
power loss;
|
|
|
|
improper building maintenance by our landlords in the buildings
that we lease;
|
|
|
|
physical or electronic security breaches;
|
|
|
|
fire, earthquake, hurricane, flood and other natural disasters;
|
|
|
|
water damage;
|
|
|
|
war, terrorism and any related conflicts or similar events
worldwide; and
|
|
|
|
sabotage and vandalism.
|
Problems at one or more of our data centers, whether or not
within our control, could result in service interruptions or
equipment damage. We provide service level commitments to
substantially all of our customers. As a result, service
interruptions or equipment damage in our data centers could
result in credits to these customers. In addition, although we
have given such credits to our customers in the past, we cannot
assure you that our customers will accept these credits as
compensation in the future. Service interruptions and
19
equipment failures may also expose us to additional legal
liability and damage our brand image and reputation. Significant
or frequent service interruptions could cause our customers to
terminate or not renew their leases. In addition, we may be
unable to attract new customers if we have a reputation for
significant or frequent service disruptions in our data centers.
Even if
we have additional space available for lease at any one of our
data centers, our ability to lease this space to existing or new
customers could be constrained by our access to sufficient
electrical power.
Our properties have access to a finite amount of power, which
limits the extent to which we can lease additional space for use
at our data centers. As current and future customers increase
their power footprint in our facilities over time, the remaining
available power for future customers could limit our ability to
increase occupancy rates or network density within our existing
facilities.
Furthermore, at certain of our data centers, our aggregate
maximum contractual obligation to provide power and cooling to
our customers may exceed the physical capacity at such data
centers if customers were to quickly increase their demand for
power and cooling. If we are not able to increase the available
power and/or
cooling or move the customer to another location within our data
centers with sufficient power and cooling to meet such demand,
we could lose the customer as well as have liability under our
leases. Any such material loss of customers or material
liability could adversely affect our results of operations.
To fund
our growth strategy and refinance our indebtedness, we depend on
external sources of capital, which may not be available to us on
commercially reasonable terms or at all.
In order to maintain our qualification as a REIT, we are
required under the Code to distribute at least 90% of our net
taxable income annually, determined without regard to the
dividends paid deduction and excluding any net capital gains. We
will also be subject to income tax at regular corporate rates to
the extent that we distribute less than 100% of our net taxable
income, including any net capital gains. Because of these
distribution requirements, we may not be able to fund future
capital needs, including any necessary acquisition financing,
from operating cash flow. Consequently, we intend to rely on
third-party sources for debt or equity financing to fund our
growth strategy. In addition, we may need external sources of
capital to refinance our indebtedness at maturity. We may not be
able to obtain the financing on favorable terms or at all. Our
access to third-party sources of capital depends, in part, on:
|
|
|
|
|
general market conditions;
|
|
|
|
the markets perception of our growth potential;
|
|
|
|
our then current debt levels;
|
|
|
|
our historical and expected future earnings, cash flow and cash
distributions; and
|
|
|
|
the market price per share of our common stock.
|
In addition, our ability to access additional capital may be
limited by the terms of our existing indebtedness, which
restricts our incurrence of additional debt. If we cannot obtain
capital when needed, we may not be able to acquire or develop
properties when strategic opportunities arise or refinance our
debt at maturity, which could have a material adverse effect on
our business.
Our
expenses may not decrease if our revenue decreases.
Most of the expenses associated with our business, such as debt
service payments, real estate, personal and ad valorem taxes,
insurance, utilities, employee wages and benefits and corporate
expenses are relatively inflexible and do not necessarily
decrease in tandem with a reduction in revenue from our
business. Our expenses will also be affected by inflationary
increases and certain of our costs may exceed the rate of
inflation in any given period. As a result, we may not be able
to fully offset our costs by higher lease rates, which could
have a material adverse effect on our results of operations.
20
We depend
on third parties to provide network connectivity within and
between certain of our data centers, and any delays or
disruptions in this connectivity may adversely affect our
operating results and cash flow.
We depend upon carriers and other network providers to deliver
network connectivity to customers within our data centers as
well as the fiber network interconnection between our data
centers. Our
hub-and-spoke
approach in particular leaves us dependent on these third
parties to provide these services between our data centers. We
cannot assure you that any network provider will elect to offer
its services within new data centers that we develop or that
once a network provider has decided to provide connectivity to
or between our data centers that it will continue to do so for
any period of time. A significant interruption in or loss of
these services could impair our ability to attract and retain
customers and have a material adverse effect on our business.
Enabling connectivity within and between our data centers
requires construction and operation of a sophisticated redundant
fiber network. The construction required to connect our data
centers is complex and involves factors outside of our control,
including the availability of construction resources. If highly
reliable connectivity within and between certain of our data
centers is not established, is materially delayed, is
discontinued or fails, our reputation could be harmed, which
could have a material adverse effect on our ability to attract
new customers or retain existing ones.
Our data
center infrastructure may become obsolete and we may not be able
to upgrade our power and cooling systems cost-effectively or at
all.
The markets for the data centers that we own and operate, as
well as the industries in which our customers operate, are
characterized by rapidly changing technology, evolving industry
standards, frequent new product introductions and changing
customer demands. Our ability to deliver technologically
sophisticated power and cooling are significant factors in our
customers decisions to rent space in our data centers. Our
data center infrastructure may become obsolete due to the
development of new systems to deliver power to, or eliminate
heat from, the servers and other customer equipment that we
house. Additionally, our data center infrastructure could become
obsolete as a result of the development of new technology that
requires levels of power and cooling that our facilities are not
designed to provide. Our power and cooling systems are also
difficult and expensive to upgrade. Accordingly, we may not be
able to efficiently upgrade or change these systems to meet new
demands without incurring significant costs that we may not be
able to pass on to our customers. The obsolescence of our power
and cooling systems would have a material adverse effect on our
business. In addition, evolving customer demand could require
services or infrastructure improvements that we do not provide
or that would be difficult or expensive for us to provide in our
current data centers, and we may be unable to adequately adapt
our properties or acquire new properties that can compete
successfully. We risk losing customers to our competitors if we
are unable to adapt to this rapidly evolving marketplace.
Furthermore, potential future regulations that apply to
industries we serve may require customers in those industries to
seek specific requirements from their data centers that we are
unable to provide. These may include physical security
requirements applicable to the defense industry and government
contractors and privacy and security regulations applicable to
the financial services and health care industries. If such
regulations were adopted, we could lose some customers or be
unable to attract new customers in certain industries, which
would have a material adverse effect on our results of
operations.
Potential
losses to our properties may not be covered by insurance or may
exceed our policy coverage limits.
We do not carry insurance for generally uninsured losses such as
loss from riots, war, terrorist attacks or acts of God. The
properties in our portfolio located in California are subject to
risks from earthquakes and our property in Miami is potentially
subject to risks related to tropical storms, hurricanes and
floods. Together, these properties represented approximately
69.7% of total annualized rent as of June 30, 2010. While
we will carry earthquake, hurricane and flood insurance on our
properties, the amount of our insurance coverage may not be
sufficient to fully cover such losses. In addition, we may
discontinue earthquake, hurricane or flood insurance on some or
all of our properties in the future if the cost of premiums for
any of these policies exceeds, in our judgment, the value of the
coverage relative to the risk of loss.
21
If we experience a loss which is uninsured or which exceeds our
policy coverage limits, we could lose the capital invested in
the damaged properties as well as the anticipated future cash
flows from those properties. In addition, if the damaged
properties are subject to recourse indebtedness, we would
continue to be liable for the indebtedness, even if these
properties were irreparably damaged.
In addition, even if damage to our properties is covered by
insurance, a disruption of our business caused by a casualty
event may result in the loss of business or customers. We carry
a limited amount of business interruption insurance, but such
insurance may not fully compensate us for the loss of business
or customers due to an interruption caused by a casualty event.
See Any failure of our physical infrastructure
or services could lead to significant costs and disruptions that
could reduce our revenues, harm our business reputation and have
a material adverse effect on our financial results.
The recent disruption in the financial markets makes it more
difficult to evaluate the stability and net assets or
capitalization of insurance companies, and any insurers
ability to meet its claim payment obligations. A failure of an
insurance company to make payments to us upon an event of loss
covered by an insurance policy could have a material adverse
effect on our business and financial condition.
Furthermore, the properties in our portfolio have historically
been covered under The Carlyle Groups umbrella insurance
policy which covers all of Carlyles real estate
investments. Upon completion of this offering, we will no longer
be covered by this umbrella policy. We plan to obtain similar
coverage for our portfolio, but because we would no longer have
the benefit of the diversification of insured risk under
Carlyles umbrella policy for its entire real estate
portfolio, we expect that our insurance premiums will be higher
following the completion of this offering and the Restructuring
Transactions.
A small
number of customers account for a significant portion of our
revenues, and the loss of any of these customers could
significantly harm our business, financial condition and results
of operations.
Our top ten customers accounted for approximately 36.7% of our
total annualized rent as of June 30, 2010. During the
second quarter of 2010, we expanded our relationship with our
largest customer, Facebook, Inc. This customer represented 13.5%
of our annualized rent as of June 30, 2010, and we expect
that this customer will account for approximately 10% of our pro
forma revenues for the year ending December 31, 2010. We
currently depend, and expect to continue to depend, upon a
relatively small number of customers for a significant
percentage of our net revenue. Some of our customers may
experience a downturn in their businesses or other factors which
may weaken their financial condition and result in them failing
to make timely rental payments, defaulting on their leases,
reducing the level of interconnection services they obtain or
the amount of space they lease from us upon renewal of their
leases or terminating their relationship with us. The loss of
one or more of our significant customers or a customer exerting
significant pricing pressure on us could also have a material
adverse effect on our results of operations.
In addition, our largest customers may choose to develop new
data centers or expand existing data centers of their own. In
the event that any of our key customers were to do so, it could
result in a loss of business to us or increase pricing pressure
on us. If we lose a customer, there is no guarantee that we
would be able to replace that customer at a competitive rate or
at all.
Some of our largest customers may also compete with one another
in various aspects of their businesses. The competitive
pressures on our customers may have a negative impact on our
operations. For instance, one customer could determine that it
is not in that customers interest to house
mission-critical servers in a facility operated by the same
company that relies on a key competitor for a significant part
of its annual revenue. Our loss of a large customer for this or
any other reason could have a material adverse effect on our
results of operations.
We are
dependent upon third-party suppliers for power and certain other
services, and we are vulnerable to service failures of our
third-party suppliers and to price increases by such
suppliers.
We rely on third parties to provide power to our data centers,
and we cannot ensure that these third parties will deliver such
power in adequate quantities or on a consistent basis. If the
amount of power available to us is inadequate to support our
customer requirements, we may be unable to satisfy our
obligations to our customers or grow our business. In addition,
our data centers are susceptible to power
22
shortages and planned or unplanned power outages caused by these
shortages. While we attempt to limit exposure to power shortages
by using backup generators and batteries, power outages may last
beyond our backup and alternative power arrangements, which
would harm our customers and our business. In the past, a
limited number of our customers have experienced temporary
losses of power. Pursuant to the terms of some of our customer
leases, continuous or chronic power outages may give certain of
our tenants the right to terminate their leases or cause us to
incur financial obligations in connection with a power loss. In
addition, any loss of services or equipment damage could reduce
the confidence of our customers in our services thereby
impairing our ability to attract and retain customers, which
would adversely affect both our ability to generate revenues and
our operating results.
In addition, we may be subject to risks and unanticipated costs
associated with obtaining power from various utility companies.
Municipal utilities in areas experiencing financial distress may
increase rates to compensate for financial shortfalls unrelated
to either the cost of production or the demand for electricity.
Other utilities that serve our data centers may be dependent on,
and sensitive to price increases for, a particular type of fuel,
such as coal, oil or natural gas. In addition, the price of
these fuels and the electricity generated from them could
increase as a result of proposed legislative measures related to
climate change or efforts to regulate carbon emissions. In any
of these cases, increases in the cost of power at any of our
data centers would put those locations at a competitive
disadvantage relative to data centers served by utilities that
can provide less expensive power.
We may be
unable to identify and complete acquisitions and successfully
operate acquired properties.
We continually evaluate the market for available properties and
may acquire data centers or properties suited for data center
development when opportunities exist. Our ability to acquire
properties on favorable terms and successfully develop and
operate them involves significant risks including, but not
limited to:
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we may be unable to acquire a desired property because of
competition from other data center companies or real estate
investors with more capital;
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even if we are able to acquire a desired property, competition
from other potential acquirors may significantly increase the
purchase price of such property;
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we may be unable to realize the intended benefits from
acquisitions or achieve anticipated operating or financial
results;
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we may be unable to finance the acquisition on favorable terms
or at all;
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we may underestimate the costs to make necessary improvements to
acquired properties;
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we may be unable to quickly and efficiently integrate new
acquisitions into our existing operations resulting in
disruptions to our operations or the diversion of our
managements attention;
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acquired properties may be subject to reassessment, which may
result in higher than expected tax payments;
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we may not be able to access sufficient power on favorable terms
or at all; and
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market conditions may result in higher than expected vacancy
rates and lower than expected rental rates.
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In the past we have acquired properties that did not perform up
to our expectations and there can be no assurance that this will
not happen again. If we are unable to successfully acquire,
redevelop, develop and operate data center properties, our
ability to grow our business, compete and meet market
expectations will be significantly impaired, which would have a
material adverse effect on the price of our common stock.
We may be
subject to unknown or contingent liabilities related to
properties or businesses that we acquire for which we may have
limited or no recourse against the sellers.
Assets and entities that we have acquired or may acquire in the
future, including the properties contributed by the Carlyle real
estate funds or their affiliates, may be subject to unknown or
contingent liabilities for which we may have limited or no
recourse against the sellers. Unknown or contingent liabilities
might include liabilities for
clean-up or
remediation of environmental conditions, claims of customers,
vendors
23
or other persons dealing with the acquired entities, tax
liabilities and other liabilities whether incurred in the
ordinary course of business or otherwise. In the future we may
enter into transactions with limited representations and
warranties or with representations and warranties that do not
survive the closing of the transactions, in which event we would
have no or limited recourse against the sellers of such
properties. While we usually require the sellers to indemnify us
with respect to breaches of representations and warranties that
survive, such indemnification (including the indemnification by
the Carlyle real estate funds or their affiliates) is often
limited and subject to various materiality thresholds, a
significant deductible or an aggregate cap on losses.
For example, under the contribution agreement pursuant to which
the Carlyle real estate funds or their affiliates are
contributing the properties that will comprise our portfolio to
the operating partnership, each of the Carlyle real estate funds
or their affiliates will make certain representations and
warranties as to certain material matters related to the
property being contributed by such fund or affiliate such as
title to any owned property, compliance with laws (including
environmental laws) and the enforceability of certain material
customer contracts and leases. In the event that such
representations and warranties are not true and correct when
made and as of the date the offering is priced, the party that
contributed the property to which such losses relate will
indemnify the operating partnership for any resulting losses,
but only to the extent the amount of losses exceeds 1% of the
aggregate value of the operating partnership units received by
all of the Carlyle funds or their affiliates (based upon the
initial offering price) and provided that the liability of each
contributor will be limited to 10% of the value of the operating
partnership units (based upon the initial offering price)
received by such contributor (adjusted for any operating
partnership units purchased by us from the Carlyle real estate
funds or their affiliates at closing) in connection with the
Restructuring Transactions, and, with respect to any liability
that arises from a specific contributed property, the
indemnification by such Carlyle real estate fund or its
affiliate will be limited to 10% of the value of the operating
partnership units issued in respect of such contributed
property. As a result, we will be solely responsible and will
not be able to seek indemnification from the Carlyle real estate
funds or their affiliates to the extent that any losses do not
meet this minimum threshold amount or exceed the maximum
threshold amount. In addition, the representations and
warranties made by the Carlyle real estate funds or their
affiliates will only survive for a period of one year after the
completion of this offering and in the event that we do not
become aware of a breach until after the end of such period or
if we otherwise fail to assert a claim prior to such date, we
will have no further recourse against the contributors.
As a result, there is no guarantee that we will recover any
amounts with respect to losses due to breaches by the sellers of
their representations and warranties. In addition, the total
amount of costs and expenses that we may incur with respect to
liabilities associated with acquired properties and entities may
exceed our expectations, which may adversely affect our
operating results and financial condition. Finally,
indemnification agreements between us and the sellers typically
provide that the sellers will retain certain specified
liabilities relating to the assets and entities acquired by us.
While the sellers are generally contractually obligated to pay
all losses and other expenses relating to such retained
liabilities, there can be no guarantee that such arrangements
will not require us to incur losses or other expenses as well.
Our
growth depends on the successful redevelopment and development
of our properties and any delays or unexpected costs associated
with such projects may harm our growth prospects, future
operating results and financial condition.
As of June 30, 2010, we had the ability to expand our
operating data center square footage by 865,621 NRSF by
redeveloping 419,371 NRSF of vacant space and developing up to
446,250 NRSF of new data center space on land we currently own.
Our growth depends upon the successful completion of the
redevelopment and development of this space and similar projects
in the future. Current and future redevelopment and development
projects will involve substantial planning, allocation of
significant company resources and certain risks, including risks
related to financing, zoning, regulatory approvals, construction
costs and delays. These projects will also require us to
carefully select and rely on the experience of one or more
general contractors and associated subcontractors during the
construction process. Should a general contractor or significant
subcontractor experience financial or other problems during the
construction process, we could experience significant delays,
increased costs to complete the project and other negative
impacts to our expected returns.
24
Site selection is also a critical factor in our expansion plans,
and there may not be suitable properties available in our
markets at a location that is attractive to our customers and
has the necessary combination of access to multiple network
providers, a significant supply of electrical power, high
ceilings and the ability to sustain heavy floor loading.
Furthermore, while we may prefer to locate new data centers
adjacent to our existing data centers, we may be limited by the
inventory and location of suitable properties.
In addition, we will be subject to risks and, potentially,
unanticipated costs associated with obtaining access to a
sufficient amount of power from local utilities, including the
need, in some cases, to develop utility substations on our
properties in order to accommodate our power needs, constraints
on the amount of electricity that a particular localitys
power grid is capable of providing at any given time, and risks
associated with the negotiation of long-term power contracts
with utility providers. We cannot assure you that we will be
able to successfully negotiate such contracts on acceptable
terms or at all. Any inability to negotiate utility contracts on
a timely basis or on acceptable financial terms or in volumes
sufficient to supply the requisite power for our development
properties would have a material negative impact on our growth
and future results of operations and financial condition.
These and other risks could result in delays or increased costs
or prevent the completion of our redevelopment and development
projects, any of which could have a material adverse effect on
our financial condition, results of operations, cash flow, the
trading price of our common stock and our ability to satisfy our
debt service obligations or pay dividends.
We do not
own all of the buildings in which our data centers are located.
Instead, we lease certain of our data center space and the
ability to renew these leases could be a significant risk to our
ongoing operations.
We do not own the buildings for three of our data centers and
our business could be harmed if we are unable to renew the
leases for these data centers at favorable terms or at all. The
following table summarizes the remaining primary term and
renewal rights associated with each of our leased properties:
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Current Lease
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Renewal
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Property
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Term Expiration
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Rights
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Base Rent Increases at
Renewal(1)
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32 Avenue of the Americas
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Apr. 2023
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2 x 5 yrs
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FMR
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One Wilshire
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July 2017
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3 x 5 yrs
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103% of previous monthly base rent
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1275 K Street
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May 2016
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3 x 5 yrs
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Greater of 103% of previous monthly base rent or 95% of FMR
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(1)
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FMR represents fair market
rent as determined by mutual agreement between landlord
and tenant, or in the case of a disagreement, mutual agreement
by third party appraisers.
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When the primary term of our leases expire, we have the right to
extend the terms of our leases as indicated above. For two of
these leases, the rent will be determined based on the fair
market value of rental rates for this property and the then
prevailing rental rates may be higher than rental rates under
the applicable lease. To maintain the operating profitability
associated with our present cost structure, we must increase
revenues within existing data centers to offset the anticipated
increase in lease payments at the end of the original and
renewal terms. Failure to increase revenues to sufficiently
offset these projected higher costs would adversely impact our
operating income. Upon the end of our renewal options, we would
have to renegotiate our lease terms with the landlord.
If we are not able to renew the lease at any of our data
centers, the costs of relocating the equipment in such data
centers and redeveloping a new location into a high-quality data
center could be prohibitive. In addition, we could lose
customers due to the disruptions in their operations caused by
the relocation. We could also lose those customers that choose
our data centers based on their locations.
Our level
of indebtedness and debt service obligations could have adverse
effects on our business.
As of June 30, 2010, after giving pro forma effect to the
Financing Transactions, we would have had a total combined
indebtedness of approximately $124.9 million (excluding a
$2.0 million fair value of debt adjustment resulting from the
Restructuring Transactions), all of which would have been
secured indebtedness. We also expect to have the ability to
borrow up to an additional
$ million under our new
$110.0 million revolving credit facility, subject to
satisfying certain financial tests, all of which if incurred
will be secured indebtedness. Upon completion of this offering,
there will be no limits on the amount of indebtedness we may
incur other than limits contained in our revolving credit
facility, mortgage loans or future agreements that we may enter
into or
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as may be set forth in any policy limiting the amount of
indebtedness we may incur adopted by our Board of Directors. A
substantial level of indebtedness could have adverse
consequences for our business, results of operations and
financial condition because it could, among other things:
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require us to dedicate a substantial portion of our cash flow
from operations to make principal and interest payments on our
indebtedness, thereby reducing our cash flow available to fund
working capital, capital expenditures and other general
corporate purposes, including to pay dividends on our common
stock as currently contemplated or necessary to maintain our
qualification as a REIT;
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make it more difficult for us to satisfy our financial
obligations, including borrowings under our new revolving credit
facility;
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increase our vulnerability to general adverse economic and
industry conditions;
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expose us to increases in interest rates for our variable rate
debt;
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limit our ability to borrow additional funds on favorable terms
or at all to expand our business or ease liquidity constraints;
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limit our ability to refinance all or a portion of our
indebtedness on or before maturity on the same or more favorable
terms or at all;
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limit our flexibility in planning for, or reacting to, changes
in our business and our industry;
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place us at a competitive disadvantage relative to competitors
that have less indebtedness; and
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require us to dispose of one or more of our properties at
disadvantageous prices or raise equity that may dilute the value
of our common stock in order to service our indebtedness or to
raise funds to pay such indebtedness at maturity.
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The
agreements governing our indebtedness place restrictions on us
and our subsidiaries, reducing operational flexibility and
creating default risks.
The agreements governing our indebtedness contain covenants that
place restrictions on us and our subsidiaries. These covenants
may restrict, among other things, our and our subsidiaries
ability to:
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merge, consolidate or transfer all or substantially all of our
or our subsidiaries assets;
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incur additional debt or issue preferred stock;
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make certain investments or acquisitions;
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create liens on our or our subsidiaries assets;
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sell assets;
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make capital expenditures;
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pay dividends on or repurchase our capital stock;
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enter into transactions with affiliates;
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issue or sell stock of our subsidiaries; and
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change the nature of our business.
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These covenants could impair our ability to grow our business,
take advantage of attractive business opportunities or
successfully compete. In addition, our new revolving credit
facility will require us to maintain specified financial ratios
and satisfy financial condition tests. Our ability to comply
with these ratios or tests may be affected by events beyond our
control, including prevailing economic, financial and industry
conditions. A breach of any of these covenants or covenants
under any other agreements governing our indebtedness could
result in an event of default. Cross-default provisions in our
debt agreements could cause an event of default under one debt
agreement to trigger an event of default under our other debt
agreements. Upon the occurrence of an event of default under any
of our debt agreements, the lenders could elect to declare all
outstanding debt under such agreements to be immediately due and
payable. If we were unable to repay or refinance the accelerated
debt, the lenders could proceed against any assets pledged to
secure that debt, including foreclosing on or requiring the sale
of our data centers, and our assets may not be sufficient to
repay such debt in full.
