Cencora, Inc. Q2 FY2020 Earnings Call

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. 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 two 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 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 in the downtown market. The addition of CH2 vastly strengthens the attractiveness 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 provides 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. 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 Los Angeles. 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 enterprise 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 into 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 realize 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. 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 two customer renewals in Virginia. Excluding these two 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. 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 requests 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.

Our first question comes from Jordan Sadler with KeyBanc Capital Markets.

Can you provide more details about the volume you're seeing in the pipeline? Are these larger scale deals with enterprise customers that are taking longer, or are they coming from hyperscale clients? I’m trying to understand the reasons for the delays. Are bigger customers taking longer to finalize their decisions, or is it mostly smaller customers experiencing delays?

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 projects that need 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?

Are those larger deals also with enterprise customers, Paul? Or is...

Yes.

Is the mix more or less the same for what you typically 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?

The pipeline has grown larger, particularly from an enterprise standpoint, which is encouraging. Additionally, the increase is reflected in the dollar amount, notably in the opportunities on a larger scale. While hyperscale opportunities fluctuate and are not our main focus, we have observed a rise in enterprise scale opportunities. This is a positive indicator, and we are hopeful for 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 some questions that Steve or Paul could address regarding enterprise. I'm interested in your confidence in the sales funnel and any successes you've experienced so far this quarter, now that we're about one-third of the way through. Additionally, have there been any changes in the close rate? While the funnel might be expanding, if the close rate is declining, that could be concerning. I would appreciate any comments or insights on these aspects.

Yes, I'll begin by saying that I cannot disclose much about our activities in the third quarter so far. However, I can mention that we are working hard to enhance our performance in various areas, including our pipeline and close rates. We are focusing on assisting our customers as they navigate this evolving environment, particularly regarding their space needs. We are being flexible in our approach to generating new demand, and our efforts have been increasingly successful, as reflected in the growing number of new opportunities in our pipeline. Additionally, as customers assess their space options and explore alternatives through virtual tours, we are further supporting them in their selection processes and IT projects. We are improving in this area as our customers become more efficient. We believe this will contribute to greater stability, leading to more consistent progress from our customers 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 two items. First, when you look at our renewal spreads for the last three of the last four quarters have been negative. Ultimately, that's going to translate and put some pressure on to that MRR per cab, which you're seeing. Some of that reflects 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 cab.

And finally, if Paul would like to respond, could you discuss the competitive environment regarding pricing and supply? There has been significant scale leasing in markets like Northern Virginia, Portland, and others. In your operations, are you noticing the competitive supply being absorbed? What trends are you seeing in market pricing?

I think it's really a tale of two cities, Jon. Our pricing has been quite stable. We have lower density this quarter, which is typical for a retail-driven quarter. However, our per kilowatt pricing remains stable, mainly due to the types of customers we are attracting and their need for our ecosystem. We are active in the market and will opportunistically add scale leasing for less differentiated components, but pricing seems to have remained low in markets like Santa Clara, New York, and even to some degree Chicago. Therefore, we aren't pursuing that category as aggressively.

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

Sure, I have a follow-up to some of the questions that have already been asked. When I consider the retail colocation growth opportunity in the United States, it seems to be aligned with your growth rate. For example, looking at Equinix's numbers in the Americas, even if we exclude the hyperscale growth from companies like QTS or CyrusOne, their enterprise sector shows mid-single-digit growth. This indicates that it's not due to your lack of execution; that's just the market condition. With that in mind, do you see an opportunity for the company to be more aggressive in seeking growth elsewhere? This could involve pursuing hyperscale opportunities even at lower returns, which some of your competitors are doing in less favorable conditions, or perhaps expanding outside the United States. Or are you satisfied with the current growth rates, and should we as investors or analysts be content as well? Additionally, could you clarify your assumptions for SV7 in your guidance for the remainder of 2020? It’s relatively known that Uber is vacating 5 megawatts in October, and it appears that you have not filled that yet, which might leave it dormant for November and December. Are you assuming that there will be no revenue coming from that deployment in your guidance? What does your pipeline look like for potentially filling that with another 5-megawatt type customer, or given the current pricing, have you lost interest in pursuing that?

