Cencora, Inc. (COR) Q2 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to CoreSite Realty's Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your Investor Relations host, Kate Ruppe. Please go ahead.

Thank you. Good morning, and welcome to CoreSite's Second Quarter 2020 Earnings Conference Call. I'm joined today by Paul Szurek, President and CEO; Steve Smith, Chief Revenue Officer; and Jeff Finnin, Chief Financial Officer. Before we begin, I would like to remind everyone that our remarks on today's call may include forward-looking statements as defined by federal securities laws, including statements addressing projections, plans or future expectations. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. We assume no obligation to update these forward-looking statements and can give no assurance that the expectations will be obtained. Detailed information about these risks is included in our filings with the SEC. Also, on this conference call, we refer to certain non-GAAP financial measures such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of our full earnings release, which can be found on the Investor Relations pages of our website at coresite.com. With that, I'll turn the call over to Paul.

Good morning, and thank you for joining us. Today, I'm going to cover our second quarter highlights, and Steve and Jeff will follow them with their more in-depth discussions of sales and financial matters. Our Q2 highlights include the completion of 2 key development projects, the first phase of our new CH2 building, the first purpose-built enterprise-class data center in downtown Chicago and the third and final phase of our SV8 data center expansion in Santa Clara. We also maintained momentum on construction of our new LA3 building, and we continue to be on track for construction completion in early Q4. We achieved power and cooling uptime of seven-nines year-to-date. Operating revenue was $150.5 million, representing growth of 5.3% year-over-year and funds from operations per share was $1.35, an increase of $0.08 per share year-over-year or 6.3%. The ongoing pandemic has presented many challenges, and we, like everyone else, are navigating the rapidly changing conditions in many of our markets while supporting our customers and vendors as they do the same. Coming off of a record quarter in Q1 for retail and scale sales, new and expansion sales were $3.5 million of annualized GAAP rent, lower than our trailing 12-month results, primarily due to a focus on retail and scale leases and long sales cycles influenced by the pandemic and related economic uncertainties. Steve will provide more detail on this quarter's results, the quality of the sales won and our confidence in the strong funnel for the quarters ahead. Pricing for retail and scale deployments and demand for interconnection were solid as our data center campuses and related connectivity services continue to meet the essential needs of high-performance data center deployments. Our customers have been able to operate in our data centers with significantly reduced physical visits. Utilization of our customer portal has nearly doubled since the beginning of the pandemic as customers use the portal to provision new space, power and cross connects, remote hands and monitor their temperature, humidity and power draw. We have moved in an agile manner to hosting virtual events and virtual data center tours for current and prospective customers, which have increased our sales funnel, and our sales team is hard at work to ultimately translate those opportunities into sales. We continued our COVID operating protocol so that the recent spike in cases and the related regulatory constraints have not affected our ability to remain fully operational. Turning to our property development. The completion of Phase 1 of CH2 is a significant milestone. CH2 is unique in downtown Chicago with its ability to support high-density cabinets with dark fiber campus cross-connects to our CH1 network node, with energy efficient and sustainability focused, construction features and in the downtown market. The addition of CH2 vastly strengthens the attractiveness to enterprises of our Chicago ecosystem, which already provides extensive network options, including leading network providers deployed natively at CH2 and the 40-plus domestic and international carriers as well as access to cloud on ramps at CH1. COVID has affected pre-leasing at CH2, but the enterprise sales funnel that exists today is exactly what we hope to attract with CH2, and we feel good about its future. In addition, we completed the final phase of our SV8 development, adding 52,000 net rentable square feet and 6 megawatts of capacity to our Silicon Valley campus. In total, this data center is 74% leased after only 9 months since the completion of Phase 1, which demonstrates the strong demand in the Santa Clara market and the strength of our campus ecosystem. The completion of these projects provide sufficient capacity to turn up services quickly. We expect Phase 1 of our LA3 ground-up development, which is 74% pre-leased to a hyperscale deployment to be delivered early in the fourth quarter. Completion remains dependent on the local jurisdictions and utility providers for workplace rules and final inspections and permitting as they operate in COVID conditions. In closing, we believe the sustained adaptability and strong execution of our team, the strategic nature of our diverse network and cloud-dense campuses and the interoperability we enable for a large and diverse customer ecosystem position us well to benefit further from the secular tailwinds for data center space and steady enterprise migration to powerful hybrid cloud solutions and colocation. With that, I will turn the call over to Steve.