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Mortgage
debt obligations expose us to the possibility of foreclosure,
which could result in the loss of our investment in any property
subject to mortgage debt.
Following the Restructuring Transactions and Financing
Transactions, we expect that our 427 S. LaSalle
property will be subject to $40.0 million of secured
indebtedness, our 55 S. Market property will be
subject to a $60.0 million mortgage loan and our 12100
Sunrise Valley property will be subject to a $32.0 million
secured construction loan, of which $24.9 million was
outstanding as of June 30, 2010. In addition, borrowings
under our new revolving credit facility will be secured by a
lien on certain of our properties. Incurring mortgage and other
secured debt obligations increases our risk of property losses
because defaults on secured indebtedness may result in
foreclosure actions initiated by lenders and ultimately our loss
of the property securing any loans for which we are in default.
For tax purposes, a foreclosure of any of our properties would
be treated as a sale of the property for a purchase price equal
to the outstanding balance of the debt secured by the mortgage.
If the outstanding balance of the debt secured by the mortgage
exceeds our tax basis in the property, we would recognize
taxable income on foreclosure, but would not receive any cash
proceeds, which could hinder our ability to meet the REIT
distribution requirements imposed by the Code. As we execute our
business plan, we may assume or incur new mortgage indebtedness
on our existing properties or properties that we acquire in the
future. Any default under any one of our mortgage debt
obligations may increase the risk of our default on our other
indebtedness.
Our
failure to develop and maintain a diverse customer base could
harm our business and adversely affect our results of
operations.
Our ability to increase occupancy rates in our data centers and
grow our business is, in part, dependent upon our ability to
market our data center space to a diverse customer base. A more
diverse customer base in our data centers creates more
networking interconnection opportunities that are valued by our
customers, which we believe has generated and will continue to
generate incremental revenues in the long-term. Attracting and
retaining this diverse customer base will depend on many
factors, including the density of interconnection, the operating
reliability and security of our data centers, and our ability to
market our services effectively across different customer
segments. If we fail to maintain a diverse customer base, our
business and results of operations may be adversely affected.
Certain
of the properties in our portfolio have been owned or operated
for a limited period of time, and we may not be aware of
characteristics or deficiencies involving any one or all of
them.
As of June 30, 2010, our portfolio of properties consisted
of 11 operating data center facilities, one data center under
construction and one development site. Nine of the properties
being contributed to our portfolio were acquired or developed by
the Carlyle real estate funds or their affiliates less than four
years prior to the date of this offering, including one
facility, 2901 Coronado, which was completed during the second
quarter of 2010. Because these properties have been in operation
for a relatively short period of time, we may be unaware of
characteristics of or deficiencies in such properties that could
adversely affect their valuation or revenue potential and such
properties may not ultimately perform up to our expectations.
We have
not obtained third-party appraisals to establish the amount of
operating partnership units to be issued in exchange for the
properties to be contributed to our operating partnership in
connection with the Restructuring Transactions and the operating
partnership units issued by our operating partnership in
exchange for these properties may exceed their fair market
values.
The initial public offering price of our common stock will be
determined in consultation with the underwriters and based on a
number of factors, including our results of operations,
management, estimated net income, estimated funds from
operations, estimated cash available for distribution,
anticipated dividend yield and growth prospects, the current
market valuations, financial performance and dividend yields of
publicly traded companies considered to be comparable to us and
the current state of the data center industry and the economy as
a whole, as well as market demand for this offering. As a
result, the initial public offering price does not necessarily
bear any relationship to our book value, the fair market value
of our assets or the appraised value of our properties.
Consequently, the operating partnership units received by the
Carlyle real estate funds or their affiliates, if valued on an
as exchanged basis for shares of our common stock at the per
share price set forth on the cover of this prospectus, may
exceed the fair market value or the appraised value
27
of the properties contributed for such units and the aggregate
value of our common stock at the initial offering price plus the
aggregate amount of our debt may exceed the aggregate appraised
values of our properties.
Although we have obtained preliminary appraisals of each of the
Acquired Properties in connection with the preparation of our
pro forma condensed consolidated financial statements included
elsewhere in this prospectus, such appraisals did not cover the
properties of our Predecessor, do not accurately reflect the
value of our company as a whole and the assumptions, judgments
and methodologies used in connection with these appraisals may
be different than those used by investors in our common stock.
Additionally, while the entities contributing the properties to
our operating partnership in connection with the Restructuring
Transactions obtained a third party opinion from an independent
financial advisor regarding the fairness to each of these
entities, from a financial point of view, of the allocation of
the operating partnership units as among these entities to be
received in consideration for the property or properties
contributed by each such entity based on estimated valuations of
the properties held by each fund, which valuations were obtained
solely for the purpose of allocating the operating partnership
units as among these entities. Further, the independent
financial advisor used a variety of customary valuation
methodologies and certain assumptions and judgments to determine
a range of valuations of the individual properties and no
related appraisal or physical inspection of the properties was
conducted and no attempt was made to value the properties as a
single operating company. Accordingly, the assumptions,
judgments and methodologies used in connection with these
valuations may also be different than those used by public
stockholders in assessing the value of our company taken as a
whole. In addition, while our lenders have conducted appraisals
of some of our properties in connection with determining for
loan purposes whether the collateral value is sufficient to
support the amount of the loans, we have not obtained or
reviewed copies of such appraisals.
We may be
vulnerable to security breaches which could disrupt our
operations and have a material adverse effect on our financial
performance and operating results.
A party who is able to compromise the security measures on our
networks or the security of our infrastructure could
misappropriate our proprietary information and the personal
information of our customers, and cause interruptions or
malfunctions in our or our customers operations. We may be
required to expend significant financial resources to protect
against such threats or to alleviate problems caused by security
breaches. As techniques used to breach security change
frequently and are generally not recognized until launched
against a target, we may not be able to implement security
measures in a timely manner or, if and when implemented, these
measures could be circumvented. Any breaches that may occur
could expose us to increased risk of lawsuits, loss of existing
or potential customers, harm to our reputation and increases in
our security costs, which could have a material adverse effect
on our financial performance and operating results.
Our tax
protection agreements could limit our ability to sell or
otherwise dispose of certain properties.
We have agreed with each of the Carlyle real estate funds or
their affiliates which have directly or indirectly contributed
their interests in the properties in our portfolio to our
operating partnership that if we directly or indirectly sell,
convey, transfer or otherwise dispose of all or any portion of
these interests in a taxable transaction, we will make an
interest-free loan to the contributors in an amount equal to the
contributors tax liabilities, based on an assumed tax
rate. Any such loan would be repayable out of the after
tax-proceeds (based on an assumed tax rate) of any distribution
from the operating partnership to, or any sale of operating
partnership units (or common stock issued by us in exchange for
such units) by, the recipient of such loan, and would be
non-recourse to the borrower other than with respect to such
proceeds. These tax protection provisions apply for a period
expiring on the earlier of (i) the seventh anniversary of
the completion of this offering and (ii) the date on which
these contributors (or certain transferees) dispose in certain
taxable transactions of 90% of the operating partnership units
that were issued to them in connection with the contribution of
these properties. See Certain Relationships and Related
Party TransactionsTax Protection Agreement.
Increases
in our property and other state and local taxes could adversely
affect our ability to make distributions to our stockholders if
they cannot be passed on to our customers.
We are subject to a variety of state and local taxes, including
real and personal property taxes and sales and use taxes that
may increase materially due to factors outside our control. In
particular, taxes on our properties may increase as tax rates
change and as the properties are assessed or reassessed by
taxing
28
authorities. We have been notified by local taxing authorities
that the assessed value of certain of our properties have
increased. We plan to appeal these increased assessments, but we
may not be successful in our efforts. Furthermore, some of our
properties may be reassessed retroactively to the date we or the
Carlyle real estate funds acquired the property, which could
require us to make cumulative payments for multiple years. Our
leases with our customers generally do not allow us to increase
their rent as a result of an increase in property or other
taxes. If property or other taxes increase and we cannot pass
these increases on to our customers through increased rent for
new leases or upon lease renewals, our result of operations,
cash flow and ability to make distributions to our stockholders
would be adversely affected.
Risks
Related to the Real Estate Industry
Illiquidity
of real estate investments, particularly our data centers, could
significantly impede our ability to respond to adverse changes
in the performance of our properties, which could harm our
financial condition.
Because real estate investments are relatively illiquid, our
ability to promptly sell one or more properties in our portfolio
in response to adverse changes in the real estate market or in
the performance of such properties may be limited, thus harming
our financial condition. The real estate market is affected by
many factors that are beyond our control, including:
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adverse changes in national and local economic and market
conditions;
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changes in interest rates and in the availability, cost and
terms of debt financing;
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changes in governmental laws and regulations, fiscal policies
and zoning ordinances and costs of compliance therewith;
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the ongoing cost of capital improvements that are not passed
onto our customers, particularly in older structures;
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changes in operating expenses; and
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civil unrest, acts of war, terrorist attacks and natural
disasters, including earthquakes and floods, which may result in
uninsured and underinsured losses.
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The risks associated with the illiquidity of real estate
investments are even greater for our data center properties. Our
data centers are highly specialized real estate assets
containing extensive electrical and mechanical systems that are
uniquely designed to house and maintain our customers
equipment, and, as such, have little, if any, traditional office
space. As a result, most of our data centers are not suited for
use by customers as anything other than as data centers and
major renovations and expenditures would be required in order
for us to re-lease data center space for more traditional
commercial or industrial uses, or for us to sell a property to a
buyer for use other than as a data center.
Environmental
problems are possible and can be costly.
Environmental liabilities could arise and have a material
adverse effect on our financial condition and performance.
Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous
owner or operator of real estate to investigate and remediate
hazardous or toxic substances or petroleum product releases at
or from the property. In addition, we could incur costs to
comply with such laws and regulations, the violation of which
could lead to substantial fines and penalties.
We may have to pay governmental entities or third parties for
property damage and for investigation and remediation costs that
they incurred in connection with any contamination at our
current and former properties without regard to whether we knew
of or caused the presence of the contaminants. Even if more than
one person may have been responsible for the contamination, each
person covered by these environmental laws may be held
responsible for all of the
clean-up
costs incurred.
Some of our properties contain or may contain
asbestos-containing building materials. Environmental laws may
impose fines and penalties on building owners or operators who
fail to properly manage and maintain these materials, notify and
train persons who may come into contact with asbestos and
undertake
29
special precautions, and third parties could potentially seek
recovery from owners or operators for any personal injury
associated with exposure to asbestos-containing building
materials.
Some of our properties may also contain or develop harmful mold
or suffer from other air quality issues. As a result, the
presence of significant mold or other airborne contaminants at
any of our properties could require us to undertake a costly
remediation program to contain or remove the mold or other
airborne contaminants from the affected property or increase
indoor ventilation. In addition, the presence of significant
mold or other airborne contaminants could expose us to liability
from our customers, employees of our customers and others if
property damage or health concerns arise.
We may be
adversely affected by regulations related to climate
change.
Climate change regulation is a rapidly developing area. Congress
is currently considering new laws relating to climate change,
including potential
cap-and-trade
systems, carbon taxes, and other requirements relating to
reduction of carbon footprints
and/or
greenhouse gas emissions. Other countries have enacted climate
change laws and regulations, and the United States has been
involved in discussions regarding international climate change
treaties. The U.S. Environmental Protection Agency, or EPA, and
some of the states and localities in which we operate, have also
enacted certain climate change laws and regulations,
and/or have
begun regulating carbon footprints and greenhouse gas emissions.
Although these laws and regulations have not had an adverse
effect on our business to date, they could limit our ability to
develop new facilities or result in substantial compliance
costs, retrofit costs and construction costs, including capital
expenditures for environmental control facilities and other new
equipment. We could also face a negative impact on our
reputation with the public if we violate climate change laws or
regulations.
If we do
not obtain a negative declaration from the City of Santa Clara,
we will be unable to proceed with our plans to develop the
Coronado-Stender Business Park, which would have a material
adverse effect on our business and results of
operations.
We are in the process of obtaining a negative declaration from
the City of Santa Clara in connection with our planned
development of the Coronado-Stender Business Park. The
declaration, if issued, would determine that the proposed
development will not have a significant impact on the
environment. If we are unable to obtain the negative
declaration, we will only be able to develop an additional
179,600 NRSF of data center space at this property as compared
to our current plans for the development of up to 446,250 NRSF
of additional data center space at the Coronado-Stender Business
Park.
Risks
Related to Our Organizational Structure
Our Board
of Directors may change our major corporate, investment and
financing policies without stockholder approval and those
changes may adversely affect our business.
Our Board of Directors will determine our major corporate
policies, including our acquisition, investment, financing,
growth, operations and distribution policies and whether to
maintain our status as a REIT. In particular, we anticipate that
our Board of Directors will adopt a policy of limiting the
amount of indebtedness we incur. However, our organizational
documents do not limit the amount or percentage of indebtedness,
funded or otherwise, that we may incur. Our Board of Directors
may alter or eliminate our current corporate policies, including
our policy on borrowing at any time without stockholder
approval. Accordingly, while our stockholders have the power to
elect or remove directors, our stockholders will have limited
direct control over changes in our policies and those changes
could adversely affect our business, financial condition,
results of operations, the market price of our common stock and
our ability to make distributions to our stockholders.
While the
Carlyle real estate funds and their affiliates will not control
our company following the completion of this offering, they will
own a majority of our operating partnership and have the right
initially to nominate two directors, and their interests may
differ from or conflict with the interests of our
stockholders.
Upon completion of this offering, the Carlyle real estate funds
or their affiliates will have an aggregate beneficial ownership
interest in our operating partnership of
approximately % which, if exchanged
for our common stock, would represent an
approximately % interest in our
common stock. In addition, the
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operating partnership agreement will initially grant the Carlyle
real estate funds and their affiliates the right to initially
nominate two of the seven directors to our Board of Directors.
See Description of the Partnership Agreement of CoreSite,
L.P.
As a result, the Carlyle real estate funds or their affiliates
will have the ability to exercise substantial influence over our
company, including with respect to decisions relating to our
capital structure, issuing additional shares of our common stock
or other equity securities, paying dividends, incurring
additional debt, making acquisitions, selling properties or
other assets, merging with other companies and undertaking other
extraordinary transactions. In any of these matters, the
interests of the Carlyle real estate funds and their affiliates
may differ from or conflict with the interests of our other
stockholders. In addition, the Carlyle real estate funds or
their affiliates are in the business of making investments in
companies and may, from time to time, acquire interests in
businesses that directly or indirectly compete with our
business, as well as businesses that are significant existing or
potential customers. The Carlyle real estate funds and their
affiliates may acquire or seek to acquire assets that we seek to
acquire and, as a result, those acquisition opportunities may
not be available to us or may be more expensive for us to pursue.
Our
charter and bylaws contain provisions that may delay, defer or
prevent an acquisition of our common stock or a change in
control, which may be in the best interests of our
stockholders.
Our charter and bylaws contain a number of provisions, the
exercise or existence of which could delay, defer or prevent a
transaction or a change in control that might involve a premium
price for our stockholders or otherwise be in their best
interests, including the following:
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Our Charter Contains Restrictions on the Ownership and
Transfer of Our Stock. In order to assist us
in complying with the limitations on the concentration of
ownership of REIT stock imposed by the Code on REITs, our
charter generally prohibits any person or entity (other than a
person who or entity that has been granted an exception as
described below) from actually or constructively owning more
than 9.8% (by value or by number of shares, whichever is more
restrictive) of our common stock or more than 9.8% (by value) of
our capital stock. The value and number of the outstanding
shares of common stock and the value of the outstanding shares
of capital stock shall be determined by the Board of Directors
in good faith, which shall be conclusive for all purposes. We
refer to these restrictions as the ownership limits. Our charter
permits our Board of Directors to make certain exceptions to
these ownership limits, unless it would cause us to fail to
qualify as a REIT. We expect that our Board of Directors will
grant some or all of the Carlyle real estate funds or their
affiliates exemptions from the ownership limits applicable to
other holders of our common stock. Any attempt to own or
transfer shares of our capital stock in excess of the ownership
limits without the consent of our Board of Directors will result
in the automatic transfer of the shares (and all dividends
thereon) to a charitable trust. These ownership limitations may
prevent a third party from acquiring control of us if our Board
of Directors does not grant an exemption from the ownership
limitations, even if our stockholders believe the change in
control is in their best interests.
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Our Charter Grants Our Board of Directors the Right to
Classify or Reclassify Any Unissued Shares of Capital Stock,
Increase or Decrease the Authorized Number of Shares and
Establish the Preference and Rights of Any Preferred Stock
without Stockholder Approval. Our charter
provides that the total number of shares of stock of all classes
that we currently have authority to issue
is ,
initially consisting
of shares
of common stock
and shares
of preferred stock. Our Board of Directors has the authority,
without a stockholders vote, to classify or reclassify any
unissued shares of stock, including common stock into preferred
stock or vice versa, to increase or decrease the authorized
number of shares of common stock and preferred stock and to
establish the preferences and rights of any preferred stock or
other class or series of shares to be issued. Because the Board
of Directors has the power to establish the preferences and
rights of additional classes or series of stock without a
stockholders vote, our Board of Directors may give the
holders of any class or series of stock preferences, powers and
rights, including voting rights, senior to the rights of holders
of existing stock.
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See Description of Securities for additional
information on the anti-takeover measures applicable to us.
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Certain
provisions of Maryland law may limit the ability of a third
party to acquire control of us.
Certain provisions of the Maryland General Corporation Law, or
MGCL, may have the effect of inhibiting a third party from
making a proposal to acquire us or of impeding a change of
control under circumstances that otherwise could provide our
common stockholders with the opportunity to realize a premium
over the then-prevailing market price of such shares, including:
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business combination provisions that,
subject to limitations, prohibit certain business combinations
between us and an interested stockholder (defined
generally as any person who beneficially owns 10% or more of the
voting power of our outstanding shares of voting stock or an
affiliate or associate of the corporation who, at any time
within the two-year period immediately prior to the date in
question, was the beneficial owner of 10% or more of the voting
power of the then outstanding stock of the corporation) or an
affiliate of any interested stockholder for five years after the
most recent date on which the stockholder becomes an interested
stockholder, and thereafter imposes two super-majority
stockholder voting requirements on these combinations; and
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control share provisions that provide
that control shares of our company (defined as
voting shares of stock which, when aggregated with all other
shares controlled by the stockholder, entitle the stockholder to
exercise one of three increasing ranges of voting power in
electing directors) acquired in a control share
acquisition (defined as the direct or indirect acquisition
of ownership or control of control shares) have no
voting rights except to the extent approved by our stockholders
by the affirmative vote of at least two-thirds of all of the
votes entitled to be cast on the matter, excluding all
interested shares.
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We have opted out of these provisions of the MGCL, in the case
of the business combination provisions of the MGCL, by
resolution of our Board of Directors and, in the case of the
control share provisions of the MGCL, by a provision in our
bylaws. However, our Board of Directors may elect to opt into
these provisions if approved by our stockholders by the
affirmative vote of a majority of votes cast and with the
consent of the Carlyle real estate funds or their affiliates,
provided that the consent of the Carlyle entities will not be
required unless, in the case of the control share provisions,
such provisions would apply to the Carlyle real estate funds and
their affiliates, or in either case at such time they own less
than 10% of our outstanding common stock (assuming all operating
partnership units are exchanged into common stock).
Additionally, Title 3, Subtitle 8 of the MGCL permits our
Board of Directors, without stockholder approval and regardless
of what is currently provided in our charter or bylaws, to
implement certain takeover defenses, such as a classified board,
some of which we do not yet have.
Risks
Related to Our Status as a REIT
Failure
to qualify as a REIT would have material adverse consequences to
us and the value of our stock.
We intend to elect to be taxed and to operate in a manner that
will allow us to qualify as a REIT for federal income tax
purposes under the Code. However, we cannot assure you that we
will qualify or will remain qualified as a REIT. If, in any
taxable year, we lose our REIT status, we will face serious tax
consequences that would substantially reduce our cash available
for distribution to you for each of the years involved because:
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we would not be allowed a deduction for distributions to
stockholders in computing our taxable income and we would be
subject to federal income tax, including any alternative minimum
tax, at regular corporate rates;
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we could be subject to possibly increased state and local
taxes; and
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unless we are entitled to relief under applicable statutory
provisions, we could not elect to be taxed as a REIT for four
taxable years following the year during which we were
disqualified.
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Our failure to qualify as a REIT could also impair our ability
to expand our business and raise capital, and would materially
adversely affect the value of our common stock.
32
We have
no operating history as a REIT or a public company and our
inexperience may impede our ability to successfully manage our
business.
We have no operating history as a REIT or a public company. As a
result, we cannot assure you that our past experience will be
sufficient to successfully operate our company as a REIT or a
public company. Although certain of our executive officers and
directors have experience in the real estate industry, and
Mr. Ray, our President and Chief Executive Officer and
Ms. Beckman, our Chief Financial Officer, have previously
held positions with publicly traded REITs, we cannot assure you
that our past experience will be sufficient to operate a
business in accordance with the Code requirements for REIT
qualification or in accordance with the requirements of the SEC
and the NYSE for public companies. Upon completion of this
offering, we will be required to develop and implement
substantial control systems and procedures in order to qualify
and maintain our qualification as a REIT, satisfy our periodic
and current reporting requirements under applicable SEC
regulations and comply with NYSE listing standards. As a result,
we will incur significant legal, accounting and other expenses
that we did not incur as a private company and our management
and other personnel will need to devote a substantial amount of
time to comply with these rules and regulations and establish
the corporate infrastructure and controls demanded of a
publicly-traded REIT. These costs and time commitments could be
substantially more than we currently expect. In connection with
our operation as a public company, we will be required to report
our operations on a consolidated basis, which we have not done
before. We are in the process of implementing an internal audit
function and modifying our company-wide systems and procedures
in a number of areas to enable us to report on a consolidated
basis as we continue the process of integrating the financial
reporting of the entities we intend to acquire in connection
with the Restructuring Transactions. If our finance and
accounting organization is unable for any reason to respond
adequately to the increased demands that will result from being
a public company, the quality and timeliness of our financial
reporting may suffer and we could experience significant
deficiencies or material weaknesses in our disclosure controls
and procedures or our internal control over financial reporting.
An inability to establish effective disclosure controls and
procedures and internal control over financial reporting could
cause us to fail to meet our reporting obligations under the
Securities Exchange Act of 1934, as amended, or Exchange Act, on
a timely basis or result in material misstatements or omissions
in our Exchange Act reports, either of which could cause
investors to lose confidence in our company and could have a
material adverse effect on our operating results and the trading
price of our common stock.
Failure
to qualify as a domestically-controlled REIT could subject our
non-U.S.
stockholders to adverse federal income tax
consequences.
We will be a domestically-controlled REIT if, at all times
during a specified testing period, less than 50% in value of our
shares is held directly or indirectly by
non-U.S. stockholders.
However, because our shares will be publicly traded following
this offering, we cannot guarantee that we will in fact be a
domestically-controlled REIT. If we fail to qualify as a
domestically-controlled REIT, our
non-U.S. stockholders
that otherwise would not be subject to federal income tax on the
gain attributable to a sale of our shares of common stock would
be subject to taxation upon such a sale if either (1) the
shares of common stock were not considered to be regularly
traded under applicable Treasury Regulations on an established
securities market, such as the NYSE, or (2) the selling
non-U.S. stockholder
owned, actually or constructively, more than 5% in value of the
outstanding shares of common stock being sold during specified
testing periods. If gain on the sale or exchange of our shares
of common stock was subject to taxation for these reasons, the
non-U.S. stockholder
would be subject to regular U.S. income tax with respect to
any gain on a net basis in a manner similar to the taxation of a
taxable U.S. stockholder, subject to any applicable
alternative minimum tax and special alternative minimum tax in
the case of nonresident alien individuals, and corporate
non-U.S. stockholders
may be subject to an additional branch profits tax, as described
in Federal Income Tax ConsiderationsTaxation of
Non-U.S. Stockholders.