In response to your first question, while traditional retail growth rates may be accurate, the hybrid cloud sector presents a more appealing growth opportunity with greater value. Although COVID has understandably delayed some sales cycles, pursuing this long-term remains worthwhile. The next five to ten years will reveal whether it is wise to aggressively target less differentiated deployments and accept lower yields. We believe our current strategy will yield greater value, reduce the risk of future churn, and enhance organic growth within our data center campuses, leading to mid- to high single-digit growth, sometimes even more, in a sustainable and low-risk manner. We are confident in our strategy and continuously seek to improve our execution. Regarding SV7, I can't provide specific details about our guidance, but it's known that the Santa Clara market can be unpredictable concerning hyperscale opportunities, which arise sporadically and shift quickly with limited availability. From what we've observed, pricing in the market aligns closely with current tenant rents. We have various strategies for leasing, depending on the speed at which we fill the remaining space in SV8, and we do not anticipate any significant changes from our current revenue levels.

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 views, 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 wanted to ask about the SV7 backfill. Have any customers recently come in to check out that specific area? I’m trying to understand what the delay is for the lack of progress. Do you need to wait until the current tenant vacates before you can show it?

Well, I can't provide specifics about the customers and pipeline. There are several components related to that customer's lease, with some parts expiring later this year and others next year. Filling that space depends on demand and other factors on the campus, so various elements influence our decision on placing a customer there. I wouldn't say there's a lack of traction; that's not accurate. We actually observe strong demand from that market. The key is determining where to position those customers based on all these 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 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 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 would like to revisit a topic we discussed earlier. You have a product with demand, and you're achieving the pricing you desire, which indicates that customers value it. I understand that it's challenging to replicate some highly interconnected locations. However, over time, as the need for more compute nodes arises in new areas and considering potential population shifts after COVID, why wouldn't you consider being more proactive in acquiring land or property for future development in emerging markets to replicate your existing product offerings? I also have a follow-up question.

We often evaluate those opportunities, Frank. The core of our business revolves around building customer ecosystems. We operate within that framework where customers can save a significant amount of money and improve their operating performance on high-bandwidth data applications. Consequently, their staff works more efficiently and effectively. Long-term, we believe this sector is the most resilient for us, and we see ample opportunities for growth. However, when we assess the wholesale business over the past few years, we've noticed that returns have been declining. Additionally, there are long-term risks associated with some buildings in the technology sector that we prefer to avoid. It's a positive aspect of American businesses that we can have diverse opinions, strategies, and approaches, but we are confident in where we are directing our focus and resources for the reasons I've mentioned. Each time we place a customer in our data center, we know we are saving them money and providing an environment to run their most powerful digital applications more effectively, which adds value for them, and in turn, they're willing to pay us more, all while still enjoying savings.

All right. Fair enough. And then you mentioned earlier in the call that the SV7 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 adapted 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. It really began when we recognized early on that traditional events and customer engagement would be limited. We shifted focus to virtual events and leveraged technology to attract new demand, which has been beneficial. As I mentioned earlier, we are seeing new opportunities entering the pipeline. Typically, customers would have numerous in-person visits for inspections, but we quickly adapted by recording virtual tours to allow customers to explore and engage with us remotely. This has been in place for a few months now. More recently, we have been able to conduct live videos with our on-site staff, ensuring safety protocols are followed, allowing for real-time interactions that feel personal and effective. This approach has been tailored to how each customer navigates their own environment. We have also noticed some customers expressing a desire to return to the site while adhering to safety protocols, wanting to ensure they are comfortable with their long-term IT decisions. We are assisting them in navigating this process in whatever way 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, and maybe I'm mistaken. But even in 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 two 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 address this, and Steve can add his thoughts. When we mention a pause, we refer to customers who have had to delay their plans for making significant transitions to cloud and hybrid cloud solutions due to the need to establish and accommodate remote work setups that were not previously necessary. In some instances, they might hold onto their existing assets for a while as they assess the economic landscape and work on fixing their businesses. This trend seems to be widespread and not limited to our specific markets. On the flip side, there are other customers who increasingly recognize the advantages of a hybrid multi-cloud setup, and once they have some clarity, they are pursuing that transition more vigorously. Thus, we are experiencing opposing forces, but we remain optimistic about the opportunities ahead of us.