Thanks, Paul, and hello, everyone. I'll start off reviewing our quarterly sales results and then discuss some key themes and drivers for the quarter. As Paul shared, we signed $3.5 million of annualized GAAP rent during the second quarter, comprised of 22,000 net rentable square feet at an average GAAP rate of $156 per square foot, lower than previous quarters due to lower than average densities, however, at a rate consistent with the trailing 12-month average on a kilowatt basis. Our sales for the quarter were comprised entirely of core retail colocation sales. While the second quarter results did not reflect the level of new and expansion sales that we targeted, our funnel continues to look good. And we saw encouraging trends in our sales to our cloud and network customers as well as new logos. As mentioned, we had some key network and cloud deployments during the quarter, including the completion of a natively deployed cloud on-ramp with a top-tier cloud service provider in L.A. Offsetting the momentum, we saw with our network, cloud and technology verticals was a slowdown in sales to enterprise customers. The ongoing pandemic has elongated the buying patterns for enterprises customers as they become more deliberate in assessing the impacts of current market conditions on their own business and focused on adapting their business operations during this time. We continue to believe that the long-term value of adding these companies to our ecosystem warrants the patience and persistence required to secure them as customers. The volume of our pipeline as of the end of the second quarter remains as strong as we have seen in recent years, which leads us to believe these challenges do not eliminate sales opportunities, but likely defer them to later periods. Given this, we remain optimistic about our prospects for the remainder of 2020, but we need to ultimately translate these opportunities and to close sales and the timing of which is still to be determined. We do continue to be successful in a number of key areas despite these challenges, including important expansions with several strategically existing customers, continued success in the digital media, gaming and streaming service sectors as well as education and collaboration companies, and winning some high-quality new logos that we expect to provide ongoing future opportunities. Turning to new logos. In the second quarter, we won 31 new logos, which accounted for approximately 32% of our annualized GAAP rent. These logos include many quality brands that enrich our ecosystem, including a technology services company providing Internet services to education, healthcare and government communities; an IT automation and security company offering next level network security services; and a well-known cloud-based software company that offers AI-enabled connections between businesses and their suppliers. We remain acutely focused on attracting high-quality new customers that value our platform and will help drive future growth as their IT needs evolve. Moving forward through the second half of 2020, we continue to see demand for high performance, hybrid cloud architectures, and we are focused on maintaining pricing discipline and enhancing the quality and vibrancy of our customer ecosystems. In order to translate our pipeline into sales, we continue to help enterprises navigate these challenging times and realizing the value of the CoreSite ecosystem with their digital transformation and future growth. We are working on attractive scale and selective hyperscale opportunities as they align with our campus value and our shareholder objectives. And as always, we remain focused on improving efficiency and effectiveness in all we do. Technology continues to play an increasingly important role in the success of every business. We believe our network-dense cloud-enabled and enterprise-rich campus ecosystems position us well to capture a strong share of high performance, hybrid cloud requirements and edge needs in our major metropolitan markets. With that, I will turn the call over to Jeff.

Thanks, Steve. Today, I will review our second quarter results, discuss our balance sheet, including liquidity and leverage and review our financial outlook and 2020 guidance. Looking at our financial results. For the quarter, operating revenues were $150.5 million, which represents 5.3% growth year-over-year and 2.2% sequentially, including growth in interconnection revenue of 11.3% year-over-year and 4% sequentially. Our customer renewals included annualized GAAP rent of $25 million, which represents a cash rent reduction of 1.5% and churn of 1%, both in line with our expectations. The negative cash mark-to-market for the quarter was the result of 2 customer renewals in Virginia. Excluding these 2 renewals, mark-to-market for the quarter would have been an increase of 2.2%. Commencement of new and expansion leases consisted of $7.9 million of annualized GAAP rent during the quarter. And our sales backlog, as of June 30, consists of $13.3 million of annualized GAAP rent for signed, but not yet commenced leases, or $18.5 million on a cash basis. We expect roughly 40% of our GAAP backlog to commence in Q3 2020 and substantially all of the remaining GAAP backlog to commence in Q4 2020. Net income was $0.52 per diluted share, a decrease of $0.01 year-over-year and an increase of $0.04 sequentially. FFO per share was $1.35, an increase of $0.08 per share or 6.3% year-over-year and $0.06 sequentially or 4.7%. Adjusted EBITDA was $81.6 million for the quarter, an increase of 6.5% year-over-year and 3.8% sequentially. As I shared last quarter, due to the ongoing COVID-19 pandemic, we have received request from a small number of customers related to some level of payment deferral or relief from current obligations. Since mid-May, we have seen a significant slowdown in the number of requests received with minimal additional requests coming from our customers in recent weeks. The financial impact is included in our 2020 guidance, which I will address shortly. Moving to our balance sheet. Our debt to annualized adjusted EBITDA was 5x at quarter end, consistent with the previous quarter. Inclusive of the current GAAP backlog mentioned earlier, our leverage ratio is 4.8x. To recap and update our financing activities during the quarter and as mentioned on our last earnings call, on May 6, the company closed on a 7-year $150 million unsecured private placement of senior notes at 3.75%. $100 million was funded at closing and the remaining $50 million was funded on July 14. Proceeds from this issuance were used to pay down outstanding amounts under our revolving credit facility. We ended the quarter with $397.6 million of liquidity, which provides us the ability to fund our business plan beyond our remaining committed construction cost of $66 million related to current projects in development. Turning to 2020 guidance. We are increasing our 2020 guidance related to net income attributable to common diluted shares from our previous range of $1.74 to $1.84 per share to our new guidance range of $1.81 to $1.91 per share. In addition, our 2020 FFO per share guidance has been increased from our previous range of $5.10 to $5.20 per share to our new guidance range of $5.15 to $5.25 per share. The increase of $0.05 per share at the midpoint or approximately 1% is largely driven by interest expense savings, resulting from our financing activities earlier this year and lower rates expected through the rest of this year. Although the change is noted, our 2020 guidance and guidance drivers remain unchanged. In closing, as we move into the second half of 2020, we will be working to continue translating our new capacity into increased sales opportunities and ultimately executing on those opportunities. We have ample liquidity to fund our business plan through the end of 2021. Our balance sheet is strong with no near term debt maturities. Our business fundamentals are strong, and we believe we are well positioned for the long term. With that, operator, we would now like to open the call for questions.