Our cash
available for distribution to stockholders may not be sufficient
to pay distributions at expected levels or at all.
In order to maintain our qualification as a REIT, we are
required under the Code to distribute at least 90% of our net
taxable income annually to our stockholders. In any period our
net taxable income may be greater than the cash flow from
operations. In addition, we may become party to debt agreements
that include
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cash management or similar provisions, pursuant to which
revenues generated by properties subject to such indebtedness
are immediately, or upon the occurrence of certain events, swept
into an account for the benefit of the lenders under such debt
agreements, which revenues would typically only become available
to us after the funding of reserve accounts for, among other
things, debt service, taxes, insurance and leasing commissions.
If our properties do not generate sufficient cash flow, we may
be required to fund distributions from working capital,
borrowings under our new revolving credit facility, proceeds
from this offering, the sale of assets or by obtaining other
debt or equity financing, which may not be available, pay
dividends in the form of taxable stock dividends in order to
meet our distributions requirements or reduce expected
distributions, any of which could have a material adverse effect
on the price of our common stock.
Applicable
REIT laws may restrict certain business activities.
As a REIT we are subject to various restrictions on our income,
assets and activities. These include restrictions on our ability
to pursue certain strategic acquisitions or business
combinations and our ability to enter into other lines of
business. Due to these restrictions, we anticipate that we will
conduct certain business activities, such as interconnection
services, in one or more taxable REIT subsidiaries. Our taxable
REIT subsidiaries are taxable as regular C corporations and are
subject to federal, state, local, and, if applicable, foreign
taxation on their taxable income at applicable corporate income
tax rates. However, we may still be limited in the business
activities we can pursue.
Despite
our REIT status, we remain subject to various taxes.
Notwithstanding our status as a REIT, we will be subject to
certain federal, state and local taxes on our income and
property. For example, we will pay tax on certain types of
income that we do not distribute and will incur a 100% excise
tax on transactions with our TRS that are not conducted on an
arms length basis. Moreover, our TRS is taxable as a
regular C corporation and will pay federal, state and local
income tax on its net income at the applicable corporate rates.
We
generally will have a carryover tax basis on our properties
acquired in the Restructuring Transactions, which could reduce
our depreciation deductions.
We expect that the properties that we will acquire in the
Restructuring Transactions generally will have a carryover tax
basis that is lower than the respective fair market values of
the properties. This could result in lower depreciation
deductions on these properties, thereby (i) increasing the
distribution requirement imposed on us which could adversely
affect our ability to satisfy the REIT distribution requirement,
and (ii) decreasing the extent to which our distributions
are treated as tax-free return of capital
distributions.
If the
structural components of our properties were not treated as real
property for purposes of the REIT qualification requirements, we
would fail to qualify as a REIT.
A significant portion of the value of our properties is
attributable to structural components related to the provision
of electricity, heating, ventilation and air conditioning,
humidification regulation, security and fire protection, and
telecommunication services. We have received a private letter
ruling from the Internal Revenue Service, or the IRS, holding,
among other things, that our buildings, including the structural
components, constitute real property for purposes of the REIT
qualification requirements. We are entitled to rely upon that
private letter ruling only to the extent that we did not
misstate or omit a material fact in the ruling request we
submitted to the IRS and that we operate in the future in
accordance with the material facts described in that request.
Moreover, the IRS, in its sole discretion, may revoke the
private letter ruling. If our structural components are
determined not to constitute real property for purposes of the
REIT qualification requirements, including as a result of our
being unable to rely upon the private letter ruling or the IRS
revoking that ruling, we would fail to qualify as a REIT, which
could have a material adverse effect on the value of our common
stock.
34
Risks
Related to this Offering
Increases
in market interest rates may cause potential investors to seek
higher dividend yields and therefore reduce demand for our
common stock and result in a decline in our stock
price.
One of the factors that may influence the price of our common
stock is the dividend yield on our common stock (the amount of
dividends as a percentage of the price of our common stock)
relative to market interest rates. An increase in market
interest rates, which are currently at low levels relative to
historical rates, may lead prospective purchasers of our common
stock to expect a higher dividend yield, which we may be unable
or choose not to provide. Higher interest rates would likely
increase our borrowing costs and potentially decrease the cash
available for distribution. Thus, higher market interest rates
could cause the market price of our common stock to decline.
The
number of shares available for future sale could materially
adversely affect the market price of our common stock.
We cannot predict whether future issuances of shares of our
common stock or the availability of shares of our common stock
for resale in the open market will decrease the market price per
share of our common stock. Sales of a substantial number of
shares of our common stock in the public market, either by us or
by holders of operating partnership units upon exchange of such
units for our common stock, or the perception that such sales
might occur, could materially adversely affect the market price
of the shares of our common stock. The Carlyle real estate funds
or their affiliates, as holders of
the
operating partnership units to be issued in the Restructuring
Transactions, will have the right to require us to register with
the SEC the resale of the common stock issuable, if we so elect,
upon redemption of these operating partnership units. Such funds
or affiliates are restricted from exercising their redemption
rights prior to the first anniversary of the completion of this
offering. In addition, after completion of this offering, we
intend to
register shares
of common stock that we have reserved for issuance under our
equity incentive plan, and once registered they can generally be
freely sold in the public market after issuance, assuming any
applicable restrictions and vesting requirements are satisfied.
In addition, except as described herein, we, our operating
partnership our directors and officers and the Carlyle real
estate funds or their affiliates have agreed with the
underwriters not to offer, sell, contract to sell, pledge or
otherwise dispose of any shares of common stock, operating
partnership units or other securities convertible or
exchangeable into our common stock for a period of 180 days
(or 365 days in the case of the Carlyle real estate funds
or their affiliates) after the date of this prospectus; however,
these lock-up agreements are subject to numerous exceptions and
the representatives of the underwriters may waive these lock-up
provisions without notice. If any or all of these holders cause
a large number of their shares to be sold in the public market,
the sales could reduce the trading price of our common stock and
could impede our ability to raise future capital. In addition,
the exercise of the underwriters option to purchase up to
an
additional shares
of our common stock or other future issuances of our common
stock would be dilutive to existing stockholders.
Our
earnings and cash distributions will affect the market price of
shares of our common stock.
We believe that the market value of a REITs equity
securities is based primarily upon market perception of the
REITs growth potential and its current and potential
future cash distributions, whether from operations, sales,
acquisitions, development or refinancing, and is secondarily
based upon the value of the underlying assets. For these
reasons, shares of our common stock may trade at prices that are
higher or lower than the net asset value per share. To the
extent we retain operating cash flow for investment purposes,
working capital reserves or other purposes rather than
distributing the cash flow to stockholders, these retained
funds, while increasing the value of our underlying assets, may
negatively impact the market price of our common stock. Our
failure to meet market expectations with regard to future
earnings and cash distributions would likely adversely affect
the market price of our common stock.
The
market price and trading volume of our common stock may be
volatile following this offering.
Even if an active trading market develops for our common stock,
the market price of our common stock may be volatile. In
addition, the trading volume in our common stock may fluctuate
and cause significant price variations to occur. If the market
price of our common stock declines significantly, you may be
unable to
35
resell your shares at or above the public offering price or at
all. We cannot assure you that the market price of our common
stock will not fluctuate or decline significantly in the future.
Some of the factors that could negatively affect the market
price of our common stock or result in fluctuations in the price
or trading volume of our common stock include:
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actual or anticipated variations in our quarterly operating
results or dividends;
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changes in our funds from operations or earnings estimates;
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publication of research reports about us or the real estate,
technology or data center industries;
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increases in market interest rates that may cause purchasers of
our shares to demand a higher yield;
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changes in market valuations of similar companies;
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adverse market reaction to any additional debt we may incur in
the future;
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additions or departures of key personnel;
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actions by institutional stockholders;
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speculation in the press or investment community about our
company or industry or the economy in general;
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the occurrence of any of the other risk factors presented in
this prospectus; and
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general market and economic conditions.
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There is
currently no public market for our common stock. An active
trading market for our common stock may not develop following
this offering and you may be unable to sell your stock at a
price above the initial public offering price or at
all.
There has not been any public market for our common stock prior
to this offering. We have applied to have our common stock
listed on the NYSE following the completion of this offering. We
cannot assure you, however, that an active trading market for
our common stock will develop after this offering or, if one
develops, that it will be sustained. In the absence of a public
market, you may be unable to liquidate an investment in our
common stock. The initial public offering price of our common
stock will be determined in consultation with the underwriters
and based on a number of factors, including our results of
operations, management, estimated net income, estimated funds
from operations, estimated cash available for distribution,
anticipated dividend yield and growth prospects, the current
market valuations, financial performance and dividend yields of
publicly traded companies considered to be comparable to us and
the current state of the data center industry and the economy as
a whole. The price at which shares of our common stock trade
after the completion of this offering may be lower than the
price at which the underwriters sell them in this offering.
If you
purchase shares of common stock in this offering, you will
experience immediate and significant dilution in the net
tangible book value per share of our common stock.
We expect the initial public offering price of our common stock
to be substantially higher than the book value per share of our
outstanding common stock immediately after this offering. If you
purchase our common stock in this offering, you will incur
immediate dilution of approximately
$ in the book value per share of
common stock from the price you pay for our common stock in this
offering, based on an assumed initial public offering price of
$ per share, the midpoint of the
range indicated on the cover of this prospectus. See
Dilution for further discussion of how your
ownership interest in us will be immediately diluted.
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FORWARD-LOOKING
STATEMENTS
This prospectus includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements provide our current expectations or
forecasts of future events. Forward-looking statements include
statements about our expectations, beliefs, intentions, plans,
objectives, goals, strategies, future events, performance and
underlying assumptions and other statements that are not
historical facts. You can identify forward-looking statements by
their use of forward-looking words, such as may,
will, anticipates, expect,
believe, intend, plan,
should, seek or comparable terms, or the
negative use of those words, but the absence of these words does
not necessarily mean that a statement is not forward-looking.
These forward-looking statements are made based on our
expectations and beliefs concerning future events affecting us
and are subject to uncertainties and factors relating to our
operations and business environment, all of which are difficult
to predict and many of which are beyond our control, that could
cause our actual results to differ materially from those matters
expressed in or implied by these forward-looking statements.
Important factors that could cause actual results to differ
materially from our expectations are disclosed under Risk
Factors and elsewhere in this prospectus. These factors
include, among others:
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general economic conditions as well as adverse economic or real
estate developments in our industry resulting in decreased
demand for data center space;
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the geographic concentration of the properties in our portfolio;
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non-renewal of leases by customers;
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inability to retain key personnel;
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difficulties in redeveloping, developing or identifying
properties to acquire and completing acquisitions;
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failure of our physical infrastructure or disruption of the
services necessary for the function of our properties;
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increased interest rates and operating costs not offset by
increased revenues;
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our failure to successfully operate acquired properties and
operations;
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our failure to maintain our status as a REIT; and
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financial market fluctuations or a lack of external financing.
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Except as required by law, we do not undertake any
responsibility to release publicly any revisions to these
forward-looking statements to take into account events or
circumstances that occur after the date of this prospectus or to
update you on the occurrence of any unanticipated events which
may cause actual results to differ from those expressed or
implied by the forward-looking statements contained in this
prospectus.
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USE OF
PROCEEDS
We estimate that the net proceeds to us from the sale
of shares
of common stock will be approximately
$ million, or
$ million if the underwriters
exercise their over-allotment option in full, assuming an
initial public offering price of $
per share, the midpoint of the range set forth on the cover of
this prospectus, and after deducting underwriting discounts and
commissions and estimated offering expenses of approximately
$ million payable by us.
We will contribute the net proceeds of this offering to our
operating partnership. Our operating partnership will
subsequently use the proceeds received from us as follows:
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To repay approximately $94.5 million of indebtedness, including
related fees and expenses as follows:
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$13.0 million on a mezzanine loan secured by our 55 S.
Market property with an interest rate of LIBOR plus 4.50% (4.85%
as of June 30, 2010) that matures on November 9, 2010,
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$32.2 million on a senior mortgage loan secured by our
900 N. Alameda property with an interest rate of 7.75% as
of June 30, 2010 that matures on November 1, 2010,
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$1.5 million on a subordinate mortgage loan secured by our
900 N. Alameda property with an interest rate of 7.75% as
of June 30, 2010 that matures on November 1, 2010,
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$15.1 million on a mortgage loan secured by our
70 Innerbelt property with an interest rate of 7.25% as of
June 30, 2010 that matures on March 1, 2011,
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$28.0 million on a senior mortgage loan secured by the
Coronado Stender Business Park with an interest rate of LIBOR
plus 1.40% (1.75% as of June 30, 2010) that matures on
March 9, 2011, and
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$4.6 million on a junior mortgage loan secured by the
Coronado Stender Business Park with an interest rate of LIBOR
plus 1.40% (1.75% as of June 30, 2010) that matures on
March 9, 2011;
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to
purchase
operating partnership units from our operating partnership;
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to
purchase
operating partnership units from the Carlyle real estate funds
and their affiliates that are contributing properties to our
operating partnership; and
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for related transaction expenses. Our operating partnership
intends to use the cash received from our purchase of its
operating partnership units to redevelop and develop additional
data center space and for general corporate purposes.
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A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would (i) increase (decrease) the net proceeds to us from
this offering by $ million,
assuming the number of shares offered by us, as set forth on the
cover page of this prospectus, remains the same and after
deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by us. We may also
increase or decrease the number of shares we are offering. Each
increase of 1.0 million shares in the number of shares
offered by us, together with a concomitant $1.00 increase in the
assumed public offering price of $
per share, would increase the net proceeds to us from this
offering by approximately
$ million. Similarly, each
decrease of 1.0 million shares in the number of shares
offered by us, together with a concomitant $1.00 decrease in the
assumed public offering price of $
per share, would decrease the net proceeds to us from this
offering by approximately
$ million. We do not expect
that a change in the initial public offering price will have a
material effect on our use of proceeds.
38
DIVIDEND
POLICY
We intend to elect to be taxed and to operate in a manner that
will allow us to qualify as a REIT for U.S. federal income tax
purposes, commencing with our tax year ending December 31,
2010. In order to qualify as a REIT under the Code, we generally
must make distributions to our stockholders each year in an
amount equal to at least:
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90% of our REIT taxable income (which does not include the
earnings of our taxable REIT subsidiary) determined without
regard to the dividends paid deduction; plus
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90% of the excess of our net income from foreclosure property
over the tax imposed on such income by the Code; minus
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any excess non-cash income.
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We intend to make regular quarterly distributions to holders of
our common stock. We intend to pay an initial distribution with
respect to the period commencing on the completion of this
offering and
ending , ,
based on a distribution of $ per
share for a full quarter. On an annualized basis, this would be
$ per share, or an annual
distribution rate of
approximately % based on an assumed
initial public offering price of $
per share (of which we currently estimate % may
represent a return of capital for tax purposes), the midpoint of
the range indicated on the cover of this prospectus. We estimate
that this initial annual distribution rate will represent
approximately % of estimated cash
available for distribution for the twelve months ending
June 30, 2011 on a pro forma basis. We have estimated our
cash available for distribution to our common stockholders for
the 12 months ending June 30, 2011 based on
adjustments to our pro forma as adjusted net income available to
common stockholders for the 12 months ended June 30,
2010 (giving effect to the Restructuring Transactions and the
Financing Transactions), as described below. This estimate was
based upon the historical operating results of our Predecessor
and the Acquired Properties, as adjusted on a pro forma basis
for the Restructuring Transactions and the Financing
Transactions and does not take into account any additional
investments and their associated cash flows, unanticipated
expenditures that we may have to make or any additional debt we
may incur. In estimating our cash available for distribution to
holders of our common stock, we have made certain assumptions as
reflected in the table and footnotes below. To the extent our
initial annual distribution is in excess of 100% of our
estimated cash available for distribution, we will use existing
cash to fund such shortfall or possibly borrowings under our new
revolving credit facility.
We anticipate that, at least initially, our distributions will
exceed our then current and accumulated earnings and profits as
determined for federal income tax purposes primarily due to
depreciation and amortization charges that we expect to incur.
Therefore, we anticipate that a portion of these distributions
will represent a return of capital for federal income tax
purposes. The percentage of our stockholder distributions that
exceeds our current and accumulated earnings and profits, if
any, may vary substantially from year to year. For a discussion
of the tax treatment of distributions to holders of our common
stock, see Federal Income Tax Considerations.
We intend to maintain our initial distribution rate for the
12-month period following completion of this offering unless
actual results of operations, economic conditions or other
factors differ materially from the assumptions used in our
estimate. Distributions made by us will be authorized by our
Board of Directors out of funds legally available and therefore
will be dependent upon a number of factors, including
restrictions under applicable law. We believe that our estimate
of cash available for distribution constitutes a reasonable
basis for setting the initial distribution; however, the actual
amount, timing and frequency of our distributions will be at the
discretion of, and authorized by, our Board of Directors and
will depend on our actual results of operations and a number of
other factors, including:
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the timing of our investment of the net proceeds of this
offering to fund redevelopment and development projects;
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the rent received from our lessees;
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our debt service requirements;
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39
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capital expenditure requirements for our properties;
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unforeseen expenditures at our properties;
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our ability to renew existing leases and lease available space
at anticipated rates;
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our taxable income and the taxable income of our TRS;
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the annual distribution requirement under the REIT provisions of
the Code;
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our operating expenses;
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relevant provisions of Maryland law; and
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other factors that our Board of Directors may deem relevant.
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We may retain earnings of our TRS, and such amount of cash would
not be available to satisfy the 90% distribution requirement. If
our cash available for distribution to our stockholders is less
than 90% of our REIT taxable income, we could be required to
sell assets or borrow funds to make distributions. Dividend
distributions to our stockholders will generally be taxable to
our stockholders as ordinary income to the extent of our current
or accumulated earnings and profits.
We cannot assure you that our estimated distributions will be
made or sustained. Any distributions we pay in the future will
depend upon our actual results of operations, economic
conditions and other factors that could differ materially from
our current expectations. Our actual results of operations will
be affected by a number of factors, including the revenue we
receive from our properties, our operating expenses, interest
expense, the ability of our customers to meet their obligations
and unanticipated expenditures. If our properties do not
generate sufficient cash flow, we may be required to fund
distributions from (i) working capital, which could include
proceeds from this offering, (ii) borrowings under our new
revolving credit facility or (iii) from other debt or equity
financing, which may not be available. If our properties fail to
generate sufficient cash flow, we may also be forced to pay
dividends in the form of taxable stock dividends in order to
meet our distributions requirements or reduce expected
distributions. For more information regarding risk factors that
could materially adversely affect our actual results of
operations and our ability to make distributions to our
stockholders, see Risk Factors, including
Risks Related to Our Status as a REIT Our cash
available for distribution to stockholders may not be sufficient
to pay distributions at expected levels or at all.
40
The following table describes our pro forma income (loss) from
continuing operations before non-controlling interests for the
year ended December 31, 2009, and the adjustments we have
made thereto in order to estimate our initial cash available for
distribution for the twelve months ending June 30, 2011
(amounts in thousands except share data, per share data, square
footage data and percentages):
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Pro Forma loss before non-controlling interests for the
12 months ended December 31, 2009
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$
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(21,794
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)
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Less: Pro Forma loss before non-controlling interests for the
six months ended June 30, 2009
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(12,053
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)
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Add: Pro Forma loss before non-controlling interests for the six
months ended June 30, 2010
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(2,406
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)
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Pro Forma loss before non-controlling interests for the
12 months ended June 30, 2010
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$
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(12,147
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)
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Add: Pro forma real estate depreciation and amortization
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38,333
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Add: Net increases in contractual rental
income(1)
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15,922
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Less: Net decreases in contractual net income due to lease
expirations, assuming no
renewals(2)
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(14,163
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)
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Less: Net effect of straight line rents and fair market value
adjustments to customer
leases(3)
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(4,315
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)
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Add: Net effect of straight line rent expense and fair market
value adjustments for leased
properties(4)
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2,628
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Add: Non-cash compensation
expense(5)
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2,079
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Add: Non-cash interest
expense(6)
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3,246
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Estimated cash flow from operating activities for the
12 months ended June 30, 2011
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$
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31,583
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Estimated cash flows used in investing activities
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Less: Contractual obligations for tenant improvement and leasing
commissions(7)
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(2,183
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)
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Less: Estimated annual provision for recurring capital
expenditures(8)
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(1,023
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)
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Total estimated cash flows used in investing activities
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(3,206
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)
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Estimated cash flows used in financing activities
Scheduled mortgage loan principal
payments(9)
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(86
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)
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Estimated cash flow available for distribution for the
12 months ending June 30, 2011
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$
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28,291
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Our share of estimated cash available for
distribution(10)
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Non-controlling interests share of estimated cash
available for distribution
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Total estimated initial annual distribution to
stockholders
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Estimated initial annual distribution per
share(11)
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Payout ratio based on our share of estimated cash available for
distributions(12)
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(1)
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Represents net increases from new
leases, renewals and contractual rent increases, net of
abatements, from existing leases that were not in effect for the
entire 12 month period ended June 30, 2010 or that
will go into effect during the 12 months ending
June 30, 2011 based on leases entered into through
June 30, 2010.
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(2)
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Assumes no renewals for leases that
expired during the 12 months ended June 30, 2010 or
will expire during the 12 months ending June 30, 2011,
unless a new or renewal lease had been entered into by
June 30, 2010.
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(3)
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Represents GAAP to cash conversion
of estimated rental revenues on in-place customer leases for the
12 months ended June 30, 2010.
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(4)
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Represents GAAP to cash conversion
of estimated rental expenses on properties leased by us for the
12 months ended June 30, 2010.
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(5)
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Pro forma non-cash compensation
expenses related to the vesting of incentive awards granted
under the 2010 Equity Incentive Plan.
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(6)
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Pro forma non-cash amortization of
financing costs and below market debt for the 12 months
ending June 30, 2011.
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(7)
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Reflects contractual tenant
improvement costs and leasing commissions for the 12 months
ending June 30, 2011 based on leases in effect as of
June 30, 2010 and new leases entered into through
June 30, 2010. Leasing commission commitments totaling
$667,215 include costs related to the Facebook and CSC leases of
$372,240 and $109,000, respectively. Tenant improvement
commitments related to the General Services
Administration IRS lease agreement at 55 S.
Market under which we are obligated to pay $4.3 million
between 2010 and 2012. The timing of these payments are
dependent on the achievement of certain defined milestones. We
expect to pay $1.5 million under this contract during the
twelve months ended June 30, 2011. Tenant improvement costs
and leasing commissions for renewed and retenanted space at the
properties in our portfolio incurred during the 12 months
ended December 31, 2008 and 2009 and the six months ended
June 30, 2010
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41
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is set forth in the following
table and demonstrates the variability of such costs between
periods, given the nature of the leases that we execute with our
customers.
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Weighted Avg
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Year Ended
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Six Months
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January 1,
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December 31,
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Ended
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2008-
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2008
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2009
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June 30, 2010
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June 30, 2010
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Average tenant improvement costs and leasing commissions
(in thousands)
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$
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3,475
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$
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2,373
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$
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1,529
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$
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2,951
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(8)
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For the 12 months ending
June 30, 2011, the estimated costs of recurring capital
expenditures (excluding costs of tenant improvements) at our
properties are based on the weighted average annual capital
expenditures costs of $.69 per rentable square foot in our
portfolio incurred during the 12 months ended
December 31, 2008 and 2009 and the six months ended
June 30, 2010 multiplied by 1,481,741 rentable square
feet. The following table sets forth certain information
regarding capital expenditures at our properties through
June 30, 2010.