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 shells that we've built very quickly.

The next question comes 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?

We're pleased to announce that CH2 is now operational, which is a significant achievement for our engineering and construction team. I want to thank everyone involved in this effort. Securing permits and constructing in major urban areas can be challenging, so completing this project is a significant milestone. CH2 is a distinctive asset in Chicago, and we are looking forward to the opportunities it presents. Its location near our CH1 facility, linked by dark fiber, not only allows us to market CH2 but also enhances the value of CH1 and supports the expansion of the ecosystem that was mentioned earlier. Additionally, we benefit from being close to other important network hubs downtown. We are optimistic about our pipeline, have increased our sales staffing, and are excited about the upcoming opportunities in retail, as well as in larger-scale and hyperscale markets.

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. Similar to what we mentioned in the last call, as we continue our development throughout this year, I expect that leverage will slightly rise above 5x. Once we complete our projects and begin serving the customers currently in our backlog, I anticipate it will gradually return to around 5x. This is likely where we'll operate in the short term. Regarding capital, as previously stated, we have no plans this year for equity issuance. However, as we approach our 2021 business plan, we'll provide guidance in February, which will include considerations for capital needs and the amount we really need to invest in 2021. Additionally, as Paul mentioned, we currently have ample capacity. The extra capacity we develop in 2021 will require significantly less capital. Consequently, I expect our capital requirements in 2021 to decrease compared to 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 provide some insights on the backlog first. Our GAAP backlog has traditionally been slightly lower than our cash backlog, with a difference this quarter of about $5 million. This variance typically ranges from $3 million to around $7 million, which is quite normal. This discrepancy largely arises from a few larger deployments that ramp up over several months, typically requiring 2 to 5 months to fully ramp into those deployments. This pattern is quite typical for larger tech implementations, which explains the difference. Regarding our debt, on Page 20 of our supplemental report, we provide a recap of our weighted average interest rate, which ended the quarter at 3.19% when everything is aggregated. As for the latter part of your question about potential repricing, we recently refinanced or issued debt in May at 3.75%. That environment was quite unique due to the implications of COVID. We experienced solid demand for the debt issuance, but the spreads were wider than our historical averages, and treasury rates were at their lowest levels that I've seen in my career. Thus, it's a distinctive time for issuing debt. I don't think that gives a precise estimate for today's potential repricing. However, if I had to estimate today, I believe we could likely achieve a rate closer to 2.75% or 3%, possibly slightly lower, to give you some perspective.

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 mainly focused on our scale, retail pipeline, and specific edge cloud opportunities that can drive growth. Most of this involves developing facilities within our existing campus, allowing us to quickly increase capacity without committing to long-term landfill projects. The supply-demand situation in the market has improved, but I agree that hyperscale pricing remains very competitive. In that environment, everyone has learned to be more cautious, not just regarding the volume of hyperscale transactions but also their composition. For instance, in the first half of this year, over half of the uptake in Northern Virginia came from a single customer. There's a question of whether that customer will continue to purchase at the same rate in the coming years, as historically, that hasn't been the case. Therefore, it's wise for everyone to proceed with caution regarding 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 try to pay attention to what's happening in the market. I wouldn't say there has been any compression in cap rates, but they have remained fairly stable 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 data 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.