[Operator Instructions] Our first question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Sorry about that, I was muted. Can you characterize the volume you're seeing in the pipeline a little bit more, Steve? Is it larger scale deals that are taking longer with enterprise customers or are they hyperscale? Just trying to understand the nature of sort of the delays, if it's just -- business moving away -- sorry, if it's bigger customers that are just taking longer to execute? Or if it's just a bunch of smaller customers who were taking longer to execute?

Sure. Thanks, Jordan. Yes, let me first, as far as characterizing the pipeline, start with the new opportunities and the volume that we've seen of new opportunities coming into the pipeline through Q2. And even through the end of Q1 when COVID really started back in March, we've actually seen the number of opportunities increase since that time. And as mentioned in the prepared remarks, it's one of the robust new pipelines that we've seen in recent years. So that's encouraging to see. As far as the elongated sales cycles, actually, I think you're kind of referring to there. When you think about the current business environment that we're in today, those enterprise customers that are clearly seeing the value in digitizing their business in today's environment are seeing interest there. And that's where the pipeline is coming from. Where the challenge has been is then, first of all, grappling with their own challenges of operating in this environment as far as employee distance engagement, their customers, their supply chain, all of those things that are more complicated now along with kicking off the new IT project that needs to be evaluated in all the various aspects that go into that. So that just takes more time. Some of the challenges that go along with that have made that a bit longer than what we've seen in prior cycles.

And they do tend to be larger deals than what we've seen historically in our funnel, right?

And is that -- so are those larger deals, also with enterprise customers, Paul? Or is...

Yes.

Or is that -- okay. Okay. So is the mix sort of static -- sorry, status quo for you guys in terms of what you guys would ordinarily target?

Say the question again there, Jordan?

It's still a status quo in terms of mix of customers in the pipeline? Because I mean, the pipeline is bigger, I'm just trying to understand what's driving it, if it's a different type of customer, just bigger requirements?

Sure. The pipeline is bigger. And it's bigger from an enterprise perspective. So that's good to see. It's also bigger from just the dollars and there's -- especially in the scale, size opportunities. The hyperscale come and go, and that's not necessarily an area that we're primarily focused on. But those enterprise scale opportunities, we've seen more of those. So that's encouraging to see, and we're optimistic about the second half of 2020.

Jordan, I would only add that the big driver here are the increasing number of companies that are moving towards a hybrid cloud, multi-cloud infrastructure and the subset of those companies that realize that their performance requirements, in other words, the amount of data that they will be transferring around from time to time between their own servers, their cloud servers between clouds, between cloud adjacent functions is growing. And we've had some private research commission and surveys done, and we think it's going to continue to grow. And our own historical research and, of course, performance strongly emphasizes the value of increasing these customers in our ecosystem in terms of the stickiness, growth and all the other organic growth attributes that you desire. So it's definitely a class of customer, very much worth pursuing, and we believe the opportunities. We're in the early stages of the good opportunities for the next few years to acquire these customers.

Okay. And then just as a follow-up, are some of these folks targeted for or slotted for the Santa Clara backfill?

You're talking about SV7?

Yes.