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Weighted Avg
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Year Ended
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Six Months
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January 1,
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December 31,
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Ended
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2008-
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2008
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2009
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June 30, 2010
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June 30, 2010
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Recurring capital expenditures per rentable square foot
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$
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0.37
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$
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1.07
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$
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0.29
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$
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0.69
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Total rentable square feet
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1,481,741
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Total estimated recurring capital expenditures
(in thousands)
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$
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1,023
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(9)
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Represents scheduled principal
amortization payments of the mortgage loan on the 12100 Sunrise
Valley property due during the 12 months ending June 30,
2011. We have not included repayment of our mortgage on the 427
S. LaSalle property, since this mortgage includes a
one-year
extension without any performance tests or other conditions
outside our control, which we intend to exercise.
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(10)
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Our share of estimated cash
available for distribution and estimated initial annual cash
distributions to our stockholders is based on an
estimated % aggregate partnership
interest in our operating partnership.
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(11)
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Based on a total
of shares
of our common stock to be outstanding after this offering.
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(12)
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Calculated by dividing our
estimated initial annual distribution by our share of estimated
cash available for distribution for the 12 months ending
June 30, 2011.
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42
CAPITALIZATION
The following table sets forth the capitalization of our
Predecessor as of June 30, 2010 on: (i) a historical basis;
(ii) a pro forma basis to reflect the Restructuring
Transactions (but excluding the Financing Transactions) and
(iii) a pro forma as adjusted basis to reflect the
Restructuring Transactions, the Financing Transactions and the
application of the net proceeds from this offering as set forth
under Use of Proceeds. You should read this table in
conjunction with Use of Proceeds, Selected
Historical and Pro Forma Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of OperationsLiquidity and Capital
Resources and our consolidated historical and pro forma
financial statements and the notes thereto appearing elsewhere
in this prospectus.
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June 30, 2010
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Pro Forma
|
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Historical Predecessor
|
|
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Pro Forma
|
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As
Adjusted(1)
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(In thousands)
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(Unaudited)
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(Unaudited)
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(Unaudited)
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Mortgages
payable(2)
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$
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72,054
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$
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216,519
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$
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122,919
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Redeemable noncontrolling interests in operating partnership
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500,129
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Stockholders equity:
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Preferred stock, $ par value per
share, shares
authorized, none issued or outstanding
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Common stock, $ par value per
share, shares
authorized, shares
issued and outstanding on a pro forma
basis(3)
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Additional paid in capital
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289,881
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Members equity
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188,450
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|
|
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630,113
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|
|
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Total stockholders and members equity
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|
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188,450
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|
|
|
630,113
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|
|
289,881
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|
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|
|
|
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|
|
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Total capitalization
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$
|
260,504
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|
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$
|
846,632
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$
|
912,929
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|
|
|
|
|
|
|
|
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(1)
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The closing of the Financing
Transactions will be a precondition to the consummation of this
offering and it is our intention to enter into binding
agreements or to otherwise obtain firm commitments with respect
to the Financing Transactions prior to seeking effectiveness of
the registration statement of which this prospectus is a part.
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(2)
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Mortgages payable as of June 30,
2010 on a pro forma as adjusted basis reflect
(i) $38.0 million of debt under three loans (after
giving effect to a $2.0 million fair value of debt
adjustment resulting from the Predecessors acquisition of
the Acquired Properties) secured by our 427 S. LaSalle property,
which mature in March 2011 (subject to our option to extend each
of these loans to March 2012, which option is not subject to
performance tests or conditions outside our control);
(ii) a $32.0 million construction loan on our 12100
Sunrise Valley property due June 2013, of which
$24.9 million was outstanding as of June 30, 2010 and
(iii) $60.0 million of debt secured by the 55
S. Market property, which will have a term of not less than
two years.
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(3)
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Includes shares
of common stock to be issued by us to employees (none of whom
are executive officers) in connection with the Restructuring
Transactions in exchange for profits interests previously issued
under our profits interest incentive program
and shares
of restricted stock in the aggregate to be issued to each of our
executive officers and employees under our 2010 Equity Incentive
Plan in connection with this offering, based on an initial
public offering price per share of
$ ,
the midpoint of the range set forth on the cover of this
prospectus, and excludes (a) up
to shares
issuable upon exercise of the underwriters over-allotment
option,
(b) shares
issuable upon conversion of outstanding operating partnership
units issued to the Carlyle real estate funds and their
affiliates in connection with the Restructuring Transactions,
(c) operating
partnership units to be issued by us to each of our executive
officers (other than Messrs. Ray, Bair, Price and Sistek)
under our profits interest incentive program in connection with
the Restructuring Transactions and
(d) shares
available for future issuance under our 2010 Equity Incentive
Plan immediately upon completion of this offering.
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Each $1.00 increase (decrease) in the assumed public offering
price of $ per share would
increase (decrease) each of additional paid-in capital, total
stockholders/owners equity and total capitalization
by approximately $ million,
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same, and
after deducting underwriting discounts and commissions and
estimated offering expenses payable by us. We may also increase
or decrease the number of shares we are
43
offering. Each increase of 1.0 million shares in the number
of shares offered by us, together with a concomitant $1.00
increase in the assumed offering price of
$ per share, would increase each
of additional paid-in capital, total
stockholders/owners equity and total capitalization
by approximately $ million.
Similarly, each decrease of 1.0 million shares in the
number of shares offered by us, together with a concomitant
$1.00 decrease in the assumed offering price of
$ per share, would decrease each
of additional paid-in capital, total
stockholders/owners equity and total capitalization
by approximately $ million.
The as adjusted information discussed above is illustrative only
and will be adjusted based on the actual public offering price
and other terms of this offering determined at pricing.
44
DILUTION
Purchasers of our common stock offered in this prospectus will
experience an immediate and substantial dilution of the net
tangible book value of our common stock from the initial public
offering price. At June 30, 2010, our Predecessor had a net
tangible book value of approximately
$ million, or
$ per share of our common stock to
be held by holders of operating partnership units after this
offering, assuming the exchange of operating partnership units
held by the Carlyle real estate funds or their affiliates
following the Restructuring Transactions for shares of our
common stock on a
one-for-one
basis. After giving pro forma effect to the Restructuring
Transactions, the Financing Transactions, including the sale of
the shares of our common stock offered hereby, and the use of
proceeds therefrom, the pro forma net tangible book value
at , attributable
to common stockholders would have been
$ million, or
$ per share of our common stock.
This amount represents an immediate increase in net tangible
book value of $ per share to
holders of operating partnership units and an immediate dilution
in pro forma net tangible book value of
$ per share from the assumed
public offering price of $ per
share of our common stock to new public investors. The following
table illustrates this per share dilution:
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Per share
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Assumed initial public offering price
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|
$
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Net tangible book value per share of our Predecessor as
of assuming
the exchange of all operating partnership units held by the
Carlyle real estate funds or their affiliates following the
Restructuring Transactions for shares of our common stock but
before the Financing Transactions as of June 30, 2010
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|
|
Increase in pro forma net tangible book value per share
attributable to the Restructuring Transactions, the Financing
Transactions and the use of proceeds therefrom
|
|
|
|
|
Pro forma net tangible book value per share after giving effect
to the Restructuring Transactions, the Financing Transactions
and the use of proceeds therefrom (assuming the exchange of all
operating partnership units outstanding immediately following
the Restructuring Transactions for shares of our common stock)
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new
investors
|
|
$
|
|
|
|
|
|
|
|
Differences
Between New Investors and Existing Investors in Number of Shares
and Amount Paid
The table below summarizes, as of June 30, 2010, on a pro
forma basis after giving effect to the Restructuring
Transactions, the Financing Transactions and the use of proceeds
therefrom, the differences between the number of shares of
common stock received by the Carlyle real estate funds or their
affiliates in the Restructuring Transactions (assuming the
exchange of all operating partnership units held by the Carlyle
real estate funds or their affiliates following the
Restructuring Transactions for shares of our common stock) and
the new investors purchasing shares in this offering, the total
consideration paid and the average price per share paid by the
Carlyle real estate funds or their affiliates in the
Restructuring Transactions and paid in cash by the new investors
purchasing shares in this offering (based on the net tangible
book value attributable to Carlyle real estate funds or their
affiliate receiving operating partnership units in the
Restructuring Transactions). In calculating the shares to be
issued in this offering, we used an assumed initial public
offering price of $ per share,
which is the midpoint of the price range indicated on the front
cover page of this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares/OP
|
|
|
Net Tangible Book Value of
|
|
|
|
|
|
|
Units Issued
|
|
|
Contribution/Cash(1)
|
|
|
Average Price
|
|
(dollars in thousands, except per share data)
|
|
Number
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
|
Per Share/OP Unit
|
|
|
Existing investors(2)
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
New investors
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents pro forma net tangible
book value as of June 30, 2010 of the assets contributed to
our operating partnership in the Restructuring Transactions,
giving effect to the Financing Transactions and the use of
proceeds therefrom, prior to deducting the estimated costs of
the Restructuring Transactions and the Financing Transactions.
|
45
|
|
|
(2)
|
|
Includes (i) 1,000 shares
of our common stock representing our initial capitalization,
(ii) an aggregate
of
operating partnership units acquired by the Carlyle real estate
funds and their affiliates in consideration of the contributions
by such entities to our operating partnership in the
Restructuring Transactions after giving effect to our purchase
of a portion of such operating partnership units
and
operating partnership units issued to each of our executive
officers (other than Messrs. Ray, Bair, Price and Sistek)
concurrently with the completion of this offering in exchange
for profits interests previously granted under our profits
interest incentive plan, (iii) an aggregate
of shares
of restricted stock to be issued by us to employees (none of
whom are executive officers) concurrently with the completion of
this offering in exchange for profits interests previously
granted under our profits interest incentive plan
and
shares of restricted stock in the aggregate to be issued by us
to each of our executive officers and other employees pursuant
to awards under our 2010 Equity Incentive Plan, based on an
initial public offering price of
$ per share, the midpoint of
the range set forth on the cover of this prospectus, and
excludes
(a) operating
partnership units that we will purchase from the Carlyle real
estate funds and their affiliates and
(b) operating
partnership units that we will purchase from our operating
partnership, in each case, concurrently with the completion of
this offering and the Restructuring Transactions.
|
If the underwriters option to purchase additional shares
is exercised in full, the following will occur:
|
|
|
|
|
the as adjusted number of shares of common stock held by
existing stockholders will decrease
to ,
or approximately %, of the total
number of shares of our common stock outstanding after this
offering; and
|
|
|
|
the number of shares of common stock held by new investors will
increase
to ,
or approximately %, of the total
number of shares of our common stock outstanding after this
offering.
|
46
SELECTED
HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary selected financial data
on a historical basis for our Predecessor. Our Predecessor is
comprised of the real estate activities 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, all wholly owned by CRP Fund V Holdings,
LLC. As part of our Restructuring Transactions, we will acquire
other data center properties and buildings housing office and
other space under common management, which we refer to in this
prospectus as our Acquired Properties. Our Acquired Properties
include the continuing real estate operations of
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 as our corporate headquarters, which does not generate
operating revenue. For accounting purposes, our Predecessor is
considered to be the acquiring entity in the Restructuring
Transactions and, accordingly, the acquisition of our Acquired
Properties will be recorded at fair value. For more information
regarding the Restructuring Transactions, please see
Structure and Formation of Our Company.
The historical financial information as of December 31,
2009 and 2008 and for each of the years ended December 31,
2009, 2008 and 2007 has been derived from our Predecessors
audited financial statements included elsewhere in this
prospectus. The historical financial information as of
December 31, 2007, 2006 and 2005 and for the years ended
December 31, 2006 and 2005 has been derived from our
Predecessors unaudited financial statements. The
historical financial information as of June 30, 2010 and
for each of the six months ended June 30, 2010 and 2009 has
been derived from our Predecessors unaudited financial
statements included elsewhere in this prospectus. In the opinion
of the management of our company, the unaudited interim
financial information included herein includes any adjustments
(consisting of only normal recurring adjustments) necessary to
present fairly the information set forth herein.
The unaudited pro forma condensed consolidated financial data
for the year ended December 31, 2009 and the six months
ended June 30, 2010 are presented as if this offering and
the Restructuring Transactions and Financing Transactions had
all occurred on June 30, 2010 for the pro forma condensed
consolidated balance sheet data and as of January 1, 2009
for the pro forma condensed consolidated statement of operations
data. Our pro forma financial information is not necessarily
indicative of what our actual financial position and results of
operations would have been as of the date and for the periods
indicated, nor does it purport to represent our future financial
position or results of operations.
You should read the following selected financial data in
conjunction with our pro forma financial statements, our
Predecessors historical consolidated and combined
financial statements and the related notes thereto, and our
Acquired Properties historical combined financial
statements and the related notes thereto, along with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, which are included
elsewhere in this prospectus.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
Year Ended December 31,
|
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Historical Predecessor
|
|
|
Consolidated
|
|
|
Historical Predecessor
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006(1)
|
|
|
2005(1)
|
|
|
|
(In thousands except per share data)
|
|
|
(In thousands except per share data)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
66,567
|
|
|
$
|
21,419
|
|
|
$
|
12,362
|
|
|
$
|
114,011
|
|
|
$
|
28,831
|
|
|
$
|
15,581
|
|
|
$
|
10,349
|
|
|
$
|
|
|
|
$
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and maintenance
|
|
|
20,742
|
|
|
|
8,465
|
|
|
|
6,586
|
|
|
|
37,466
|
|
|
|
13,954
|
|
|
|
11,258
|
|
|
|
4,451
|
|
|
|
|
|
|
|
|
|
Management fees to related party
|
|
|
|
|
|
|
2,295
|
|
|
|
914
|
|
|
|
|
|
|
|
2,244
|
|
|
|
1,523
|
|
|
|
363
|
|
|
|
|
|
|
|
|
|
Real estate taxes and insurance
|
|
|
2,836
|
|
|
|
812
|
|
|
|
903
|
|
|
|
5,730
|
|
|
|
1,787
|
|
|
|
2,125
|
|
|
|
1,015
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
18,661
|
|
|
|
6,948
|
|
|
|
5,279
|
|
|
|
41,330
|
|
|
|
11,193
|
|
|
|
7,966
|
|
|
|
3,528
|
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
1,178
|
|
|
|
59
|
|
|
|
63
|
|
|
|
2,650
|
|
|
|
135
|
|
|
|
170
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
12,308
|
|
|
|
501
|
|
|
|
633
|
|
|
|
22,042
|
|
|
|
1,401
|
|
|
|
1,325
|
|
|
|
267
|
|
|
|
|
|
|
|
|
|
Rent expense
|
|
|
9,411
|
|
|
|
1,389
|
|
|
|
1,438
|
|
|
|
19,206
|
|
|
|
2,816
|
|
|
|
2,624
|
|
|
|
509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,136
|
|
|
|
20,469
|
|
|
|
15,816
|
|
|
|
128,424
|
|
|
|
33,530
|
|
|
|
26,991
|
|
|
|
10,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
1,431
|
|
|
|
950
|
|
|
|
(3,454
|
)
|
|
|
(14,413
|
)
|
|
|
(4,699
|
)
|
|
|
(11,410
|
)
|
|
|
156
|
|
|
|
|
|
|
|
|
|
Other income and expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4
|
|
|
|
|
|
|
|
2
|
|
|
|
79
|
|
|
|
3
|
|
|
|
17
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(3,841
|
)
|
|
|
(911
|
)
|
|
|
(1,178
|
)
|
|
|
(7,460
|
)
|
|
|
(2,343
|
)
|
|
|
(2,495
|
)
|
|
|
(2,123
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(2,406
|
)
|
|
|
39
|
|
|
|
(4,630
|
)
|
|
|
(21,794
|
)
|
|
|
(7,039
|
)
|
|
|
(13,888
|
)
|
|
|
2,571
|
|
|
|
|
|
|
|
|
|
Net loss attributable to redeemable noncontrolling interests in
operating partnership
|
|
|
(1,521
|
)
|
|
|
|
|
|
|
|
|
|
|
(13,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to controlling interests
|
|
$
|
(885
|
)
|
|
$
|
39
|
|
|
$
|
(4,630
|
)
|
|
$
|
(8,020
|
)
|
|
$
|
(7,039
|
)
|
|
$
|
(13,888
|
)
|
|
$
|
2,571
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma (earning/loss) per sharebasic and diluted
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average common shares - basic and undiluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 31,
|
|
|
As of December 31,
|
|
|
|
Pro Forma
|
|
|
Historical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Predecessor
|
|
|
Historical Predecessor
|
|
|
|
2010
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006(1)
|
|
|
2005(1)
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investments in real estate
|
|
$
|
632,848
|
|
|
$
|
250,838
|
|
|
$
|
218,055
|
|
|
$
|
197,493
|
|
|
$
|
151,044
|
|
|
$
|
28,432
|
|
|
$
|
|
|
Total assets
|
|
|
961,471
|
|
|
|
275,896
|
|
|
|
239,420
|
|
|
|
213,846
|
|
|
|
164,762
|
|
|
|
28,461
|
|
|
|
|
|
Mortgages payable
|
|
|
122,919
|
|
|
|
72,054
|
|
|
|
62,387
|
|
|
|
52,530
|
|
|
|
44,332
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests in operating partnership
|
|
|
500,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders and members equity
|
|
|
289,881
|
|
|
|
188,450
|
|
|
|
162,338
|
|
|
|
149,103
|
|
|
|
107,228
|
|
|
|
28,414
|
|
|
|
|
|
|
|
(1) |
The Predecessor acquired its first property in December 2006 and
did not commence operations until 2007. Accordingly, the
selected financial data does not include statement of operations
data for the years ended December 31, 2006 and 2005 or balance
sheet data as of December 31, 2005.
|
48
We consider 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 NAREIT. FFO
represents net income (loss) (computed in accordance with GAAP),
excluding gains (or losses) from sales of property, 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.
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 income (loss)
to FFO:
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Six Months Ended June 30,
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Year Ended December 31,
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Pro Forma
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Pro Forma
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Consolidated
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Historical Predecessor
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Consolidated
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Historical Predecessor
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2010
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2010
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2009
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2009
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2009
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2008
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2007
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(In thousands)
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(In thousands)
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(Unaudited)
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(Unaudited)
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Funds from Operations
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Net income (loss)
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$
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(2,406
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)
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$
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39
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$
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(4,630
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)
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$
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(21,794
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)
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$
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(7,039
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)
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$
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(13,888
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)
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$
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2,571
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Real estate depreciation and amortization
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18,488
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6,948
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5,279
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40,985
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11,193
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7,966
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3,528
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Gain on sale of real estate
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(4,500
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)
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FFO
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$
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16,082
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$
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6,987
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$
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649
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|
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$
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19,191
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$
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4,154
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$
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(5,922
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)
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$
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1,599
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49
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our
results of operations, financial condition and liquidity in
conjunction with our consolidated and combined financial
statements and the related notes included elsewhere in this
prospectus. Some of the information contained in this discussion
and analysis or set forth elsewhere in this prospectus,
including information with respect to our plans and strategies
for our business, statements regarding the industry outlook, our
expectations regarding the future performance of our business
and the other non-historical statements contained herein are
forward-looking statements. See Forward-Looking
Statements. You should also review the Risk
Factors section of this prospectus for a discussion of
important factors that could cause actual results to differ
materially from the results described herein or implied by such
forward-looking statements. Our Predecessor is comprised of the
real estate activities and holdings of a Carlyle real estate
fund that will contribute properties into our portfolio. We
refer to the assets we will acquire upon completion of this
offering and completion of the Restructuring Transactions as the
Acquired Properties, which are comprised of certain
real estate activities and holdings of the Carlyle real estate
funds or their affiliates other than our Predecessor. Since our
formation as CoreSite Realty Corporation on February 17,
2010, we have not had any corporate activity other than the
issuance of shares of common stock in connection with the
initial capitalization of our company. Because we believe that a
discussion of the historical results of CoreSite Realty
Corporation would not be meaningful, we have set forth below a
discussion of the historical operations of (i) our
Predecessor and (ii) the Acquired Properties.
Overview
We are an owner, developer and operator 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 are able to
satisfy the full spectrum of our customers data center
requirements by providing data center space ranging in size from
an entire building or large dedicated suite to a cage or
cabinet. We lease our space to a broad and growing customer base
ranging from enterprise customers to less space-intensive, more
network-centric customers. Our operational flexibility allows us
to selectively lease data center space to its highest and best
use depending on customer demand, regional economies and
property characteristics.
As of June 30, 2010, 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 NRSF, of which approximately
1.0 million NRSF is existing data center space. These
properties include 277,126 NRSF of space readily available for
lease, of which 190,788 NRSF is available for lease as data
center space. As of June 30, 2010, we had the ability to
expand our operating data center square footage by 865,621 NRSF
by redeveloping 419,371 NRSF of vacant space and developing up
to 446,250 NRSF of new data center space on land we currently
own. We expect that this redevelopment and development potential
will enable us to accommodate existing and future customer
demand and positions us to significantly increase our cash flows.
For the years ended December 31, 2009 and 2008, our
Predecessor had net losses of $7.0 million and
$13.9 million, respectively. These losses were primarily a
result of
year-over-year
increased depreciation and amortization expense and property
operating and maintenance costs during the period of
lease-up to
stabilization of our Predecessors properties. Increased
interest expense from property level debt incurred to fund the
acquisition and development of our Predecessors properties
has also contributed to these historical losses. Our ability to
achieve profitability is dependent upon a number of risks and
uncertainties discussed in the section Risk Factors,
many of which are beyond our control. We cannot assure you that
we will be successful in executing our business strategy and
become profitable following the Restructuring Transactions and,
if we achieve profitability, given the competitive nature of the
industry in which we operate, we may not be able to sustain
profitability or grow our business at the levels we anticipate.
Acquisitions, Redevelopment and
Development. The following sets forth the
acquisition, redevelopment and development activities for our
Predecessor and the entities contributing the Acquired
Properties since
50
January 1, 2007. We refer to each entity contributing a
property as a Contributing Entity. All NRSF totals
presented below are as of June 30, 2010.
Operating
Property Acquisitions and Operating Leases
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February 2007A Contributing Entity acquired
427 S. LaSalle, located in downtown Chicago, for
$35.0 million, which comprises 175,073 NRSF of operating
space and 5,309 NRSF of vacant redevelopment space.
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February 2007Our Predecessor acquired the
Coronado-Stender Business Park in Santa Clara, California
for $37.8 million, which consists of 15.75 contiguous acres
in Santa Clara, California. The Coronado-Stender Business Park
encompasses: (i) the Coronado-Stender Properties, a development
site consisting of 9.1 acres housing
(a) five buildings with 78,800 NRSF of office and
light-industrial operating space and (b) 50,400 NRSF
of vacant space on land held for development, (ii) 2901
Coronado, a 50,000 NRSF building on 3.14 acres and
(iii) 2972 Stender, a 50,400 NRSF building on
3.51 acres planned for development. Subject to
entitlements, we believe the Coronado-Stender Properties and
2972 Stender can be developed into up to 446,250 NRSF of data
center space in addition to the 50,000 NRSF of data center space
completed during the second quarter of 2010 at 2901 Coronado.
See Development Projects.
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April 2007Our Predecessor acquired 70
Innerbelt, located just outside of Bostons central
business district, for $32.5 million, which comprises
121,591 NRSF of operating space and 155,015 NRSF of vacant
redevelopment space.