Yes. Well, as we mentioned on the prior calls, that is an option for us. And as we look at the various opportunities out there, one of the benefits that we have now in Santa Clara that we have across more and more of our portfolio is that the ability to leverage the campus and fitting customers into the right space at the right time. The SV7 lease is still under lease. And so as that rolls off and provides opportunity there, and we have SV8 now also to fit customers into, we just look at the balance of that and where the best place is to position that customer to get the best yield out of that space. So we'll continue to manage that as opportunities present themselves, and we feel optimistic about where that market sits today.

The next question is from the line of Jonathan Atkin with RBC.

I wanted to follow-up on maybe some questions that Steve or Paul could address. Just around enterprise, and it sounds like your confidence in the sales funnel, interested in any -- quarter-to-date -- any successes you've seen quarter-to-date now that the quarter is kind of 1/3 of the way done? And any changes around the close rate, right? I mean the funnel can get larger -- late-stage funnel stage can get larger, but if the close rate is getting the other way then maybe that's not so good. So just kind of comments or observations on those piece parts?

Yes. Well, I'll start, and I guess there's -- clearly, I can't say a whole lot about what we're doing in Q3 thus far. I can say that we continue to try to improve on all fronts between pipeline and close rate and all those kind of things and helping customers really just navigate this new environment as they look to typically tour space and how we find pipeline, for example, really trying to be agile about how we approach finding new demand, which I think we've been more and more effective at, as you can see in just the numbers of new opportunities coming into the pipeline. But also in customers as they evaluate space and their alternatives and doing virtual tours and those kind of things that help them continue in their process of making selections and moving on in their IT projects. So that continues to -- we continue to get better and better at that as customers continue to get more and more efficient at it. So we feel like that's going to also start to stabilize, and customers are going to start moving forward more consistently in the future.

And, I guess, unless, Paul, that has anything more to add on that. I got you. Just maybe a question for Jeff on MRR per cabinet, and I know it's just a minor blip in terms of dollar contribution, but it is the first time that that chart has not been consistently up and to the right. And I wonder, John, did that have anything to do with renewal spreads? Or what are the contributors to that this quarter, that metric?

Yes. Jon, it's really attributable to 2 items. First, when you look at our renewal spreads for the last 3 of the last 4 quarters have been negative. Ultimately, that's going to translate and put some pressure on to that MRR per cabi, which you're seeing. Some of that reflected this quarter. Secondly, there's a customer in SV7 that we've mentioned and talked about as it relates to our churn expectations going forward, but that customer has largely vacated the premises in over the last couple of quarters. And as a result, they are no longer drawing any power associated with that deployment. That also puts a negative impact on the MRR per cabi as well.

And finally, maybe if Paul wants to answer it, just competitive environment around pricing or competitive supply, there has been a lot of scale leasing in markets such as Northern Virginia, in Portland and elsewhere. But where you operate, are you seeing the amount of competitive supply kind of get absorbed? And what's happening with the pricing -- market pricing trends?

So I think it's really a tale of 2 cities, Jon. We -- our pricing has been pretty stable. We have lower density this quarter, but that's typical for a retail-driven quarter. But our per kilowatt pricing has been stable, and it's primarily because of the types of customers that we're winning and their need for the ecosystem that we have. We are in the market. We'll opportunistically add scale leasing for less differentiated components, but the pricing on that seems to have stayed down in markets like Santa Clara, New York, even Chicago to some extent. And so we're not going after that category business as aggressively.

Our next question is from the line of Colby Synesael with Cowen and Company.

Sure. I guess I have a follow-up to some of the questions that have already been asked. But when I think of the retail colocation growth opportunity in the United States, it's probably around what your growth rate is. You look at what, for example, an Equinix is putting up in their Americas number. And even if you back out, for example, the hyperscale growth that you're seeing from a QTS or CyrusOne, you just look at their enterprise, you're going to see that mid-single-digit type growth. So it's really not a function of you guys not executing. It's just -- that's what the market is giving you. I guess with that said, is there an opportunity or should the company actually becoming more aggressive in looking for growth elsewhere, whether it is being more aggressive going after hyperscale, even at a lower return, which you've obviously seen some of your competitors do in the market where it's worse than poor or potentially even go outside the United States or is it simply that your content with the growth rates that you're seeing and we as investors or analyst should be as well? And then secondly, just more as a clarification on SV7. What have you assumed in your guidance for the remainder of 2020? So I think it's fairly understood that Uber is vacating 5 megawatts in October. It doesn't seem like you've filled that obviously just yet, so that could actually go dormant at least for November and December. Is it assumed in your guidance that there's 0 revenue coming from that deployment? And what does the pipeline look like to potentially fill that with another Paul Knopp 5-megawatt type customer or given the pricing that you're seeing out there, you're not even interested in doing that?

So on your first question, I think, if you were looking at traditional retail, you're probably right about the growth rates. But if you're looking at further up the scale category of enterprises going to hybrid cloud, I think that's a much more attractive growth picture and also a higher value picture. And while COVID has certainly, as Steve mentioned, for good reason, slowed down some of those sales cycles, it's still long-term worth pursuing. And while the next 5 to 10 years will tell the story about how aggressively -- how wise it is to aggressively go after the less differentiated deployments and accept lower yields. Our view is that the approach we're on will actually generate more value, create less risk of future churn and generate more organic growth within our data center campuses and will provide a good level of mid- to high single-digit growth in some years more than that and in a way that is more sustainable and lower risk. So obviously, we feel good about our strategy. We always have to continue to get better executing it, but that's how we see the landscape right now. In terms of SV7, we don't give -- Jeff will shake his head at me, if I try to give specific detail about what's in our guidance. But the market in Santa Clara, as you know, Colby, tends to be lumpy in terms of hyperscale opportunities. They come up periodically, and they move quickly, and there's not a whole lot of space in that market. And pricing in the market from what we've seen is pretty consistent with the rent that the current tenant is paying. So we don't see -- when we do lease that, we've got different ways to go about that depending on how quickly we lease-up the balance of SV8. We don't expect it to be a material difference from what we are currently receiving.

Colby, the only thing I would add as far as the approach that we're taking and looking at retail, we can have a lot of different view, I think, as Paul's alluded to there. But what we're also building here is future value for these key markets in the U.S. and a lot of that involves not only the interconnection, which we've been focused on since the beginning and it's very difficult to replicate. So that's part of our differentiation, but also native cloud on-ramps and those native compute nodes that we're seeing more and more of that are lumpy in nature, but more in that scale, size of deployment that I think will further differentiate and drive not only more demand in the future, but also be able to garner better returns. So that's part of the broader picture, too.

The next question is from the line of Nate Crossett with Berenberg.

I just wanted to also ask on the SV7 backfill. Have you guys had customers come through recently to look at that specific space? I guess, I'm just trying to understand what the holdup is as to why there hasn't been any kind of traction? Is it -- do you have to really wait until the tenant moves out before you can show it or...

Well, no, not getting into the specific customers and pipeline and so forth, the -- there's several different pieces of that customer's leaf, part of which rolls off later this year, part of which rolls out later next year and how we fill up that entire room is based off of the demand and the other characteristics we have within the campus. So there's a lot of different factors that play into whether or not we place a customer there. So I wouldn't say that there's no traction. That is not accurate. We actually see good demand out of that market. It's just a matter of where we place those various customers based off of all those different dynamics.

Okay. What about SV2? I think last quarter, there was some move out there. What's the latest on backfilling that space?

Yes. I think that also just speaks to the overall options that we have in that general market. It's a different asset with different characteristics that are associated with it, and we have different pipeline demands that better align to that asset versus others. And we have current pipeline that is in conversation to take that space even today.

Okay. Would you guys ever consider sacrificing your return threshold surprised you to fill some of these sooner rather than later or...

Well, I mean, at the end of the day, you're always making a decision about where the market is, the value of the customer, the specific asset, and what you net from the rent. Even our overall ROIC is -- which has been high and continues to be high, has been driven by a mix of decisions all along the spectrum of pricing. So, yes, we can be flexible where we feel it's appropriate to be flexible and where we feel that we have the ability to claim more value, we do that.

Our next question comes from the line of Erik Rasmussen with Stifel.

Just back to leasing, it seemed to take a little bit of a pause after a solid Q1. You didn't book any scale deals, but were there any deals that were pushed out? Or how should we think about then the balance of the year in terms of maybe regaining some momentum? And then I have a follow-up.

Sure. Well, Erik, to your point, we did come off a record Q1 as far as retail and scale revenue was concerned. So that was exciting to see. And I'd be the first one to tell you that I would have liked to see more come out of Q2. That being said, and as I mentioned in my prepared remarks some, a lot of those sales cycles were elongated. So I don't know if you want to call that a push necessarily into future quarters or not. As I mentioned, we got to ultimately translate those into sales. So we'll see how that plays out. But at the end of the day, the pipeline looks good. And we're -- we feel positive about the balance of the year and how we'll finish up 2020 as far as total sales are concerned.

Okay. Great. And then maybe just on the Silicon Valley. As a lot discussed on SV7, SV8, but what are your plans for SV9? Is that more of optionality at this point and the focus for the team is backfilling SV7 and then you have another 25% or so to fill on capacity in SV8, and it almost becomes a jigsaw puzzle in terms of how you want to fulfill that demand that you're seeing in the most efficient way. But how should we think about then SV9 in the context of all that?