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June 2007Our Predecessor entered into a
lease for the seventh floor in the 32 Avenue of the Americas
building in New York City. This lease accounts for 49,303 total
NRSF, of which 48,404 NRSF is operating space.
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August 2007A Contributing Entity entered
into a lease for space in the One Wilshire building in Los
Angeles, California. This lease accounts for 172,970 total
square feet, of which 164,021 NRSF is operating space.
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December 2007Our Predecessor acquired 12100
Sunrise Valley, located in Reston, Virginia, for
$45.0 million, which comprises 154,848 NRSF of operating
space and 107,921 NRSF of vacant redevelopment space.
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Redevelopment
History
Since the acquisition of our first property
55 S. Market, an Acquired Property, in February 2000,
we have completed over 30 data center redevelopment projects.
Included among these, from January 1, 2006 through
June 30, 2010, we completed 28 projects totaling 570,586
NRSF, representing 52.6% of our existing data center NRSF. In
addition to our completed redevelopment projects, at
June 30, 2010, we were in the process of redeveloping or
developing a total of 85,434 NRSF of additional data center
space.
Development
Projects
In March 2010, our Predecessor signed a six-year lease with a
leading online social networking company for 100% of the 50,000
NRSF of high-quality data center space at 2901 Coronado, which
is located within the Coronado-Stender Business Park. The
development site for 2901 Coronado was acquired by our
Predecessor as a component of the Coronado-Stender Business
Park. Since acquiring the Coronado-Stender Business Park, as of
June 30, 2010, our Predecessor had invested
$38.2 million in connection with the development of 2901
Coronado and additional improvements to the Coronado-Stender
Properties. In addition, we are currently in the process of
developing 2972 Stender into a 50,400 NRSF data center. We
have submitted a request for a negative declaration from the
City of Santa Clara to enable us to construct up to an
additional 50,600 NRSF at this building, for a total of up to
101,000 NRSF of data center space. Should we obtain entitlements
to construct the additional 50,600 NRSF and, provided we then
believe market demand warrants and that it would be the best use
of our capital available for expansion, we may elect to
construct the entire 101,000 NRSF of space, comprised of the
initial 50,400 NRSF of data center space plus the incremental
50,600 NRSF of unconditioned core and shell space held for
potential future development into data center space.
51
Redevelopment and Development. We
identify space suitable for redevelopment and development both
at the time we purchase an asset and from time to time as we own
and operate an asset. We often strategically purchase properties
with large vacancies or expected near-term lease roll-over and
use our extensive knowledge of the property and market to
determine the optimal use and customer mix. Generally, a
redevelopment consists of a range of improvements to a property,
including upgrades to existing data center space by adding
additional power and cooling capabilities
and/or a
targeted remodeling of common areas and customer spaces to make
the property more attractive to certain customers. A development
may involve a more comprehensive structural renovation of an
existing building to significantly upgrade the character of the
property, or it may involve
ground-up
construction of a new building to support data center
operations. The redevelopment or development process generally
occurs in stages and requires significant capital expenditures
in many cases.
The Restructuring
Transactions. Immediately prior to the
completion of the initial public offering of our common stock,
we will enter into a series of transactions with the Carlyle
real estate funds or their affiliates to create our new
organizational structure. These transactions, which we refer to
as our Restructuring Transactions, are described more fully
under the caption Certain Relationships and Related Party
TransactionsThe Restructuring Transactions.
As a result of the Restructuring Transactions, after the
completion of this offering, substantially all of our assets
will be held by, and our operations conducted through, CoreSite,
L.P. and its subsidiaries. All of our interconnection services
will be provided by our TRS, CoreSite Services, Inc., a wholly
owned subsidiary of our operating partnership. We will control
CoreSite, L.P. as general partner and as the owner of
approximately % of the interests in
our operating partnership. Our primary asset will be our general
and limited partner interests in our operating partnership.
Revenues. Our operating revenue
generally consists of base rent, power, tenant reimbursements
and interconnection services. Upon completion of this offering
and consummation of the Restructuring Transactions, the Acquired
Properties will no longer earn and record management fees
revenue as the management services provided to the Predecessor
will be eliminated. Additionally, following the Restructuring
Transactions, our property portfolio will include nine owned
properties and three leased properties with an aggregate of
2.0 million NRSF. As of June 30, 2010, our operating
facilities were approximately 81.3% leased at an annualized rent
per leased NRSF of $71.14 and during the six months ending
December 31, 2010, represented 8.2% of our portfolios
NRSF and 14.4% of our portfolios annualized rent. As of
June 30, 2010, and based on annualized rent, our
dollar-weighted average lease term was 5.0 years.
As of June 30, 2010, of the 1,085,099 NRSF of operating
data center space in our portfolio, our data center facilities
were approximately 82.4% leased at an annualized rent per leased
NRSF of $88.83. Leases scheduled to expire during the six months
ending December 31, 2010 represented 12.3% of our data
center portfolios leased NRSF and 14.0% of our data center
portfolios annualized rent.
Operating Expenses. Our operating
expenses generally consist of utilities, site maintenance costs
(including
on-site
personnel and security, repairs and maintenance), real estate
and personal property taxes, insurance, selling, general and
administrative and rental expenses on our leased properties.
With respect to property operating expenses, many of our
customer leases are full service gross or modified gross, both
net of electricity expense, as more fully described below.
Following the completion of this offering, as a public company,
we estimate our annual general and administrative expenses will
increase by approximately $6.8 million initially due to
increased property taxes, insurance premiums and increased
legal, accounting and other expenses related to corporate
governance, public reporting and compliance with the various
provisions of the Sarbanes-Oxley Act of 2002, and we will not be
able to pass through a significant amount of these costs to our
customers. We believe our general and administrative expenses
will decrease as a percentage of revenue to the extent that we
experience revenue growth in future periods.
Factors
that May Influence our Results of Operations
Rental Income. Our ability to grow the
amount of net rental income generated by the properties in our
portfolio depends principally on our ability to maintain the
historical occupancy rates of currently leased space
52
and to lease currently available space and space that becomes
available from leases that expire or are terminated. As of
June 30, 2010, our operating facilities comprised
approximately 73.0% of our total NRSF. Our ability to grow the
rental income generated by us also depends on our ability to
maintain or increase rental rates at our properties. Negative
trends in one or more of these factors could adversely affect
our rental income in future periods. Future economic downturns
or regional downturns affecting our markets or downturns in the
technology industry that impair our ability to renew or re-lease
space and the ability of our customers to fulfill their lease
commitments, as in the case of customer bankruptcies, could
adversely affect our ability to maintain or increase rental
rates at our properties.
Leasing Arrangements. Historically,
many of our properties have been leased to customers on a full
service gross or a modified gross basis, both net of electricity
expense, and to a limited extent on a triple net lease basis. We
expect to continue to do so in the future. Under a full service
gross lease, the customer pays a fixed annual rent on a monthly
basis, and in return we are required to pay all maintenance,
repair, property taxes, insurance, and selling, general and
administrative expenses. Under a modified gross lease, the
customer has a base-year expense stop, whereby the customer pays
a stated amount of certain expenses as part of the rent payment,
while future increases (above the base-year stop) in property
operating expenses are billed to the customer based on such
customers proportionate square footage of the property and
other factors. The increased property operating expenses billed
are reflected as customer reimbursements in the statements of
operations. Finally, in a triple net lease, the customer is
responsible for all operating expenses, property taxes and
insurance. As such, the base rent payment does not include any
operating expense, but rather all such expenses are billed to
the customer. The full amount of the expenses for this lease
type is reflected in customer reimbursements. Since a portion of
our revenue consists of those expenses reimbursed to us by our
customers, in any given period our revenue will be determined in
part by the amount of expenses that are reimbursed by our
customers.
The following table sets forth the NRSF of our portfolio leased
under full service gross, modified gross and triple net leases
as well as the annualized rent attributable to such leases as of
June 30, 2010:
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Full Service Gross
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Modified Gross
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Triple Net
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Total
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Leased NRSF
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633,535
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147,295
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423,785
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1,204,615
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% of Total
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52.6%
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12.2%
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35.2%
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Annualized Rent
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$
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62,562
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$
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4,057
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$
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19,096
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$
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85,695
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% of Total
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73.0%
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4.7%
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22.3%
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Substantially all of our data center NRSF are subject to the
breakered-amp
or sub-metered (branch circuit monitoring) pricing models. The
allocation between the two models across our data center
customer base does not materially affect our ability to recover
our electricity costs because we separately recover all or
substantially all of our electricity costs for all of our leased
data center space under either model. Under the sub-metered
model, a customer pays us monthly for the power attributable to
its equipment in the data center as well as for its ratable
allocation of the power used to provide the cooling, lighting,
security and other requirements supporting the data center, in
each case, at a rate substantially equivalent to our then
current cost of electricity. Under
breakered-amp
leases a customer pays a fixed monthly fee per committed
available ampere of connected power. The extent to which this
fixed monthly fee correlates to the monthly amount we pay to our
utility provider for electricity at each data center facility
varies depending upon the amount of power each customer utilizes
each month relative to the amount of committed power purchased.
Under the
breakered-amp
model a customers base rent per NRSF is generally lower
than in the branch-circuit monitoring model reflecting the
differing approach to electricity cost recovery between the two
models. Fluctuations in our customers monthly utilization
of power and the prices our utility providers charge us for
power impact our operating revenue, expense and earnings
differently depending upon the applicable power pricing model.
Under
breakered-amp
leases, such fluctuations do not impact our operating revenue
but do impact our operating expense and as such our earnings.
This is because our
breakered-amp
customers pay for an amount of committed power regardless of the
amount of power they use and we recognize the difference between
monthly revenue from
breakered-amp
power commitments and our monthly electricity costs as income.
Accordingly, in any month our
breakered-amp
revenue is fixed whereas our related expense (which is dependent
on utilization) can fluctuate. For leases under our sub-metered
model, fluctuations in our customers monthly utilization
of power and the prices our utility providers charge us for
power impact our operating revenue and operating expense
similarly and as such do not
53
materially impact our earnings. Additionally, under each model,
during the initial
lease-up
period, we generally do not fully recover our electricity costs
attributable to the power used to provide the cooling, lighting,
security and other requirements supporting the data center.
Scheduled Lease Expirations. Our
ability to re-lease expiring space will impact our results of
operations. As of June 30, 2010, approximately 277,126 NRSF
of our portfolio represented currently available space and
leases representing approximately 8.2% and 17.9% of the NRSF
across our portfolio were scheduled to expire during the years
ending December 31, 2010 and 2011, respectively. These
leases, scheduled to expire during the years ending
December 31, 2010 and 2011, also represented approximately
14.4% and 20.4%, respectively, of our annualized rent as of
June 30, 2010.
Acquisitions, Redevelopment and
Development. Our ability to grow rental
income will depend on our ability to acquire, redevelop, develop
and lease data center space at favorable rates. As of
June 30, 2010, we had approximately 419,371 NRSF of
redevelopment space, or approximately 20.7% of the total space
in our portfolio. In addition, during the second quarter of
2010, we completed development on a 50,000 NRSF data center at
2901 Coronado, Santa Clara, California. During March 2010, we
entered into a lease for 100% of this space with a leading
online social networking company. Our portfolio also contains a
50,400 NRSF data center under construction and five
buildings on a 9.1 acre development site in
Santa Clara, California, which we believe can be developed
into up to 446,250 NRSF of data center space.
Conditions in Significant Markets. Our
operating properties are located in Los Angeles, the San
Francisco Bay and Northern Virginia areas, Chicago, Boston, New
York City and Miami. These markets comprised 36.7%, 31.5%,
12.5%, 7.0%, 6.4%, 4.4% and 1.5%, respectively, of our
annualized rent as of June 30, 2010. Positive or negative
changes in conditions in these markets will impact our overall
performance.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our Predecessors and
Acquired Properties historical 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 Predecessors and
Acquired Properties financial statements included
elsewhere in this prospectus. 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. Subsequent to the
completion of the Financing, these same critical accounting
policies and estimates will also be used in our financial
statements. 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. We depreciate the
54
buildings, on average, over 39 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.
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.
55
Our
Portfolio
The following table provides an overview of our properties as of
June 30, 2010 after giving effect to the Restructuring
Transactions.
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|
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|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NRSF
|
|
|
|
|
|
|
|
|
|
|
Operating(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Office and Light-
|
|
|
|
|
|
|
|
|
Redevelopment and
|
|
|
|
|
|
|
|
|
|
|
Annualized
|
|
|
Data
Center(2)
|
|
|
Industrial(3)
|
|
|
Total
|
|
|
Development(4)
|
|
|
|
|
|
|
Metropolitan
|
|
Acquisition
|
|
Rent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
Percent
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|
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Under
|
|
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|
|
|
|
|
|
Total
|
|
Facilities
|
|
Area
|
|
Date(5)
|
|
($000)(6)
|
|
|
Total
|
|
|
Leased(7)
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|
|
Total
|
|
|
Leased(7)
|
|
|
Total(8)
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|
|
Leased(7)
|
|
|
Construction(9)
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|
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Vacant
|
|
|
Total
|
|
|
Portfolio
|
|
|
Predecessor Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
12100 Sunrise Valley
|
|
Northern Virginia
|
|
Dec. 2007
|
|
$
|
8,838
|
|
|
|
116,498
|
|
|
|
70.5
|
%
|
|
|
38,350
|
|
|
|
99.2
|
%
|
|
|
154,848
|
|
|
|
77.6
|
%
|
|
|
|
|
|
|
107,921
|
|
|
|
107,921
|
|
|
|
262,769
|
|
2901 Coronado
|
|
San Francisco Bay
|
|
Feb. 2007
|
|
|
8,820
|
|
|
|
50,000
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
1656 McCarthy
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|
San Francisco Bay
|
|
Dec. 2006
|
|
|
6,507
|
|
|
|
71,847
|
|
|
|
85.7
|
|
|
|
|
|
|
|
|
|
|
|
71,847
|
|
|
|
85.7
|
|
|
|
4,829
|
|
|
|
|
|
|
|
4,829
|
|
|
|
76,676
|
|
70 Innerbelt
|
|
Boston
|
|
Apr. 2007
|
|
|
5,506
|
|
|
|
118,991
|
|
|
|
94.0
|
|
|
|
2,600
|
|
|
|
57.1
|
|
|
|
121,591
|
|
|
|
93.2
|
|
|
|
25,118
|
|
|
|
129,897
|
|
|
|
155,015
|
|
|
|
276,606
|
|
32 Avenue of the Americas*
|
|
New York
|
|
June 2007
|
|
|
3,730
|
|
|
|
48,404
|
|
|
|
68.8
|
|
|
|
|
|
|
|
|
|
|
|
48,404
|
|
|
|
68.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,404
|
|
Coronado-Stender
Properties(10)
|
|
San Francisco Bay
|
|
Feb. 2007
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
|
78,800
|
|
|
|
74.3
|
|
|
|
78,800
|
|
|
|
74.3
|
|
|
|
|
|
|
|
50,400
|
|
|
|
50,400
|
|
|
|
129,200
|
|
2972
Stender(11)
|
|
San Francisco Bay
|
|
Feb. 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,400
|
|
|
|
|
|
|
|
50,400
|
|
|
|
50,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Predecessor
|
|
$
|
34,079
|
|
|
|
405,740
|
|
|
|
83.5
|
%
|
|
|
119,750
|
|
|
|
81.9
|
%
|
|
|
525,490
|
|
|
|
83.1
|
%
|
|
|
80,347
|
|
|
|
288,218
|
|
|
|
368,565
|
|
|
|
894,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Facilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Wilshire*
|
|
Los Angeles
|
|
Aug. 2007
|
|
$
|
20,391
|
|
|
|
156,521
|
|
|
|
74.1
|
%
|
|
|
7,500
|
|
|
|
62.2
|
%
|
|
|
164,021
|
|
|
|
73.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,021
|
|
900 N. Alameda
|
|
Los Angeles
|
|
Oct. 2006
|
|
|
11,044
|
|
|
|
256,690
|
|
|
|
91.1
|
|
|
|
16,622
|
|
|
|
7.1
|
|
|
|
273,312
|
|
|
|
86.0
|
|
|
|
16,126
|
|
|
|
144,721
|
|
|
|
160,847
|
|
|
|
434,159
|
|
55 S. Market
|
|
San Francisco Bay
|
|
Feb. 2000
|
|
|
11,003
|
|
|
|
84,045
|
|
|
|
86.5
|
|
|
|
205,846
|
|
|
|
77.9
|
|
|
|
289,891
|
|
|
|
80.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,891
|
|
427 S. LaSalle
|
|
Chicago
|
|
Feb. 2007
|
|
|
5,950
|
|
|
|
129,790
|
|
|
|
74.5
|
|
|
|
45,283
|
|
|
|
100.0
|
|
|
|
175,073
|
|
|
|
81.1
|
|
|
|
|
|
|
|
5,309
|
|
|
|
5,309
|
|
|
|
180,382
|
|
1275 K Street*
|
|
Northern Virginia
|
|
June 2006
|
|
|
1,914
|
|
|
|
22,137
|
|
|
|
96.6
|
|
|
|
|
|
|
|
|
|
|
|
22,137
|
|
|
|
96.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,137
|
|
2115 NW 22nd Street
|
|
Miami
|
|
June 2006
|
|
|
1,314
|
|
|
|
30,176
|
|
|
|
49.4
|
|
|
|
1,641
|
|
|
|
40.2
|
|
|
|
31,817
|
|
|
|
49.0
|
|
|
|
|
|
|
|
13,447
|
|
|
|
13,447
|
|
|
|
45,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal Acquired
|
|
|
51,616
|
|
|
|
679,359
|
|
|
|
81.8
|
%
|
|
|
276,892
|
|
|
|
76.6
|
%
|
|
|
956,251
|
|
|
|
80.3
|
%
|
|
|
16,126
|
|
|
|
163,477
|
|
|
|
179,603
|
|
|
|
1,135,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
$
|
85,695
|
|
|
|
1,085,099
|
|
|
|
82.4
|
%
|
|
|
396,642
|
|
|
|
78.2
|
%
|
|
|
1,481,741
|
|
|
|
81.3
|
%
|
|
|
96,473
|
|
|
|
451,695
|
|
|
|
548,168
|
|
|
|
2,029,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Indicates properties in which we
hold a leasehold interest.
|
(1)
|
|
Represents the square feet at a
building under lease as specified in existing customer lease
agreements plus managements 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 an operating
facility that is currently leased or readily available for lease
as data center space. Both leased and available data center NRSF
include a customers 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 an 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 use.
|
(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)
|
|
Represents the date a property was
acquired by a Carlyle real estate fund or, in the case of a
property under lease, the date the initial lease commenced for
the property.
|
|
|
|
(6)
|
|
Represents the monthly contractual
rent under existing customer leases as of June 30, 2010
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. Total abatements for leases in
effect as of June 30, 2010 for the 12 months ending
June 30, 2011 were $26,303. On a gross basis, our
annualized rent was approximately $90,792,000 as of
June 30, 2010, which reflects the addition of $4,341,014 in
operating expense reimbursements to contractual net rent under
modified gross and
triple-net
leases.
|
|
|
|
(7)
|
|
Includes customer leases in effect
as of June 30, 2010. 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. Of
the 96,473 NRSF under construction as of June 30,
2010, 85,434 NRSF was data center space and
11,039 NRSF was ancillary data center support space.
|
(10)
|
|
We currently have the ability to
develop 129,200 NRSF of data center space at the
Coronado-Stender Properties and, subject to our obtaining a
negative declaration from the City of Santa Clara, we
believe that we will be able to develop an additional 216,050
NRSF, or up to 345,250 NRSF in the aggregate, of data center
space at this property. See Business and
PropertiesDescription of Our
PortfolioCoronado-Stender Business Park, Santa Clara,
California.
|
(11)
|
|
We currently have the ability to
develop 50,400 NRSF of data center space at
2972 Stender. We have submitted a request for a negative
declaration from the City of Santa Clara to enable us to
construct up to an additional 50,600 NRSF at this
|
56
|
|
|
|
|
building, for a total of up to
101,000 NRSF of data center space. We are under
construction on the currently entitled 50,400 NRSF of data
center space. Should we obtain entitlements to construct the
additional 50,600 NRSF and, provided we then believe market
demand warrants and that it would be the best use of our capital
available for expansion, we may elect to construct the entire
101,000 NRSF of space, comprised of the initial
50,400 NRSF of data center space plus the incremental
50,600 NRSF of unconditioned core and shell space held for
potential future development into data center space. See
Business and PropertiesDescription of Our
PortfolioCoronado-Stender Business Park, Santa Clara,
California.
|
Results
of Operations
Since our formation on February 17, 2010 we have not had
any corporate activity other than the issuance of shares of
common stock in connection with the initial capitalization of
our company. Because we believe that a discussion of the
operating results for this limited period would not be
meaningful, we have set forth below a discussion of the results
of operations of our accounting predecessor, or our Predecessor,
CRP Fund V Holdings, LLC, which consisted of the operations
of four wholly owned operating properties and one development
property. Separately, we have presented a discussion of the
combined results of operations of the other properties in our
portfolio, or our Acquired Properties, which consisted of six
operating properties and a property leased as our corporate
headquarters, which does not generate operating revenue. Our
Acquired Properties do not comprise a legal entity, but rather a
combination of assets from certain Carlyle real estate funds,
and their respective wholly owned subsidiaries, that have common
management. The historical combined financial statements of our
Acquired Properties contained in this prospectus represent the
combination of the financial statements of those entities. We
believe that the results of our Acquired Properties, when
considered along with the results of our Predecessor, present a
more comprehensive picture of our historical operating results
than our Predecessor alone. In addition, the historical results
of operations presented below should be reviewed along with the
pro forma financial information contained elsewhere in this
prospectus, which includes adjustments related to the effects of
the Restructuring Transactions and the Financing Transactions.
Results
of Operations of Our Predecessor
During the periods presented below, our Predecessor, CRP
Fund V Holdings, LLC, consisted of four wholly owned
properties operating as data centers including 1656 McCarthy, 32
Avenue of the Americas, 12100 Sunrise Valley and 70 Innerbelt,
as well as the Coronado-Stender Business Park in Santa Clara,
California, consisting of 2901 Coronado, a 50,000 NRSF data
center completed during the second quarter of 2010,
2972 Stender, a 50,400 NRSF data center under
construction and the Coronado-Stender Properties, a
9.1 acre development site that houses five buildings.
Certain of the five buildings located at the Coronado-Stender
Properties are under short-term lease for office or
light-industrial use, which operating revenue is reflected in
our Predecessors results of operations for the periods
presented below. We completed the first phase of 2901 Coronado
in April 2010, and completed the remainder by the end of the
second quarter of 2010. During March 2010, we fully leased this
space to a leading online social networking company pursuant to
a six-year lease.
Three
Months Ended June 30, 2010 Compared to Three Months Ended
June 30, 2009
Operating Revenue. Operating revenue for the three months
ended June 30, 2010 was $12.4 million. This includes
rental revenue of $8.8 million, power revenue of
$2.7 million, tenant reimbursements of $0.4 million
and other revenue of $0.4 million, primarily from
interconnection services. This compares to revenue of
$6.3 million for the three months ended June 30, 2009.
The increase of $6.0 million, or 95%, was due primarily to
$4.7 million of increased rental revenue due to the
placement into service and subsequent leasing of 2901 Coronado
during the second quarter of 2010, the placement into service
and subsequent leasing of expansion space completed in the
second half of 2009 at 12100 Sunrise Valley and the continued
lease up of 32 Avenue of the Americas, 1656 McCarthy and 70
Innerbelt and $1.0 million of increased power revenue
related to the increased occupancy at these locations.