Think about SV9, consistent with our previous descriptions of having a proactive shovel-ready development program. So getting through the permitting process, having it ready to go gives us the optionality to move quickly on it when we see the demand or the pre-lease opportunities to drive that.

Our next question comes from the line of Frank Louthan with Raymond James.

I want to circle back on a topic that was touched on a little bit earlier. So you have a product, you have demand, you're getting -- you're able to get pricing that you want, clearly, customers value it. I can appreciate where it's hard to replicate some very interconnection dense locations. But given sort of over time, we're going to see more compute nodes needed to be in new locations, potential population shifts post COVID, say things like that. Why wouldn't you be a little bit more aggressive in getting some land banks or some other property that you could do some future development on in some newer markets and try and replicate the product set that you have? And then I've got a follow-up.

Well, we look at those opportunities often time, Frank. What really drives our business is creating these customer ecosystems. We're operating within that environment. Customers can really save a ton of money, and they can also get much better operating performance off of their high bandwidth data applications. And as a result, their own staff operates more efficiently and effectively. Long term, we think that's the most resilient business to be in. We think there's enough of it as far as we can see to generate the type of growth opportunities we've talked about. And as we've looked at the wholesale business over the last 4 or 5 years, the returns have continued to diminish. And I think the longer term risk associated with some of the buildings in the technology space are just -- they're not what we want to buy into. So that's a great thing about American businesses that we all can have different opinions and views and strategies, but we feel pretty good about where we're focusing and committing our resources for the reasons I mentioned. Every time we can put a customer in our data center knowing that we're going to save them a lot of money and give them an environment where they can do their most powerful digital applications much more effectively, we know that's more valuable to them, and they'll pay us more for that. And they feel good about that because the net result is they're still saving money.

All right. Fair enough. And then you mentioned earlier in the call that the SV7 that account accelerating a little bit in COVID with some of the virtual selling and so forth that you're doing. Talk a little bit about that dynamic and what's kind of changed? And how customers adapt it from the more traditional come in and see the physical space and kick the tires kind of approach? How are you guys being successful without that dynamic?

Sure. Well, Frank, it's Steve. I really starts with -- we started early in the process, when we saw that with there was going to be limited ability to do what we can consider traditional events and customer engagement, demand gen and really pivoted to more virtual events and trying to leverage technology ourselves into attracting new demand. So that has proved to be beneficial so far. As far as, as I mentioned earlier, it's the overall new opportunities coming into the pipeline. So that's kind of where it starts. As customers engage into the process, what would typically be a lot of in-person come out and view the site, go through and inspect the plant and all those different physical inspections. We also quickly adapted and recorded virtual tours that we can conduct with those customers to let them walk through and see that virtually and be able to talk to them as they do that. So that's been in place for a couple of months now, a few months now. But even more recently, we've been able to, with our staff that's on-site and followed all the protocols to ensure that they're safe and our customers are safe, be able to do even live videos and walk them through and do real conversations with them to make it even more personal and hopefully more effective. So that's a combination of all those things based off of how individual customers are navigating the environment on their own. And we've even seen some customers that are now wanting to come back and still work through our protocols and so forth to ensure that everyone is safe, but then actually come out, see the space, make sure that they know where their IT is going to be placed. And it is a long-term strategic decision for them. So we're helping them navigate that, however, it works best for them.

The next question comes from the line of Nick Del Deo with MoffettNathanson.

First, Jeff, to what degree, if any, did factors like lower T&E expense or lower power prices help the bottom line?

Yes, Nick. How are you doing? Yes, a couple of things. Great question, similar to maybe what you've heard on maybe some of the calls. But as you look at our Q2 results, we had some benefit in the quarter, probably about $0.02 to $0.03 per share, and that was largely comprised of property tax accruals and adjustments we needed to make in our portfolio as well as some smaller amounts contributing from additional power margins. So as you think about Q2, keep that in mind, again, that was about a $0.02 to $0.03 benefit in the quarter. As you think about things going forward through the second half of this year, historically, we've always had some compression in our power margins in the third quarter, largely due to increased power cost and the highest demand needs throughout the year. And that's what we continue to anticipate, but it remains to be seen given this environment, whether or not that plays out similar to what it has done in the previous years. Just so you're aware, we've always had about $0.01 to $0.02 per share of additional expense in the third quarter. And one other thing to think about for the second half of this year, as those developments that we've completed some of this last quarter, obviously, in some of the first quarter, will continue to absorb more operating expenses associated with those developments. So property taxes, insurance, the additional interest expense, all that gets capitalized during development as well as the operating costs from our staff that had been hired to run those facilities like CH2. So just keep that in mind when you just think about the second half of this year.