Operating Expenses. Operating expenses for the three
months ended June 30, 2010 were $11.0 million compared
to $8.4 million for the three months ended June 30,
2009. The increase of $2.6 million, or 32%, was primarily
due to increased property operating and maintenance costs and
depreciation and amortization expense of $1.1 million and
$1.0 million, respectively, mainly resulting from the
placement into service and
57
subsequent leasing of 2901 Coronado during the second quarter of
2010 and the placement into service and subsequent leasing of
expansion space completed in the second half of 2009 at 12100
Sunrise Valley.
Interest Expense. Interest expense, including
amortization of deferred financing costs, for the three months
ended June 30, 2010 was $0.4 million compared to
interest expense of $0.6 million for the three months ended
June 30, 2009. The decrease in interest expense was due to
lower interest rates on our floating rate debt and increased
capitalized interest related to the construction of 2901
Coronado during the three months ended June 30, 2010
partially offset by increased debt balances.
Net Income (Loss). Net income for the three months ended
June 30, 2010 was $0.9 million compared to a net loss
of $2.6 million for the three months ended June 30,
2009. The increase of $3.6 million was primarily due to
increased operating revenue from the placement into service and
subsequent leasing of 2901 Coronado during the second quarter of
2010 and the placement into service and subsequent leasing of
expansion space completed in the second half of 2009 at 12100
Sunrise Valley partially offset by increased property
depreciation and amortization expense and property operating and
maintenance costs.
Six
Months Ended June, 2010 Compared to Six Months Ended
June 30, 2009
Operating Revenue. Operating revenue for the six months
ended June 30, 2010 was $21.4 million. This includes
rental revenue of $15.0 million, power revenue of
$4.9 million, tenant reimbursements of $0.7 million
and other revenue of $0.8 million, primarily from
interconnection services. This compares to revenue of
$12.4 million for the six months ended June 30, 2009.
The increase of $9.1 million, or 73%, was due primarily to
$7.1 million of increased rental revenue due to the
placement into service and subsequent leasing of 2901 Coronado
during the second quarter of 2010, the placement into service
and subsequent leasing of expansion space completed in the
second half of 2009 at 12100 Sunrise Valley and the continued
lease up of 32 Avenue of the Americas, 1656 McCarthy and 70
Innerbelt and $1.9 million of increased power revenue
related to the increased occupancy at these locations.
Operating Expenses. Operating expenses for the six months
ended June 30, 2010 were $20.5 million compared to
$15.8 million for the six months ended June 30, 2009.
The increase of $4.7 million, or 29%, was primarily due to
increased property operating and maintenance costs and
depreciation and amortization expense of $1.9 million and
$1.7 million, respectively, mainly resulting from the
placement into service and subsequent leasing of 2901 Coronado
during the second quarter of 2010 and the placement into service
and subsequent leasing of expansion space completed in the
second half of 2009 at 12100 Sunrise Valley.
Interest Expense. Interest expense, including
amortization of deferred financing costs, for the six months
ended June 30, 2010 was $0.9 million compared to
interest expense of $1.2 million for the six months ended
June 30, 2009. The decrease in interest expense was due to
lower interest rates on our floating rate debt and increased
capitalized interest related to the construction of 2901
Coronado during the six months ended June 30, 2010
partially offset by increased debt balances.
Net Income (Loss). Net income for the six months ended
June 30, 2010 was less than $0.1 million compared to a
net loss of $4.6 million for the six months ended
June 30, 2009. The increase of $4.6 million was
primarily due to increased operating revenue from the placement
into service and subsequent leasing of 2901 Coronado during the
second quarter of 2010 and the placement into service and
subsequent leasing of expansion space completed in the second
half of 2009 at 12100 Sunrise Valley partially offset by
increased property depreciation and amortization expense and
property operating and maintenance costs.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Operating Revenue. Operating revenue for the
year ended December 31, 2009 was $28.8 million. This
includes rental revenue of $19.0 million, power revenue of
$7.4 million, tenant reimbursements of $1.1 million
and other revenue of $1.4 million, primarily from
interconnection services. This compares to revenue of
$15.6 million for the year ended December 31, 2008.
The increase of $13.3 million, or 85%, was due primarily to
$10.4 million of increased rental revenue due to a full
year of operations at 32 Avenue of the Americas and 12100
Sunrise Valley which were placed into service during the third
quarter of 2008 and the
58
continued lease up of 1656 McCarthy and 70 Innerbelt and
$2.4 million of increased power revenue resulting from the
increased occupancy at these locations.
Operating Expenses. Operating expenses for the
year ended December 31, 2009 were $33.5 million
compared to $27.0 million for the year ended
December 31, 2008. The increase of $6.5 million, or
24%, was primarily due to increased depreciation and
amortization expense of $3.2 million resulting from a full
of year of depreciation for 32 Avenue of the Americas and 12100
Sunrise Valley which were both placed into service during the
third quarter of 2008 and $2.7 million of increased
property operating and maintenance expenses due to the continued
lease up of properties in 2009.
Interest Expense. Interest expense, including
amortization of deferred financing costs, for the year ended
December 31, 2009 was $2.3 million compared to
interest expense of $2.5 million for the year ended
December 31, 2008. The decrease in interest expense was due
to lower interest rates on floating rate debt partially offset
by increased debt balances.
Net Loss. Net loss for the year ended
December 31, 2009 was $7.0 million compared to a net
loss of $13.9 million for the year ended December 31,
2008. The decrease of $6.9 million was primarily due to
increased operating revenue from the continued lease up
activities partially offset by increased property depreciation
and amortization expense and property operating and maintenance
costs.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Operating Revenue. Operating revenue for the
year ended December 31, 2008 was $15.6 million. This
includes rental revenue of $8.6 million, power revenue of
$5.0 million, tenant reimbursements of $1.2 million
and other revenue of $0.8 million, primarily from
interconnection services. This compares to revenue of
$10.3 million for the year ended December 31, 2007.
The increase of $5.2 million, or 51%, was due primarily to
the following: $3.5 million of increased rental revenue
resulting from the commencement of operations at 32 Avenue of
the Americas and 12100 Sunrise Valley during the third quarter
of 2008 and a full year of operations at the remaining
properties which were all acquired during 2007 and
$2.0 million of increased power revenue resulting from the
increased occupancy at these locations.
Operating Expenses. Operating expenses for the
year ended December 31, 2008 were $27.0 million
compared to $10.2 million for the year ended
December 31, 2007. The increase of $16.8 million, or
165%, was primarily due to the following: $6.8 million of
increased property operating and maintenance costs due to the
continued lease up of properties in 2008, increased depreciation
and amortization expense of $4.4 million resulting from the
placement of 32 Avenue of the Americas and 12100 Sunrise Valley
into service during the third quarter of 2008 and a full of year
of depreciation and amortization for the remaining properties
which were all acquired and placed into service at varying times
during 2007, $2.1 million of increased rent expense at 32
Avenue of the Americas resulting from a full year of rent
expense compared to 2007 which included rent expense subsequent
to the execution of the property lease in June, 2007,
$1.2 million of increased management fees primarily due to
the increase in operating revenues and leasing activities, and
$1.1 million of increased real estate taxes and insurance
from 32 Avenue of the Americas and 12100 Sunrise Valley which
had capitalized these costs prior to the respective
propertys placement into service during the third quarter
of 2008.
Net Income (Loss). Net loss for the year ended
December 31, 2008 was $13.9 million compared to net
income of $2.6 million for the year ended December 31,
2007. The decrease of $16.5 million was primarily due to
the gain on the sale of four buildings owned by CRP Oak
Creek V, LLC recognized in 2007, and the increased
operating expenses in 2008 as previously discussed, partially
offset by the placement of 32 Avenue of the Americas and 12100
Sunrise Valley into service during the third quarter of 2008 and
increased operating revenue from the continued lease up
activities.
Results
of Operations of Our Acquired Properties
During the periods presented below, our Acquired Properties
consisted of six properties operating as data centers including,
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
leased as our corporate headquarters, which does not generate
operating revenue. As discussed above, our Acquired Properties
commenced operations prior to 2007
59
with the exception of One Wilshire, concerning which we executed
our lease in August 2007 and 427 S. LaSalle, which
commenced operations in February 2007. The continued
redevelopment and development and lease up of the properties are
the primary factors that explain a significant amount of the
changes in the results of operations for our Acquired Properties
for the periods discussed below.
Three
Months Ended June 30, 2010 Compared to Three Months Ended
June 30, 2009
Operating Revenue. Operating revenue for the three months
ended June 30, 2010 was $24.9 million. This includes
rental revenue of $13.8 million, power revenue of
$5.7 million, tenant reimbursements of $0.6 million,
other revenue of $2.5 million, primarily from
interconnection services, and property management fees from
related parties of $2.2 million. This compares to revenue
of $21.7 million for the three months ended June 30,
2009. The increase of $3.2 million, or 15%, was due
primarily to increased rental revenue of $1.0 million from
increased occupancy and rental rates, increased power revenue of
$0.9 million due to the increased occupancy and
$1.1 million of increased management fees from related
parties due to increases in leasing commissions, construction
management fees and property management fees.
Operating Expenses. Operating expenses for the three
months ended June 30, 2010 were $22.5 million compared
to $19.4 million for the three months ended June 30,
2009. The increase of $3.1 million, or 16%, was primarily
due to increased depreciation and amortization expense of
$0.4 million resulting from the placement of additional
space into service at 900 N. Alameda and
427 S. LaSalle during 2009 and $2.4 million of
increased general and administrative expense primarily due to
increased employee head count and increased audit fees.
Interest Expense. Interest expense, including
amortization of deferred financing costs, for the three months
ended June 30, 2010 was $1.5 million compared to
interest expense of $1.3 million for the three months ended
June 30, 2009. The increase in interest expense was due to
an increase in the interest rate on the 900 N. Alameda
loan due to the exercise of the first loan extension in the
second half of 2009.
Net Income. Net income for the three months ended
June 30, 2010 was $0.8 million compared to
$1.0 million for the three months ended June 30, 2009.
The decrease of $0.2 million was primarily due to increased
interest expense and increased operating expenses partially
offset by increased operating revenue as discussed previously.
Six
Months Ended June 30, 2010 Compared to Six Months Ended
June 30, 2009
Operating Revenue. Operating revenue for the six months
ended June 30, 2010 was $51.5 million. This includes
rental revenue of $27.3 million, power revenue of
$11.1 million, tenant reimbursements of $1.4 million,
other revenue of $4.9 million, primarily from
interconnection services, and property management fees from
related parties of $6.7 million. This compares to revenue
of $42.5 million for the six months ended June 30,
2009. The increase of $9.1 million, or 21%, was due
primarily to increased rental revenue of $1.9 million from
increased occupancy and rental rates, increased power revenue of
$1.8 million due to the increased occupancy and
$4.7 million of increased management fees from related
parties due to increases in leasing commissions earned in
connection with the leasing of 2901 Coronado, construction
management fees and property management fees earned in
connection with the completion and placement into service of
2901 Coronado.
Operating Expenses. Operating expenses for the six months
ended June 30, 2010 were $43.6 million compared to
$37.3 million for the six months ended June 30, 2009.
The increase of $6.3 million, or 17%, was primarily due to
increased property operating and maintenance costs of
$0.9 million due to increased occupancy, increased
depreciation and amortization expense of $1.0 million
resulting from the placement of additional space into service at
900 N. Alameda and 427 S. LaSalle during
2009, $1.9 million of increased general and administrative
expense primarily due to increased employee head count and
$1.8 million of general and administrative expenses
primarily related to audit fees, consulting services and
recruiting fees incurred in connection with this offering and
the Restructuring Transactions.
Interest Expense. Interest expense, including
amortization of deferred financing costs, for the six months
ended June 30, 2010 was $3.1 million compared to
interest expense of $2.4 million for the six months ended
June 30, 2009. The increase in interest expense was due to
an increase in the interest rate on the 900 N. Alameda
loan due to the exercise of the first loan extension in the
second half of 2009.
60
Net Income. Net income for the six months ended
June 30, 2010 was $4.8 million compared to
$2.7 million for the six months ended June 30, 2009.
The increase of $2.0 million was primarily due to increased
operating revenue resulting from the increased occupancy and
rental rates partially offset by increased operating expenses
and interest expense as discussed previously.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Operating Revenue. Operating revenue for the
year ended December 31, 2009 was $88.8 million. This
includes rental revenue of $51.7 million, power revenue of
$19.4 million, tenant reimbursements of $3.0 million,
other revenue of $9.0 million, primarily from
interconnection services, and management fees from related
parties of $5.6 million. This compares to revenue of
$74.4 million for the year ended December 31, 2008.
The increase of $14.4 million, or 19%, was due primarily to
increased rental revenue of $7.7 million from increased
occupancy and rental rates, increased power revenue of
$2.9 million due to the increased occupancy and
$3.1 million of increased other revenue resulting from
increased interconnection services above.
Operating Expenses. Operating expenses for the
year ended December 31, 2009 were $78.5 million
compared to $73.5 million for the year ended
December 31, 2008. The increase of $5.0 million, or
7%, was primarily due to the following: increased depreciation
and amortization expense of $2.6 million resulting from the
placement of additional space into service at One Wilshire and
the completion of additional capital improvements at
427 S. LaSalle during 2008 and $1.0 million of
increased property operating and maintenance costs due to the
continued lease up of properties in 2008.
Interest Expense. Interest expense, including
amortization of deferred financing costs, for the year ended
December 31, 2009 was $5.5 million compared to
interest expense of $8.7 million for the year ended
December 31, 2008. The decrease in interest expense was due
to lower interest rates on floating rate debt.
Net Income (Loss). Net income for the year
ended December 31, 2009 was $4.9 million compared to a
net loss of $7.4 million for the year ended
December 31, 2008. The increase of $12.2 million was
primarily due to increased operating revenues of
$14.4 million as previously discussed, a reduction in
interest expense due to lower interest rates on floating rate
debt, partially offset by increased operating expenses as
discussed previously.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Operating Revenue. Operating revenue for the
year ended December 31, 2008 was $74.4 million. This
includes rental revenue of $44.0 million, power revenue of
$16.5 million, tenant reimbursements of $2.5 million
and other revenue of $5.9 million, primarily from
interconnection services, and management fees from related
parties of $5.5 million. This compares to revenue of
$48.0 million for the year ended December 31, 2007.
The increase of $26.4 million, or 55%, was due primarily to
$15.0 million of increased rental revenue due to a full
year of operations at One Wilshire and 427 S. LaSalle
which were placed into service during 2007 and the continued
lease up of the remaining properties, $7.8 million of
increased power revenue due to the increase in lease
commencements during 2008, and $2.7 million of increased
other revenue from increased interconnection services provided.
Operating Expenses. Operating expenses for the
year ended December 31, 2008 were $73.5 million
compared to $43.9 million for the year ended
December 31, 2007. The increase of $29.6 million, or
67%, was primarily due to the following: $9.2 million of
increased property operating and maintenance costs due to the
continued lease up of properties in 2008 and a full year of
operations at One Wilshire and 427 S. LaSalle which
were placed into service during 2007, $7.7 million of
increased rent expense at One Wilshire resulting from a full
year of rent expense compared to 2007 which included rent
expense subsequent to the execution of the property lease in
August, 2007, increased general and administrative expense of
$6.5 million, increased depreciation and amortization
expense of $5.1 million resulting from the placement of One
Wilshire and 427 S. LaSalle into service during 2007.
Interest Expense. Interest expense, including
amortization of deferred financing costs, for the year ended
December 31, 2008 was $8.7 million compared to
interest expense of $11.9 million for the year ended
61
December 31, 2007. The decrease in interest expense was due
to lower interest rates on floating rate debt, partially offset
by increased debt balances.
Net Loss. Net loss for the year ended
December 31, 2008 was $7.4 million compared to a net
loss of $7.0 million for the year ended December 31,
2007. The increase of $0.4 million was primarily due to
increased operating expenses of $29.6 million as previously
discussed, partially offset by increased operating revenues of
$26.4 million and a reduction in interest expense.
Liquidity
and Capital Resources
As a REIT, we are required to distribute at least 90% of our
taxable income to our stockholders on an annualized basis. We
intend to make, but are not contractually bound to make, regular
quarterly distributions to common stockholders and unit holders
in order to maintain our status as a REIT. All such
distributions are at the discretion of our Board of Directors.
We intend to fund these distributions with cash generated from
operations and external sources of capital, if necessary. As of
June 30, 2010 and as adjusted for the Financing
Transactions, we would have had $80.5 million of cash and
cash equivalents.
Short-term
Liquidity
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 this offering and to the extent necessary, by
incurring additional indebtedness, including by drawing on our
revolving credit facility. Upon completion of this offering and
the Financing Transactions, we expect to have
$ million of cash and cash
equivalents on our balance sheet and the ability to borrow up to
an additional $ million under
a new $110.0 million revolving credit facility, subject to
satisfying certain financial tests, which we believe will be
sufficient to meet our short-term liquidity needs for the
foreseeable future.
Long-term
Liquidity
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.
In view of our strategy to grow our portfolio over time, we do
not, in general, expect to meet our long-term liquidity needs
through sales of our properties. In the event that,
notwithstanding this intent, we were in the future to consider
sales of our properties from time to time, our ability to sell
certain of our assets could be adversely affected by obligations
under our tax protection agreement, the general illiquidity of
real estate assets and certain additional factors particular to
our portfolio such as the specialized nature of our properties,
and property use restrictions.
Pro
Forma Indebtedness
As summarized in the following table, on a pro forma basis after
giving effect to the Restructuring Transactions, the Financing
Transactions and the repayment of certain of our existing
indebtedness as set forth under the heading Use of
Proceeds, we would have had approximately
$124.9 million of aggregate combined indebtedness
(excluding a $2.0 million fair value of debt adjustment
resulting from the Restructuring Transactions) as of
June 30, 2010. We expect that we will also have
$ million of undrawn
62
capacity under a new $110.0 million revolving credit
facility. However, the availability of funds under our revolving
facility will depend on, among other things, compliance with
applicable restrictions and covenants set forth in the
agreements governing our indebtedness and market conditions and
there can be no assurance that additional credit would be
available to us at acceptable terms or at all.
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Interest
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Principal
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Annual Debt
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Pro forma Mortgage debt
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Rate(1)
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Amount
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Service(2)
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Maturity
Date(3)
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(in thousands)
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(in thousands)
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55 S. Market
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L + 3.50
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%
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$
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60,000
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$
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2,310
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November 2012
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427 S. LaSalle
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L + 1.95
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%(4)
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40,000
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(6)
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920
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March 2012
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12100 Sunrise Valley
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L + 2.75
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%
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24,927
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773
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June 2013
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Total pro forma
debt(5)
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$
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124,927
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$
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4,003
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(1)
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The effective interest rate for
variable rate loans is calculated based on the
1-month
LIBOR rate at June 30, 2010, which was 0.35%. Does not give
effect to the interest rate hedging arrangements we intend to
enter into in connection with our refinancing and assumption of
the indebtedness secured by our 55 S. Market and 12100
Sunrise Valley properties, respectively. See footnote 2(DD) to
our pro forma condensed consolidated financial statements
included elsewhere in this prospectus.
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(2)
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Annual debt service includes
payments for interest only. The weighted average stated interest
rate of our debt was LIBOR plus 2.85% on a pro forma basis as of
June 30, 2010. Does not give effect to the interest rate
hedging arrangements we intend to enter into in connection with
our refinancing and assumption of the indebtedness secured by
our 55 S. Market and 12100 Sunrise Valley properties,
respectively. See footnote 2(DD) to our pro forma condensed
consolidated financial statements included elsewhere in this
prospectus.
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(3)
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Maturity date represents the date
on which the principal amount is due and payable, assuming no
payment has been made in advance of the maturity date. The
maturity date on our 427 S. LaSalle property includes
a one-year extension without performance tests or conditions
outside our control. In addition, we have the right to extend
the loan on 55 S. Market by two additional years to
November 2014 and the loan on 12100 Sunrise Valley by one
additional year to June 2014. These extensions require the
compliance with certain performance tests, which, in each case,
we currently meet on a pro forma basis after giving effect to
this offering and Restructuring Transactions, and expect to
continue to meet in the future.
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(4)
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Represents the weighted average
interest rate as of June 30, 2010 under three loans secured
by 427 S. LaSalle: (i) a 0.60% spread on a $25.0 million
senior note; (ii) a 4.825% spread on a $10.0 million
mezzanine note; and (iii) a variable spread on a
$5.0 million subordinate senior note.
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(5)
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Upon consummation of the Financing
Transactions, we expect that we will have $9.4 million of
letters of credit issued but undrawn, and no other borrowings
outstanding, under our new revolving credit facility. See
Material Terms of Our Indebtedness to be Outstanding
After this Offering.
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(6)
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Excludes a $2.0 million fair
value of debt adjustment resulting from the Predecessors
acquisition of the Acquired Properties.
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Material
Terms of Our Indebtedness to be Outstanding After this
Offering
Revolving Credit Facility. We expect
that the revolving credit facility will be subject to usual and
customary affirmative and negative covenants.
Mortgage(s). Prior to the completion of
this offering, we expect to assume and, in one case, refinance
certain loans currently held by the entities contributing the
427 S. LaSalle property, 55 S. Market
property and 12100 Sunrise Valley property to our portfolio in
connection with the Restructuring Transactions. We expect to
obtain lender consent to assume a total of $40.0 million of
debt under three loans secured by our 427 S. LaSalle
property. These loans mature in March 2011; however, we expect
to exercise the 12-month options to extend each of these loans
to a maturity date of March 2012. There are no performance tests
or conditions outside our control to exercise these extension
options. These loans bear interest at a weighted average rate of
LIBOR plus 1.95%. We also expect to obtain lender consent to
assume a $32.0 million construction loan due June 2013
secured by our 12100 Sunrise Valley property, of which
$24.9 million was outstanding as of June 30, 2010. We
believe that the outstanding balance of the construction loan
will be $25.5 million upon completion of this offering.
This construction loan bears interest at a rate of LIBOR plus
2.75%. Concurrently with the completion of this offering, we
expect to refinance the existing $73.0 million of debt
secured by our 55 S. Market property with a new
$60.0 million mortgage loan, which will have a term of not
less than two years. We plan to repay the remaining
$13.0 million of the existing loan with a portion of the
proceeds from this offering. The existing loans bear interest at
a weighted average rate of LIBOR plus 2.25%, and we expect that
the refinanced loan will bear interest at a rate of LIBOR plus
3.50%. However, in connection with our refinancing and
assumption of the indebtedness secured by our
55 S. Market and 12100 Sunrise Valley properties,
respectively, we intend to enter into interest rate hedging
arrangements that would effectively swap the interest rate of
these loans to a fixed rate through their respective maturity
dates. These
63
hedging arrangements would fix the interest rate on the loans on
each of our 55 S. Market and 12100 Sunrise Valley
properties at 5.00% and 4.75%, respectively. See footnote 2(DD)
to our pro forma condensed consolidated financial statements
included elsewhere in this prospectus.
Commitments
and Contingencies
Upon completion of the Restructuring Transactions, the Financing
Transactions and repayment of certain of our existing
indebtedness, on a pro forma basis, assuming these transactions
occurred as of June 30, 2010, we would have had aggregate
combined indebtedness totaling $124.9 million (excluding a
$2.0 million fair value of debt adjustment resulting from
the Restructuring Transactions). The closing of the Financing
Transactions will be a precondition to the consummation of this
offering, and it is our intention to enter into binding
agreements or to otherwise obtain firm commitments with respect
to the Financing Transactions prior to seeking effectiveness of
the registration statement of which this prospectus is a part.