Okay. That's great detail. And regarding the change in rents on renewal, you noted that was attributable to a couple of leases in Reston. I feel like that may have happened to you at some point a couple of quarters ago in that market, maybe I'm mistaken. But even a more general sense, with prices down in that market, should we expect that there are more larger leases there that are going to price down in the coming quarters or coming years?

Yes, Nick, you're accurate. When you look at some of the negative mark-to-market over the last couple of quarters that we've experienced in ways, I would say, there's been some share, obviously, coming from Virginia as we saw this quarter. I think it remains to be seen in terms of pricing in that market and how we execute. But our pricing in Virginia has varied largely depending upon the types of deals we're signing in those given quarters. And obviously, what else plays into that are the length of those customer deployments as they come up for renewal. So to give you some more color on that. If you think about these 2 in Virginia, those were a couple of long-term customers inside our portfolio. And as their pricing continued to increase through their contractual provisions, they got well above market. And obviously, we had to address that in connection with their renewals this quarter. So some of those factors will play into things as we move through and continue to renew space in Virginia as well as other markets.

Our next question is from the line of Richard Choe with JPMorgan.

You talked about a pause in the business, is it from a specific business sector? Or is this more of a regional thing? And then I have a follow-up.

Let me, Richard, I think -- and Steve can jump in here. But what we -- when we talk about a pause, we talked about customers who have had to set aside their plans and their process for making a kind of a big move into cloud and hybrid cloud because they had to deal with setting up and accommodating a lot of remote work that they didn't have to do before. Or in some cases, they're going to sweat assets for a while, while they see how the economy plays out, how to fix their business. And I think that's probably global wide, not just affecting us in our markets. But on the -- by the same token, you have other customers who see even more the need to gain the efficiencies of a hybrid multi-cloud environment. And once they clear the decks, they're pursuing that more aggressively. So again, you got countervailing tides, but we like the opportunities that are in front of us right now.

Yes. I don't have to add anything more there, Richard. So I think if unless there's something else you wanted to ask there. Go ahead.

No, no. That's fine. And then the other point is, do you feel like you have enough space available to sell, and that's not an issue. It's just right now, the current business environment seems to be more of the issue than availability.

Yes. We've got as much space as I think we've ever had to accommodate growth, and frankly, across a broader set of markets to accommodate that. So from a capacity standpoint, we're in good shape. And if we can capitalize on the increased opportunities we have in our funnels, things will look very good.

And the only thing I would add there is that if you think about all the work that's been done over the last couple of years to reestablish our capacity position, a lot of the ground-up work has been done. So we do have capacity both in place that we can absorb existing demand, but also quickly add more demand or more capacity rather into those shales that we've built very quickly.

The next question is from the line of Eric Luebchow with Wells Fargo.

So my first was on Chicago at CH2. It looks like I was wondering what your funnel looked like in that market. We understand, at least, in the city proper, there's relatively limited supply relative to some of the suburbs of Chicago. So you kind of see a pipeline of enterprise deals or is there some potential for hyperscale activity in that market as well, particularly with the sales tax exemption that they passed last year? Could that maybe drive some additional demand into that market?

Yes. We're happy to see CH2 come online. So that's a great feat for our engineering and construction team. So I appreciate all the work that went into that. As you know, it's not easy to do permit, much less build in some of these key metro cities. So that's -- it's great to have that done. It's a unique asset in Chicago. So we're excited about the opportunity there. And the proximity to our CH1 facility and having it connected with dark fiber, I think, it's not only give us the opportunity to sell into CH2, but it's also provided more value for CH1 and the ability to expand that ecosystem that Paul mentioned earlier. And also being in proximity to other key network hubs that are right downtown there as well. So the pipeline, we're encouraged with the pipeline. We've staffed up and more sales there, and we're excited about the opportunity that's ahead of us, both in terms of retail and scale opportunities, and in some cases, hyperscale.

Okay. Great. And then just one more, if I could, more for Jeff. So I appreciate you're not giving guidance beyond 2020. But considering, as you mentioned, that you have a decent amount of supply to sell into right now and more new development will be, less on the ground-up and more filling data halls. So should we kind of expect capital intensity cadence to improve beyond this year? And then related to that, are you kind of comfortable operating at slightly north of 5x net leverage for a period of time or kind of alternative funding sources, including equity, something on the table as well?

Yes. Eric, I think similar to maybe what we mentioned last call as we work through the rest of our development that's ongoing here through this year, I would expect that leverage to slightly go above the 5x. And as we complete and then get those customers that are currently in our backlog able to commence, I would anticipate it to start to receive back down close to the 5x. And I think that's where you'll see us operate in the near term. In terms of capital, as I think we mentioned earlier, you referenced to capital sources. We don't have anything in our plans this year for issuance of equity capital. But obviously, as we look towards our 2021 business plan, and we'll provide guidance in February around what that looks like. It's just one of those additional sources that we just got to keep in mind as we navigate capital needs and how much capital we really need to deploy in 2021. The only thing I'd -- the only thing else -- other thing I'd offer is that as you think about -- we -- as Paul mentioned, we've got plenty of capacity today. And the additional capacity that we'll be developing in '21 will require much less capital. So I would see our capital needs probably coming down in 2021 as compared to where they were this year and last year.

Our next question comes from the line of Michael Rollins with Citi.

Just a follow-up on the capital allocation discussion. Can you remind us your average borrowing rate today that's in the balance sheet? And then if you were able to refinance the balance sheet at today's rates, just wave a magic wand, what rate would you estimate that you'd be able to get for the totality of the balance sheet? And then just second, a follow-up to the backlog disclosures earlier. I think you mentioned that the cash backlog was ahead of the GAAP were higher than the GAAP backlog. If you can maybe unpack what's happening within the backlog, that would be great.

Yes, Michael, let me give you some commentary on the backlog first, but that -- our GAAP backlog has historically always been just a little bit lower than our GAAP backlog. So that difference this quarter of about $5 million. It will range anywhere between $3 million and roughly $7 million. That's fairly common. That's largely just a difference due to a couple of larger deployments where they are ramping into their deployments over a period of time where they may get 2, 3, 4 or 5 months just to ramp into those deployments. And that's fairly typical for the larger tech deployments and so that's what caused that difference. In terms of our debt, inside our supplemental on Page 20, we always recap ultimately what our weighted average interest rate is. And we ended the quarter at 3.19% when you blend everything together. And to the latter part of that question, what could we reprice that at? We just did the most recent refinancing -- or I should say, debt issuance in May at 3.75%. I would say that, that was an environment that was a little interesting just given all that's going on with COVID. Obviously, we saw good demand for the debt issuance, but the spreads were wider than what we've done historically and, obviously, treasury rates were down lower -- the lowest we've probably seen at least in my career. And so it's a unique time to be issuing debt. I don't think that, that gives you a really good sense for where that would be repriced today. If I had to do it again today, I think we'd be inside that rate. I don't know where it'd be probably 2.75%, 3%, maybe a little bit lower, something like that, to give you some sense.

Next question is from the line of David Guarino with Green Street Advisors.

A question for you on Northern Virginia. The industry data that we looked at suggests that there's been a strong first half of the year. And maybe even the supply demand pendulum has kind of swung back to not being so oversupplied. And I know you also noted that market is still seeing some aggressive pricing. So what do you guys look internally to determine when you're going to add new capacity in Northern Virginia?

We're primarily looking at our scale and retail pipeline and select edge cloud opportunities that would drive that. The -- and mostly that's building in buildings that already exist at our existing campus. So we can spin up new capacity pretty nimbly. So we don't have to take a long-term swing at landfill development. That market has gotten better from a supply demand perspective. But I would agree with what you said, hyperscale pricing is still very competitive. And in that market, we -- I think everyone is learned to be a little bit and hopefully learned to be more careful at not just the volume of hyperscale transactions in any period, but also the composition of it because there are periods where like the first half of this year, I think, more than half of the take-up in Northern Virginia was just 1 customer. And does that customer continue to buy the same amount in future years? Historically, it hasn't happened that way. So I think people are right to continue to be careful about Northern Virginia.

That's helpful. And then maybe switching gears, obviously, in the public market, data center stocks have shown really strong performance year-to-date. But do you have any idea how that might translate into pricing in the private market for data centers? Have we seen any sort of cap rate compression in the sector? Or is it still too early to tell?

We -- as you know, we try to pay attention to what's going on out there. And I wouldn't say there's been any cap rate compression, but cap rates have held pretty steady in the private markets.

At this time, I will turn the call back to Paul Szurek for a few closing comments. Please go ahead.

Well, thank you very much for your interest in CoreSite and your questions today. And I'd like to thank all of my colleagues throughout the CoreSite system. They've been tremendous as we have worked through all these constantly changing challenges and new regulations. But most importantly, they've all been safe and they've kept each other safe and they've kept our customers safe and they've enabled our customers to operate seamlessly in our day centers and that's no small feat under these circumstances. So I'm grateful for what they've done. Look, we've had great questions on this call today. I appreciate the opportunity to clarify our strategy and our focus on growing the quality and the size and the organic growth potential of our ecosystems. I feel very good about the space we're in and the opportunities that it provides us. And I look forward to us continuing to perform going forward. Thank you very much, and have a great day.

Thank you, everyone. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.