The following table summarizes our contractual obligations as of
June 30, 2010, on a pro forma basis, including the
maturities and scheduled principal repayments of indebtedness
and excluding other borrowings incurred subsequent to
June 30, 2010:
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Obligation
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2010
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2011
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2012
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2013
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2014
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Thereafter
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Total
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(in thousands)
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Operating
Leases(1)
|
|
$
|
8,043
|
|
|
$
|
16,356
|
|
|
$
|
16,806
|
|
|
$
|
17,228
|
|
|
$
|
17,549
|
|
|
$
|
61,682
|
|
|
$
|
137,664
|
|
Revolver
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage(s)
payable(2)
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
24,927
|
|
|
|
|
|
|
|
|
|
|
|
124,927
|
|
Other(3)
|
|
|
971
|
|
|
|
2,898
|
|
|
|
2,182
|
|
|
|
278
|
|
|
|
151
|
|
|
|
294
|
|
|
|
6,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,014
|
|
|
$
|
19,254
|
|
|
$
|
118,988
|
|
|
$
|
42,433
|
|
|
$
|
17,700
|
|
|
$
|
61,976
|
|
|
$
|
269,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Lease obligations for One Wilshire,
1275 K Street, 32 Avenue of the Americas, and 1050
17th Street.
|
|
|
|
(2)
|
|
Mortgage debt includes
$40.0 million on 427 S. LaSalle due in 2012,
including extensions without performance tests or conditions
outside our control, $60.0 million on
55 S. Market due in 2012 and $24.9 million on
12100 Sunrise Valley due in 2013. We have the right to extend
the loan on 55 S. Market by two additional years to
November 2014 and the loan on 12100 Sunrise Valley by one
additional year to June 2014. These extensions require the
compliance with certain performance tests, which, in each case,
we currently meet on a pro forma basis after giving effect to
this offering and Restructuring Transactions, and expect to
continue to meet in the future. The balances on
55 S. Market and 427 S. LaSalle are pro
forma and assume the transactions set forth in the Financing
Transactions are completed. In June 2011, we will begin
amortizing the 12100 Sunrise Valley loan based on a
30-year term
using an interest rate equal to the greater of 150 basis
points per year in excess of the then current
10-year U.S.
Treasury Note, or seven percent. Additional information on these
loans is available in the Material Terms of Our
Indebtedness to be Outstanding After this Offering section.
|
|
|
|
(3)
|
|
Obligations for tenant improvement
work at 55 S. Market Street, power contracts and
telecommunications leases.
|
Off-Balance
Sheet Arrangements
As of June 30, 2010, December 31, 2009 and 2008,
neither our Predecessor nor the Acquired Properties had any
material off-balance sheet arrangements.
Discussion
of Cash Flows
Our
Predecessor
Six
Months Ended June 30, 2010 Compared to Six Months Ended
June 30, 2009
Net cash provided by operating activities was $1.3 million
for the six months ended June 30, 2010, compared to cash
used in operating activities of $1.8 million for the prior
period. The increased cash provided by operating activities of
$3.1 million was primarily due to additional operating cash
generated by the continued lease up of the properties and
increases in amounts due to related parties and accounts payable
and accrued expenses, partially offset by the payment of leasing
costs.
Net cash used in investing activities increased by
$30.3 million to $37.5 million for the six months
ended June 30, 2010, compared to $7.2 million for the
six months ended June 30, 2009. This increase was primarily
due to an increase in cash paid for capital expenditures related
to redevelopment and development of data center space.
64
Net cash provided by financing activities increased by
$26.6 million to $35.5 million for the six months
ended June 30, 2010 from $8.9 million for the six
months ended June 30, 2009 primarily due to an increase in
capital contributions received from the member of the
Predecessor and proceeds from mortgages payable partially offset
by an increase in distributions.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Net cash provided by operating activities was $1.4 million
for the year ended December 31, 2009, compared to cash used
in operating activities of $9.6 million for the prior
period. The increased cash provided by operating activities of
$11.1 million is primarily due to the collection of
accounts receivable, the increase in accounts payable and
accrued expenses and additional operating cash generated by the
continued lease up of the properties.
Net cash used in investing activities decreased by
$26.4 million to $27.5 million for the year ended
December 31, 2009, compared to $53.8 million for the
year ended December 31, 2008. This decrease was primarily
due to a decrease in cash paid for capital expenditures related
to redevelopment and development of data center space.
Net cash provided by financing activities decreased by
$33.2 million to $30.0 million for the year ended
December 31, 2009 from $63.2 million for the year
ended December 31, 2008 primarily due to a decrease in
capital contributions received from the member of the
Predecessor.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Net cash used in operating activities was $9.6 million for
the year ended December 31, 2008, compared to cash provided
by operations of $1.9 million for the prior period. The
increase in cash used in operating activities of
$11.5 million is primarily due to the repayment of accounts
payable and accrued expenses and payment of leasing commissions.
Net cash used in investing activities decreased by
$64.5 million to $53.8 million for the year ended
December 31, 2008, from $118.3 million for the year
ended December 31, 2007. This decrease was primarily due to
a decrease in cash paid for acquisitions.
Net cash provided by financing activities decreased by
$57.0 million to $63.2 million the year ended
December 31, 2008, from $120.2 million for the year
ended December 31, 2007 primarily due to a decrease in
mortgage loan proceeds and capital contributions received from
the member of the Predecessor partially offset by a decrease in
distributions.
Our
Acquired Properties
Six
Months Ended June 30, 2010 Compared to Six Months Ended
June 30, 2009
Net cash provided by operating activities was $18.2 million
for the six months ended June 30, 2010, compared to cash
provided by operations of $11.2 million for the prior
period. The increased cash provided by operating activities of
$7.0 million was primarily due to additional operating cash
generated by the continued lease up of the properties and
increases in accounts payable and accrued expenses, partially
offset by the payment of amounts due to related parties.
Net cash used in investing activities increased by
$0.7 million to $7.2 million for the six months ended
June 30, 2010, from $6.5 million for the six months
ended June 30, 2009. This increase was primarily due to an
increase in contributions to reserves for capital improvements
partially offset by a decrease in cash paid for capital
expenditures.
Net cash used in financing activities increased by
$21.6 million to $20.0 million for the six months
ended June 30, 2010, compared to net cash provided by
financing activities of $1.6 million for the six months
ended June 30, 2009 primarily due to a decrease in proceeds
from mortgages and an increase in distributions during 2010.
65
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Net cash provided by operating activities was $26.0 million
for the year ended December 31, 2009, compared to cash
provided by operations of $9.3 million for the prior
period. The increased cash provided by operating activities of
$16.8 million is primarily due to the collection of
accounts receivable and additional operating cash generated by
the continued lease up of the properties.
Net cash used in investing activities decreased by
$18.7 million to $9.6 million for the year ended
December 31, 2009, from $28.3 million for the year
ended December 31, 2008. This decrease was primarily due to
a decrease in cash paid for capital expenditures.
Net cash used in financing activities was $7.5 million for
the year ended December 31, 2009, compared to net cash
provided by financing activities of $17.5 million for the
year ended December 31, 2008 primarily due to the principal
repayment of $5.2 million in 2009 and a decrease in capital
contributions received from members of the Acquired properties
during 2009 of $17.8 million compared to 2008.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Net cash provided by operating activities was $9.3 million
for the year ended December 31, 2008, compared to cash
provided by operating activities of $6.8 million for the
prior period. The increased cash provided by operating
activities of $2.5 million is primarily due to additional
operating cash generated by the continued lease up of the
properties.
Net cash used in investing activities decreased by
$83.3 million to $28.3 million for the year ended
December 31, 2008, from $111.6 million for the year
ended December 31, 2007. This decrease was primarily due to
a decrease in cash paid for acquisitions.
Net cash provided by financing activities decreased by
$94.0 million to $17.5 million for the year ended
December 31, 2008, from $111.5 million for the year
ended December 31, 2007 primarily due to a decrease in
mortgage loan proceeds and capital contributions received from
members of the Acquired Properties during 2008 compared to 2007.
Related
Party Transactions
The following related party transactions are based on agreements
and arrangements entered into prior to our initial public
offering, at which time we did not have formal procedures for
approving such related party transactions. For a more detailed
discussion of these transactions see Management and
Certain Relationships and Related Party Transactions.
We lease 1,458 NRSF of data center 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 approximately $155,300
for the year ended December 31, 2009 and $78,802 for the
six months ended June 30, 2010. Additionally, we sublease
space in our Denver corporate headquarters from an affiliate of
The Carlyle Group. The lease commenced on April 25, 2007
and expires on October 31, 2012. Rental expense was
approximately $60,300 for the year ended December 31, 2009
and $29,826 for the six months ended June 30, 2010.
On August 1, 2010, Mr. Ray, a member of our Board of
Directors and formerly a managing director of The Carlyle Group,
resigned from his position at Carlyle and entered into an
employment agreement with us to serve exclusively as our
President and Chief Executive Officer. Mr. Rays
compensation and that of his executive assistant have
historically been paid by an affiliate of The Carlyle Group. In
total, we paid an affiliate of The Carlyle Group $575,000 as
partial reimbursement for related services rendered to us by
Mr. Ray and his executive assistant during the year ended
December 31, 2009 and have paid $287,500 as partial
reimbursement for such services during the six months ended
June 30, 2010.
Affiliates of The Carlyle Group caused letters of credit to be
issued by various financial institutions to guarantee lease
commitments, payments to vendors and construction redevelopment
at certain properties in our portfolio. Prior to or concurrently
with the completion of this offering, letters of credit for four
of our
66
properties totaling $9.4 million will be cancelled and be
replaced by letters of credit, which we expect we will cause to
be issued under our new revolving credit facility.
Leasing
Arrangements
In connection with the Restructuring Transactions, we will
assume the leases for the operating properties that we do not
own (32 Avenue of the Americas, One Wilshire and
1275 K Street), as well as the lease for our corporate
headquarters, the space we currently use for our corporate
office space.
Policies
Applicable to All Directors and Officers
We intend to adopt certain written policies that are designed to
eliminate or minimize certain potential conflicts of interest,
including a policy for the review, approval or ratification of
related party transactions. We have also adopted a code of
business conduct and ethics that prohibits our employees,
officers and directors and our company from entering into
transactions where there is a conflict of interest. In addition,
our Board of Directors is subject to certain provisions of
Maryland law, which are also designed to eliminate or minimize
conflicts. See Policies with Respect to Certain
Activities.
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.
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.
As of June 30, 2010, we had approximately
$124.9 million of pro forma consolidated indebtedness
(excluding a $2.0 million fair value of debt adjustment
resulting from the Restructuring Transactions) that bore
interest at variable rates. $30.0 million of the
$124.9 million is hedged against LIBOR interest rate
increases above 6.24%. Concurrently with the completion of this
offering, we intend to enter into a $110.0 million
revolving credit facility, borrowings under which will bear
interest at variable rates; however, we anticipate that we will
not draw on this facility at closing.
If interest rates were to increase by 1%, the increase in
interest expense on our pro forma variable rate debt would
decrease future earnings and cash flows by approximately
$1,249,265 annually. If interest rates were to decrease 1%, on a
pro forma basis the decrease in interest expense on the variable
rate debt would be approximately $1,249,265 annually. Interest
risk amounts were determined by considering the impact of
hypothetical interest rates on our financial instruments. The
foregoing does not give effect to the interest rate hedging
arrangements we intend to enter into in connection with our
refinancing and assumption of the indebtedness secured by our
55 S. Market and 12100 Sunrise Valley properties,
respectively. These hedging arrangements would fix the interest
rate on the loans on each of our 55 S. Market and
12100 Sunrise Valley properties through their current maturities
at rates not to exceed 5.00% and 4.75%, respectively. See
footnote 2(DD) to our pro forma condensed consolidated financial
statements included elsewhere in this prospectus.
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.
67
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board, or FASB,
issued authoritative accounting guidance which established the
FASB Accounting Standards Codification. The Codification is the
single official source of authoritative, nongovernmental
U.S. GAAP and supersedes all previously issued non-SEC
accounting and reporting standards. We adopted the provisions of
the authoritative accounting guidance for the interim reporting
period ended September 30, 2009, the adoption of which did
not have a material effect on the our companys financial
statements.
On January 1, 2009, we adopted an accounting standard which
modifies the accounting for assets acquired and liabilities
assumed in a business combination. This revised standard
requires assets acquired, liabilities assumed, contractual
contingencies and contingent consideration in a business
combination to be recognized at fair value. Subsequent changes
to the estimated fair value of contingent consideration are
reflected in earnings until the contingency is settled. The
revised standard requires additional disclosures about
recognized and unrecognized contingencies. This standard is
effective for acquisitions made after December 31, 2008.
The adoption of this standard will change our companys
accounting treatment for business combinations on a prospective
basis.
On January 1, 2009, we adopted authoritative guidance
issued by the FASB that amended its existing standards for a
parents noncontrolling interest in a subsidiary and the
accounting for future ownership changes with respect to the
subsidiary. The new standard defines a noncontrolling interest,
previously called a minority interest, as the portion of equity
in a subsidiary that is not attributable, directly or
indirectly, to a parent. The new standard requires, among other
things, that a noncontrolling interest be clearly identified,
labeled and presented in the combined balance sheet as equity,
but separate from the parents equity; that the amount of
combined net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on
the face of the combined statement of income; and that if a
subsidiary, other than a subsidiary primarily holding real
estate, is deconsolidated, the parent measures at fair value any
noncontrolling equity investment that the parent retains in the
former subsidiary and recognize a gain or loss in net income
based on the fair value of the non-controlling equity
investment. The standard was effective for our company beginning
on January 1, 2009. The adoption of this standard did not
have a material impact on our companys financial
statements.
On January 1, 2009, we adopted authoritative guidance
issued by the FASB for its non-financial assets and liabilities
and for its financial assets and liabilities measured at fair
value on a non-recurring basis. The guidance provides a
framework for measuring fair value in generally accepted
accounting principles, expands disclosures about fair value
measurements, and establishes a fair value hierarchy that
requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair
value. In April 2009, the FASB issued further clarification for
determining fair value when the volume and level of activity for
an asset or liability had significantly decreased and for
identifying transactions that were not conducted in an orderly
market. This clarification of the accounting standard is
effective for interim reporting periods after June 15,
2009. We adopted this clarification of the standard for the
interim reporting period ended June 30, 2009. The adoption
of the provisions of this new standard did not materially impact
our companys financial statements.
On January 1, 2009, we adopted a new accounting standard
that expands the disclosure requirements regarding an
entitys derivative instruments and hedging activities. The
adoption of the provisions of this new standard did not
materially impact our companys financial statements.
In June 2009, the FASB issued guidance that amended the
consolidation of variable-interest entities, or VIEs. This
amended guidance requires an enterprise to qualitatively assess
the determination of the primary beneficiary of a VIE based on
whether the entity has (i) the power to direct the
activities of the VIE that most significantly impact a
VIEs economic performance and (ii) has the obligation
to absorb losses or receive benefits that could potentially be
significant to the VIE. Further, the amended guidance requires
ongoing reconsideration of the primary beneficiary of a VIE and
adds an additional reconsideration event for determination of
whether an entity is a VIE. The new guidance was effective
January 1, 2010 for our company. The adoption of this
guidance did not impact our companys financial position or
results of operations.
68
In October 2009, the FASB issued Accounting Standards Update
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 adoption of this
standard is not expected to have a material impact on our
companys financial statements.
In January 2010, the FASB issued guidance that amends and
clarifies existing guidance related to fair value measurements
and disclosures. This guidance requires new disclosures for
(1) transfers in and out of Level 1 and Level 2
and reasons for such transfers; and (2) the separate
presentation of purchases, sales, issuances and settlement in
the Level 3 reconciliation. It also clarifies guidance
around disaggregation and disclosures of inputs and valuation
techniques for Level 2 and Level 3 fair value
measurements. This standard will be effective for our fiscal
year beginning January 1, 2010, except for the new
disclosures relating to Level 3 fair value measurements,
which will be effective for our fiscal year beginning
January 1, 2011. The adoption of this standard is not
expected to have a material impact on our companys
financial statements.
69
INDUSTRY
OVERVIEW AND MARKET OPPORTUNITY
Industry
Overview
Data centers are highly specialized and secure buildings that
house networking, storage and communications technology
infrastructure, including servers, storage devices, switches,
routers and fiber optic transmission equipment. These buildings
are designed to provide the power, cooling and network
connectivity necessary to efficiently operate this
mission-critical IT equipment. This infrastructure requires an
uninterruptible power supply, backup generators, cooling
equipment, fire suppression systems and physical security. Data
centers located at points where many communications networks
converge can also function as interconnection hubs where
customers are able to connect to multiple networks and exchange
traffic with each other.
According to Tier1 Research, LLC, the global Internet data
center market is estimated to grow from $9.2 billion in
2008 to $18.5 billion in 2012, representing a compound
annual growth rate of
19%.(b)
We believe that the data center industry enjoys strong demand
dynamics principally driven by the continued growth of Internet
traffic, the corresponding increase in processing and storage
equipment and the increased need for network interconnection
capabilities. Additionally, companies are increasingly
outsourcing their data center needs due to the high cost of
operating and maintaining in-house data center facilities,
increasing power and cooling requirements for data centers and
the growing focus on business and disaster recovery planning.
Concurrently with the increasing demand for outsourced data
center space, we believe that the supply of new data center
facilities has been constrained by industry consolidation,
underinvestment and lack of sufficient capital to develop
additional space. New data center supply is estimated to grow by
only 5% in 2010, whereas data center demand is expected to grow
by 12% during the same
period.(c)
Through 2013, global demand for multi-customer data center space
is expected to outpace overall new supply by approximately 250%,
resulting in utilization of data center space rising from 73% at
year-end 2009 to 96% of forecasted space by
2013.(c)
Industry estimates suggest that at 70% space utilization, a data
center market will begin to experience supply constraints as
suitable space becomes
limited.(c)
At 80% space utilization, industry sources predict that demand
for data center space will greatly outpace available supply and
that pricing for available space could be driven up
significantly; and at 90% space utilization, available supply in
a data center market is estimated to be effectively filled with
the remaining space physically fragmented, held for expansion by
existing customers and very
expensive.(c)
We believe this imbalance of supply and demand will continue to
support a favorable pricing environment for providers of data
center space. Therefore, we anticipate that sufficiently
capitalized operators with space and land available for
redevelopment and development, as well as a proven track record
and reputation for operating high-quality data center
facilities, will enjoy a significant competitive advantage and
be best-positioned to accommodate market demand.
Growth in Internet Traffic. Global
Internet Protocol, or IP, traffic has experienced significant
growth and is expected to continue to grow exponentially.
According to the Cisco Visual Networking Index, global IP
traffic, including Internet, non-Internet and mobile data, is
expected to quadruple from 2009 to 2014, representing a compound
annual growth rate of
34%.(a)
This growth is expected to be driven by a mix of consumer and
business trends including increased broadband penetration, the
proliferation of wireless smart phones, rich media such as
video-on-demand,
real time online streaming video, social networks, online
gaming, mobile broadband and cloud computing. In turn, the need
for additional communications and processing equipment in the
form of servers, routers, storage arrays and other
infrastructure to support this growth, as well as the
specialized facilities to house this infrastructure will
continue to grow apace. We believe the on-going growth in the
amount of content and data created, exchanged and stored will
continue to drive strong demand for data center space and
interconnection services.
Increasing Power and Cooling
Requirements. Sufficient power availability
to operate computing equipment and cooling infrastructure is one
of the most significant challenges facing data centers today. As
server speeds continue to increase, the power requirement and
heat generated by modern servers, such as blade servers, has
more than doubled since 2000. Concurrently, increased cooling
requirements for these dense
70
servers coupled with increasing memory and storage requirements
are also driving power demand. Many legacy-built corporate data
centers have proven unable to accommodate these increasing power
and cooling requirements. According to Nemertes Research,
at the end of 2009, 28.6% of data centers between 5,000
and 50,000 square feet had insufficient power and this
figure is projected to increase to 50% by
2011.(d)
The leading third-party wholesale and colocation data center
companies can provide high-quality, reliable facilities
including power redundancy and density, cooling infrastructure,
security and overall efficiency.
Trend Toward Outsourcing. Data centers
are frequently outside of the core competency of many companies
and have become increasingly more complex and expensive to
design, build and operate. Businesses are continuing to
recognize that outsourcing could improve their cost structure,
enhance their agility, lower their overall IT risk and allow
them to focus on revenue generation. According to a Gartner
research poll in December 2008, although 84% of company
respondents primarily used their own data centers, 66% indicated
that they expected to have at least 1,000 square feet of
outsourced data center space within the next
24 months.(e)
Third-party data center providers often offer superior
infrastructure, operational expertise, redundancy, service level
commitments as well as greater access to a diversity of major
network carriers. The trend towards outsourcing is driven by the
following primary factors:
|
|
|
|
|
Legacy Corporate Data Center ObsolescenceData
centers remain expensive to build, operate and maintain with
significant upfront capital requirements. With the increasing
need for higher power density, cooling infrastructure and
network connectivity, companies are faced with the choice of
either upgrading their existing facilities or outsourcing to a
third-party data center that can provide more advanced
networking technology and a more reliable and secure
infrastructure. According to Tier1 Research, the average price
to construct a data center is approximately $1,100 to $1,300 per
raised square
foot.(f)
By outsourcing their data center needs, enterprises that
previously built and operated their own data centers are now
able to convert high capital costs into lower operating costs.
|
|
|
|
Business Continuity And Disaster
RecoveryOrganizations are increasingly reliant upon
information and communications technology to function properly.
Business continuity concerns and disaster recover planning as
prudent business practices and in response to requisite
regulatory compliance (i.e. Sarbanes Oxley, Health Insurance
Portability and Accountability Act), have led to an increasing
amount of data storage in secure, off-site facilities with
redundant systems enabling businesses to access this data at any
point in time, regardless of any failures in their
infrastructure. Outsourced data center providers can help
enterprises stay in business and meet regulatory requirements by
providing superior facilities in diverse locations, with higher
uptime and enhanced controls.
|
|
|
|
New TechnologiesThe continued adoption of
network-centric technologies such as cloud computing and hosted
application services by enterprises are also driving outsourcing
trends. These applications have significant processing and
storage requirements and need adequate and redundant network
connectivity and reduced latency, which is increasingly
difficult for in-house data center solutions to provide.
|
|
|
|
Network ChoiceData center operators are in many
cases able to offer increased access to interconnection
opportunities providing enterprises with the flexibility to
optimize their connection partners based on their individual
requirements. In addition, the ability to connect with a dense
network of communications service providers, online media, video
and content providers and other entities, can provide
enterprises with the optimum solution for their business needs,
including redundant connectivity and reduced latency.
|
Increased Need for
Interconnectivity. Network-neutral data
centers are increasingly relied upon to support global IP
traffic growth, both to house the necessary equipment and
infrastructure and to provide a centralized interconnection
point where customers can cost-efficiently exchange traffic with
each other. Data center providers with facilities housing a
large number of networks where IP transit and peering between
customers is a critical aspect of their business, see enhanced
revenue opportunities as these customers are extremely motivated
to colocate in these facilities. These types of customer
requirements revolve around
71
superior communication, access to national and international
networks and networking opportunities with other customers,
including:
|
|
|
|
|
Communications Service Providers
telecommunications carriers, wireless carriers
and Internet service providers that enable the global movement
of voice and data traffic;
|
|
|
|
Content Providers Internet, cable or other
media providers that create, maintain or distribute content;
|
|
|
|
Content Delivery Networks providers of a
network of servers delivering large amounts of data or media
content; and
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Web Hosting Providers providers of
infrastructure for making information accessible on the Internet.
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These enterprises are increasingly integrating their
network-based business applications into their IT environments
to drive economies of scale and to achieve greater processing
capabilities at lower costs. These applications can cover a host
of mission-critical business processes, such as human resource
and accounting functionality, sales and customer response
management tools and operational efficiency databases. These
network-based applications lead to increased requirements for
the breadth and depth of interconnection options that are
available at interconnection and colocation facilities but more
difficult to obtain and manage on an in-house basis.
Types of
Data Centers
Customer requirements in the data center industry fall along a
continuum from smaller colocation cabinets and cage footprints
to larger, dedicated wholesale space. All data center
facilities, whether serving wholesale or colocation customers,
require the same underlying technical infrastructure, including
robust and reliable power and HVAC systems to operate and cool
the equipment in the facilities, backup power sources, fire
suppression systems, physical security and Internet connectivity.
Wholesale Data Centers. Wholesale data
center providers lease space in large blocks ranging from
private suites up to entire buildings, with dedicated power and
cooling infrastructure, under long-term leases of five to
15 years. Rental rates per square foot at wholesale data
centers generally vary in accordance with the amount of
electrical power requirements for such space. Key selection
criteria for wholesale data center customers include the
availability of low-cost electrical power, the quality of the
facilities and the reputation of the data center provider.
Wholesale customers typically require a minimal amount of
operational support from the data center provider and include:
enterprise customers who may find it more cost and
time-effective to outsource their IT facility needs; colocation
and managed hosting and managed services providers; and network
carriers.
Carrier-Neutral
Colocation. Carrier-neutral colocation data
center providers sell space on the basis of individual cabinets
or cages generally through one to five year leases. In addition,
these providers provide interconnection services which allow
customers to access network services and exchange traffic. Key
colocation data center selection criteria include the quality of
the facility including the power, cooling and security
infrastructure, proximity to employees and company offices,
network density and reputation of the data center provider.
Colocation customers typically require a greater degree of
operational support inside the data center, including
interconnection services, full facility maintenance and
additional services such as smart and remote hands and network
monitoring services. Colocation customers encompass a wide range
of businesses, including: Fortune 1000 enterprises; network
carriers; Internet, media and content companies; content
delivery networks; providers of Internet applications, such as
Software-as-a-Service and cloud computing; shared, dedicated and
managed hosting providers; and small and medium businesses.
Interconnection
and Exchange Services
As participants in the global economy have become increasingly
dependent upon networks such as the Internet to reliably and
efficiently transfer data over long distances, the need has
grown for an organized approach to network interconnection that
can support the continued rapid growth of IP traffic. Proximity
and access to global communications networks have become
increasingly important selection criteria for data
72
center customers. Many customers not only seek space within data
centers located in major metropolitan markets where global
communications networks intersect, but also desire
interconnection services within those data centers.
Interconnection facilitates the cost efficient exchange of
information between communications service providers,
enterprises, online media, video and content providers and other
entities either directly between two parties (cross connect) or
among multiple parties (peering).
Interconnection generally provides a more cost-effective, lower
latency, more rapidly deployed method of network traffic
exchange than metro fiber or local loop alternatives. Parties
interconnecting within a common facility can connect directly,
do not require a third party to manage the interconnection once
initially established and can exchange data over shorter
distances with lower capital requirements. Direct connections
are usually via fiber optic or Ethernet cable connected between
the communications equipment of the two parties. Peering
requires use of intermediate devices such as an Ethernet switch
to connect one network to many other networks.
Barriers
to Entry to Data Center Business
Despite the increase in demand for data center infrastructure
and services, there are significant barriers to entry that we
believe would make it difficult for new companies to enter this
specialized market.
Significant Cost and Time to Develop Data
Centers. Data center construction requires
significant time, expertise and capital, which can vary by data
center design and geographic location. New data center
development requires significant upfront capital expenditures,
which present a significant risk for a traditional real estate
developer seeking to enter the data center market on a
speculative basis. Additionally, financing has been difficult to
obtain in the current economic climate with only larger,
well-known operators having been able to secure financing to
continue their growth. Finally, data center construction
requires extensive planning and adherence to local regulatory
requirements including permits. Total project length for data
center construction, from site selection to completion, can take
anywhere from 12 to 24 months.
Strong, Established Track Record with Operational and
Technical Expertise. An increasing number of
companies consider their application and Internet infrastructure
equipment to be the crown jewels of their
businesses. New entrants to the market may have difficulty
establishing a brand name and reputation that will attract high
value customers, who will entrust them with their
mission-critical IT infrastructure. Most companies are less
likely to enter into long-term leases with data center providers
with limited track records of successfully operating large-scale
facilities. We believe this represents a significant barrier to
new entrants while enabling more established providers to lease
up facilities more rapidly by leveraging long-standing customer
relationships. Finally, due to the specialized nature of data
centers, the key personnel necessary to develop and operate data
centers have training that is highly sought after, which, we
believe, can make it difficult for a new entrant to assemble a
capable team. Some of the skill sets required include experience
in commercial real estate, data center design and construction,
communications and electrical and mechanical engineering.
Network Density. Communications service
providers, content providers, content delivery networks, web
hosting providers and other enterprises select a data center in
part based on their ability to interconnect easily with a large
number of other companies within the data center and large users
of telecom bandwidth, creating a network effect that deters
these companies from switching data centers. The most well-known
and critical points of network density have required years to
establish as a result of the need to build out the necessary
infrastructure. We believe these points are extremely difficult
for a new entrant to replicate, and in each metropolitan market
there are typically only a few buildings that have the
sufficient critical mass of multiple high-speed optical
connections to major network carriers to be characterized as
points of interconnection. These points of interconnection are
critical to customers because they provide secure, direct access
to the point at which traffic is exchanged, which can reduce
their overall costs by eliminating local access charges,
decreasing their points of failure and increasing their
efficiency. The close proximity of numerous interconnection
customers within a single facility generates network
efficiencies that can result in cost savings and shorter time to
market.
73
BUSINESS
AND PROPERTIES
Our
Company
We are an owner, developer and operator 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 data centers feature advanced power, cooling
and security systems, including twenty-four hours a day, seven
days a week security staffing, and many are points of dense
network interconnection. We are able to satisfy the full
spectrum of our customers data center requirements by
providing data center space ranging in size from an entire
building or large dedicated suite to a cage or cabinet. We lease
our space to a broad and growing customer base ranging from
enterprise customers to less space-intensive, more
network-centric customers. Our operational flexibility allows us
to selectively lease data center space to its highest and best
use depending on customer demand, regional economies and
property characteristics.
As of June 30, 2010, 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 NRSF, of which over
1.0 million NRSF is existing data center space. These
properties include 277,126 NRSF of space readily available for
lease, of which 190,788 NRSF is available for lease as data
center space. As of June 30, 2010, we had the ability to
expand our operating data center square footage by
865,621 NRSF by redeveloping 419,371 NRSF of vacant
space and developing 446,250 NRSF of new data center space on
land we currently own. We expect that our redevelopment and
development potential will enable us to accommodate existing and
future customer demand and positions us to significantly
increase our cash flows.
Our diverse customer base consists of over 600 customers,
including enterprise customers, communications service
providers, media and content companies, government agencies and
educational institutions. We have a high level of customer
retention, which we believe is due to our high-quality
facilities and the interconnection opportunities available at
many of our data centers. During the second quarter of 2010, we
expanded our relationship with our largest customer, Facebook,
Inc. This customer represented 13.5% of our annualized rent as
of June 30, 2010, and we expect that this customer will
account for approximately 10% of our pro forma revenues for the
year ending December 31, 2010.
The first data center in our portfolio was purchased in 2000 and
since then we have continued to acquire, redevelop, develop and
operate these types of facilities. Our data center acquisitions
have been historically funded and held through real estate funds
affiliated with The Carlyle Group. Our properties are
self-managed, including with respect to construction project
management in connection with our redevelopment and development
initiatives. While we have no present intentions to outsource a
significant portion of our property and construction management
functions, we may do so at any time, or from time to time, as
our business plan dictates.
Our
Corporate History
The first data center in our portfolio was purchased in 2000
through an investment by a real estate fund affiliated with
Carlyle. Since the acquisition of that data center, we have
expanded our portfolio through additional investments by various
Carlyle real estate funds or their affiliates. Although our data
center portfolio has been owned by these various Carlyle real
estate funds or their affiliates, all of our data centers have
been operated or managed by our management team since they were
initially acquired or developed.
We formed CoreSite Realty Corporation as a Maryland corporation
on February 17, 2010, with perpetual existence. We elected
to be treated as an S corporation for federal income tax
purposes effective as of the date of our incorporation. We will
terminate our S corporate status shortly before completion of
this offering (ending the S corporation tax year) and
intend to qualify as a REIT for federal income tax purposes
commencing with our taxable year ending on December 31,
2010. Our corporate offices are located at 1050
17th Street, Suite 800, Denver, CO 80265. Our
telephone number is
(866) 777-2673.
Our website is www.coresite.com. The information contained on,
or accessible through, our website is not incorporated by
reference into this prospectus and should not be considered a
part of this prospectus.
74
Our
Competitive Strengths
We believe the following key competitive strengths position us
to efficiently scale our business, capitalize on the growing
demand for data center space and interconnection services, and
thereby grow our cash flow.
High Quality Data Center Portfolio. As
of June 30, 2010, our property portfolio included 11
operating data center facilities, one data center under
construction and one development site. Much of our data center
portfolio has been recently constructed. Specifically, since
January 1, 2006, we have redeveloped or developed 620,586
NRSF into data center space, or approximately 57.2% of our
current data center portfolio. Based upon our portfolio as of
June 30, 2010 and including the completion of the 85,434
NRSF of data center space under construction at that time, 60.3%
of our data center portfolio will have been built since
January 1, 2006. Our facilities have advanced power and
cooling infrastructure with additional power capacity to support
continued growth.
Significant Network Density. Many of
our data centers are points of dense network interconnection
that provide our customers with valuable networking
opportunities that help us retain existing customers and attract
new ones. We believe that the network connectivity at these data
centers provides us with a significant competitive advantage
because network-dense facilities offering high levels of
connectivity typically take many years to establish. Our
portfolio houses over 200 unique network providers, which
includes over 100 unique network providers at our One Wilshire
property. To facilitate access to these networking
opportunities, we provide services enabling interconnection
among our data center customers including private cross
connections and publicly-switched peering services. Our private
cross connection services entail installing fiber, or other
connection media, between two customer spaces. Our
publicly-switched peering services allow our customers to
exchange digitalized information with each other by connecting
to our
Any2
Exchange®
networking switch. Currently, we actively manage over 9,000
interconnections across our portfolio.
Expansion Capability. By leasing
readily available data center space and expanding our operating
data center space, we anticipate that we will be able to meet
the growing demand from our existing and prospective customers.
Our data center facilities currently have 190,788 NRSF of space
readily available for lease. We also have the ability to expand
our operating data center square footage by approximately 80%,
or 865,621 NRSF, by redeveloping 419,371 NRSF of
vacant space and developing up to 446,250 NRSF of new data
center space on land that we currently own, subject to our
obtaining a negative declaration from the City of Santa Clara.
Of this redevelopment and development space, 85,434 NRSF of data
center space was under construction as of June 30, 2010.
Facilities in Key Markets. Our
portfolio is concentrated in some of the largest and most
important U.S. metropolitan markets. As of June 30,
2010, over 70% of our leased operating NRSF, accounting for over
90% of our annualized rent, was located in five of the six North
American markets identified by Tier1 Research, LLC as markets of
high data center
demand.(b)
Our data centers are located in Los Angeles, the
San Francisco Bay and Northern Virginia areas, Chicago,
Boston, New York City and Miami. These locations offer access to
the abundant power required to run and cool the facilities. Many
of our facilities are also situated in close proximity to
hundreds of businesses and corporations, which drives demand for
our data center space and interconnection services. We expect to
continue benefitting from this proximity as customers seek new,
high-quality data center space in our markets.
Diversified Customer Base. We have a
diverse, global base of over 600 customers, which we believe is
a reflection of our strong reputation and proven track record,
as well as our customers trust in our ability to house
their mission-critical applications and vital communications
technology. As of June 30, 2010, no one customer
represented more than 13.5% of our annualized rent and our top
ten customers represented 36.7% of our annualized rent. Our
diverse customer base spans many industries and includes:
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Global Telecommunications Carriers and Internet Service
Providers: AT&T Inc., British Telecom (BT
Group Plc.), China Netcom Group Corp., China Unicom (Hong Kong)
Limited, France Telecom SA, Internap Network Services Corp.,
Japan Telecom Co., Ltd., Korea Telecom Corporation, Singapore
Telecom Ltd., Sprint Nextel Corporation, Tata Communications
Ltd., Telmex U.S.A., L.L.C. and Verizon Communications Inc.;
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Enterprise Companies, Financial and Educational Institutions
and Government Agencies: Computer Science
Corporation, the Government of the District of Columbia,
Macmillan Inc., Microsoft Corporation, The NASDAQ OMX Group,
Inc., NYSE Euronext and the University of Southern California;
and
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Media and Content Providers: Akamai
Technologies, Inc., CDNetworks Co. Ltd., DreamWorks Animation
SKG, Inc., Facebook, Inc., Google Inc., NBC Universal Inc., Sony
Pictures Imageworks Inc. and Warner Brothers Entertainment, Inc.
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Experienced Management Team. Our
management team has significant experience in the real estate,
communications and technology industries. Notably, our Chief
Executive Officer has over 22 years of experience in the
acquisition, financing and operation of commercial real estate,
which includes over 11 years in the data center industry
and five years at publicly traded REITs. Additionally, our Chief
Financial Officer has approximately 16 years of financial
experience, including nearly ten years with a publicly traded
REIT. Several members of our management team have also been with
us for a significant tenure which, we believe, leads to
operational efficiencies. Specifically, our Chief Executive
Officer, Chief Financial Officer, Senior Vice President of
Acquisitions, Senior Vice President of Marketing and Senior Vice
President of Operations have served our company in roles of
increasing importance for ten, five, eight, seven and four
years, respectively. We believe our management teams
significant expertise in acquiring, redeveloping, developing and
operating efficient data center properties has enabled us to
offer customer-focused solutions.
Balance Sheet Positioned to Fund Continued
Growth. Following completion of this
offering, we believe we will be conservatively capitalized with
sufficient funds and available capacity to pursue our
anticipated redevelopment and development plans. After giving
effect to the Restructuring Transactions, the Financing
Transactions and the use of proceeds therefrom as described more
fully below, as of June 30, 2010, we would have had
approximately $124.9 million of total long-term debt
(excluding a $2.0 million fair value of debt adjustment
resulting from the Restructuring Transactions) equal to
approximately 12.7% of the undepreciated book value of our total
assets. See Prospectus SummaryThe Restructuring
Transactions and Prospectus SummaryThe
Financing Transactions. In addition, we expect to have
$ million of cash available
on our balance sheet and the ability to borrow up to an
additional $ million under a
new $110.0 million revolving credit facility, subject to
satisfying certain financial tests. We may also incur additional
indebtedness to pursue our redevelopment and development plans.
Upon completion of this offering, there will be no limits on the
amount of indebtedness we may incur other than limits contained
in our revolving credit facility, mortgage loans or future
agreements that we may enter into or as may be set forth in any
policy limiting the amount of indebtedness we may incur adopted
by our Board of Directors. See Policies with Respect to
Certain ActivitiesFinancing Policies and Risk
FactorsOur level of indebtedness and debt service
obligations could have adverse effects on our business. We
believe this available capital will be sufficient to fund our
general corporate needs, including the completion of 85,434 NRSF
of data center space under construction as of June 30, 2010
and the redevelopment or development of an additional 99,578
NRSF of space prior to December 31, 2011, of which 82,620
NRSF is planned data center space and 16,958 NRSF is ancillary
data center support space.
Business
and Growth Strategies
Our business objective is to continue growing our position as a
provider of strategically located data center space in North
America. The key elements of our strategy are as follows:
Increase Cash Flow of Our In-Place Data Center
Space. We actively manage and lease our
properties to increase cash flow by:
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Increasing Rents. Approximately 90% of our
annualized rent as of June 30, 2010 was derived from data
center leases. Additionally, the occupancy rate of our data
centers has remained strong with over 81% of our data center
operating space under lease as of June 30, 2010 and
December 31, 2009. We believe that the average rental rate
for our in-place data center leases is substantially below
market and that our ability to renew these leases at market
rates provides us with an opportunity to increase our cash
flows. We renewed approximately 75% of our data center leases
that expired during the year
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ended December 31, 2009, while increasing rents under data
center leases renewed or newly-leased during the year. The
dollar-weighted average rental rate per NRSF of the leases for
our data center space renewed or newly-leased during 2009 was
approximately 25% greater than that of the data center leases
expiring in the same facilities during the year. We also believe
that many of our data center leases that are contractually
scheduled to expire during 2010 are at rental rates meaningfully
below current market rates. Specifically, the dollar-weighted
average rental rate per NRSF of data center leases we renewed or
newly-leased in 2009 was over 25% greater than that of the data
center leases contractually scheduled to expire in the same
facilities during 2010. Additionally, the dollar-weighted
average rental rate per NRSF of our data center leases renewed
during the six months ended June 30, 2010 was approximately
25% greater than that of the data center leases expiring in the
same facilities during that period.
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Leasing up Available Space and Power. We have
the ability to increase both our revenue and our revenue per
square foot by leasing additional space and power to new and
existing data center customers. As of June 30, 2010,
substantially all of our data center facilities offered our
customers the ability to increase their square footage under
lease as well as the amount of power they use per square foot.
In total, our existing data center facilities have 190,788 NRSF
of space available for lease. We believe this space, together
with available power, enables us to generate incremental revenue
within our existing data center footprint without necessitating
extensive capital expenditures. Additionally, we have a
substantial in-house leasing function. During the six fiscal
quarters ended June 30, 2010, over 90% of the leases we
entered into during the period were executed without the
assistance of a procuring broker or agent.
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Capitalize on Embedded Expansion
Opportunities. Our portfolio includes 419,371
NRSF of vacant space that can be redeveloped into data center
space. We believe that redevelopment provides attractive
risk-adjusted returns because by leveraging existing in-place
infrastructure and entitlements we are typically able to deliver
redevelopment space at a lower cost and faster
time-to-market
than
ground-up
development. In many cases we are able to strategically deploy
capital by redeveloping space in incremental phases to meet
customer demand.
In addition to our redevelopment space, as of June 30,
2010, our portfolio included a 15.75-acre property housing seven
buildings in Santa Clara, California. The Coronado-Stender
Business Park currently includes:
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2901 Coronado, a 50,000 NRSF data center on 3.14 acres,
representing the first phase of our development at the
Coronado-Stender Business Park, which we completed during the
second quarter of 2010. During March 2010, we fully leased this
space to a leading online social networking company pursuant to
a six-year lease;
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2972 Stender, a 50,400 NRSF data center under construction on
3.51 acres, which represents the second phase of our development
at the Coronado-Stender Business Park. We have submitted a
request for a negative declaration from the City of
Santa Clara to enable us to construct up to an additional
50,600 NRSF at this building, for a total of up to 101,000 NRSF
of data center space. Should we obtain entitlements to construct
the additional 50,600 NRSF and, provided we then believe market
demand warrants and that it would be the best use of our capital
available for expansion, we may elect to construct the entire
101,000 NRSF of space, comprised of the initial 50,400 NRSF of
data center space plus the incremental 50,600 NRSF of
unconditioned core and shell space held for potential future
development into data center space; and
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the Coronado-Stender Properties, a 9.1 acre development
site with five buildings consisting of 78,800 NRSF of office and
light-industrial operating space and 50,400 NRSF of vacant space
on land held for development, portions of which generate revenue
under short-term leases. This development site currently
provides us with the ability to develop additional data center
space in one of the fastest growing and most important data
center markets in North America. We currently have the ability
to develop 129,200 NRSF of data center space at the
Coronado-Stender Properties and, subject to our obtaining a
negative declaration from the City of Santa Clara, we
believe that we will be able to
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develop an additional 216,050 NRSF, or up to 345,250 NRSF in the
aggregate, of data center space at this property.
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Upon completion of the Restructuring Transactions and the
Financing Transactions as described more fully below, we believe
that we will have sufficient capital to execute our
redevelopment and development plans as demand dictates.
The following table summarizes the redevelopment and development
plans throughout our portfolio.
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Currently Operating
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Currently Vacant
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Redevelopment/
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Operating NRSF
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Redevelopment/Development NRSF
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Development NRSF
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Data
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Office & Light
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Under
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Near-
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Total Facility
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Near-
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Facilities
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Center
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Industrial
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Total
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Construction(1)
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Term(2)
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Long-Term
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NRSF
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Term(2)
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Long-Term
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As of March 31, 2010
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One Wilshire
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156,521
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7,500
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164,021
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164,021
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900 N. Alameda
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256,690
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16,622
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273,312
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16,126
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144,721
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434,159
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102,951
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55 S. Market
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84,045
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205,846
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289,891
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289,891
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12100 Sunrise Valley
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116,498
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38,350
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154,848
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72,269
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35,652
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262,769
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427 S. LaSalle
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129,790
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45,283
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175,073
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5,309
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180,382
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22,000
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23,283
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1656 McCarthy
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71,847
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71,847
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4,829
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76,676
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70 Innerbelt
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118,991
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2,600
|
|
|
|
121,591
|
|
|
|
25,118
|
|
|
|
|
|
|
|
129,897
|
|
|
|
276,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 Avenue of the Americas
|
|
|
48,404
|
|
|
|
|
|
|
|
48,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1275 K Street
|
|
|
22,137
|
|
|
|
|
|
|
|
22,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2115 NW 22nd Street
|
|
|
30,176
|
|
|
|
1,641
|
|
|
|
31,817
|
|
|
|
|
|
|
|
|
|
|
|
13,447
|
|
|
|
45,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2901 Coronado
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coronado-Stender Properties
|
|
|
|
|
|
|
129,200
|
|
|
|
129,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,200
|
|
|
|
|
|
|
|
129,200
|
|
|
|
|
|
2972 Stender
|
|
|
|
|
|
|
50,400
|
|
|
|
50,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,400
|
|
|
|
50,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Facilities
|
|
|
1,035,099
|
|
|
|
497,442
|
|
|
|
1,532,541
|
|
|
|
91,244
|
|
|
|
82,407
|
|
|
|
323,717
|
|
|
|
2,029,909
|
|
|
|
72,400
|
|
|
|
255,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Wilshire
|
|
|
156,521
|
|
|
|
7,500
|
|
|
|
164,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900 N. Alameda
|
|
|
256,690
|
|
|
|
16,622
|
|
|
|
273,312
|
|
|
|
16,126
|
|
|
|
|
|
|
|
144,721
|
|
|
|
434,159
|
|
|
|
|
|
|
|
102,951
|
|
|
|
|
|
55 S. Market
|
|
|
84,045
|
|
|
|
205,846
|
|
|
|
289,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12100 Sunrise Valley
|
|
|
116,498
|
|
|
|
38,350
|
|
|
|
154,848
|
|
|
|
|
|
|
|
72,269
|
|
|
|
35,652
|
|
|
|
262,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427 S. LaSalle
|
|
|
129,790
|
|
|
|
45,283
|
|
|
|
175,073
|
|
|
|
|
|
|
|
5,309
|
|
|
|
|
|
|
|
180,382
|
|
|
|
22,000
|
|
|
|
23,283
|
|
|
|
|
|
1656 McCarthy
|
|
|
71,847
|
|
|
|
|
|
|
|
71,847
|
|
|
|
4,829
|
|
|
|
|
|
|
|
|
|
|
|
76,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70 Innerbelt
|
|
|
118,991
|
|
|
|
2,600
|
|
|
|
121,591
|
|
|
|
25,118
|
|
|
|
|
|
|
|
129,897
|
|
|
|
276,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 Avenue of the Americas
|
|
|
48,404
|
|
|
|
|
|
|
|
48,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1275 K Street
|
|
|
22,137
|
|
|
|
|
|
|
|
22,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,137
|
|
|
|
|
|
|
|