Q2 2020 CoreSite Realty Corp Earnings Call
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I would now let's turn the conference over to your Investor Relations host Kate Rupee. Please go ahead.
Thank you good morning, welcome to Coresites second quarter 2020, <unk> earnings Conference call.
I'm joined today by Paul's, Eric President and CEO.
Steve Smith, Chief revenue Officer, and just a minute chief financial Officer.
Before we begin I'd like to remind everyone, but our remarks on today's call may include forward looking statements as defined by federal Securities laws, including statements addressing project shows plans for 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 freedom.
We assume no obligation to update these forward looking statements I can give no assurance that the expectations will be obtained.
Detailed information about these risks is included in our filings with the FCC.
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 supplemental information that as part of our full earnings release, which can be found on the investor relations pages of our website at <unk> Dot com.
That I'll turn the call over to Paul.
Good morning, and thank you for joining us today I'm going to cover a second quarter highlights and Steven Jeff will follow with them in depth discussions of sales and financial matters.
Q2 highlights include the completion two key development projects. The first phase of ordinary stage two building. The first purpose built enterprise class data center in downtown Chicago, and the third and final phase, where Espeed did data center expansion in Santa Clara.
We also maintained momentum on construction of our new L. Three building and we continue to be on track for construction completion in early Q4.
We achieved power and cooling uptime seven onto your day.
Operating revenue was $150.5 billion, representing growth of 5.3% year over year.
Funds from operations per share was $1.35 an increase of eight cents per share year over year were 6.3%.
The ongoing pandemic is 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 a record quarter in Q1 for retail and scale sales, new and expansion sales were $3.5 billion evangelize got Brett 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 in this quarter's results the quality of the sales one and our coverage from strong capital put 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 operating or data centers would significantly reduced physical visits.
Position of our customer portal has nearly doubled since the beginning of the pandemic as customers use the portal coopervision, new space power and cross connects remote hands and monitor the temperature humidity and power girl.
We have moved into natural manner to hosting virtual beds and virtual data center toward for current and prospective customers, which have increased our sales bottle and our sales team as hard work to ultimately translate those opportunities into sales.
We continued our co good operating protocols. So that the recent spiking cases, and the related regulatory constraints have not affected our ability to remain fully operational.
Turning to our property development the completion of phase one of stage two is a significant milestone C. H two is unique in downtown Chicago with its ability to sport high density cabinets with dark fiber campus cross connects to our see each one network node with energy efficient and sustainability focused consumer.
Trucking features and into downtown market. The addition of Sage two Vasily straight since the attractiveness to enterprises of our Chicago ecosystem, which already provides extensive network options, including leading network providers to coordinate affiliates age too and the 40, plus domestic and international carriers as well as that.
Just a crowd on ramps it's each one.
Kobin has affected preleasing its age too, but the enterprise sales bundle that exist today, that's exactly what we hope to track the stage two and we feel good about future.
In addition, we completed the final phase, where SB eight development, adding 52000, net rentable square feet and six megawatts of capacity to our Silicon Valley campus in total this dataset or seven 4% leased up rolling nine month since the completion of phase, one which demonstrates the strong demand in the Santa Clara market I'm just.
Right out of our campus ecosystem.
So based on these projects provide sufficient capacity to turn up services quickly.
We expect phase one of our El Athree ground up development, which is 74% pre leased to a hyper scale deployment to be delivered early in the fourth quarter completion remains dependent on the local jurisdictions and utility providers for workplace rules at five inspections and permitting as they operate in cobot conditions.
In closing, we believe the sustained adaptability and strong execution of our team the strategic nature of our diverse network and cloud it's campuses and the interoperability we enabled for a large and diverse customer ecosystem positioned us well the benefit further from the secular tailwinds for data center space instead.
He enterprise migration to powerful hybrid cloud solutions co location with that I'll turn the call over to Steve.
Thanks, Paul and Hello, everyone well start off are you in our quarterly sales results and then discuss some key themes and drivers for the core.
Oh sure, we signed $3.5 billion of annualized GAAP rent during the second quarter comprised of 22000 rentable square feet.
Average cap rate of $156 per square foot.
More than previous quarters due to lower than average densities harbor at a rate consistent with the trailing 12 month average honor kilowatt basis.
Our sales for the quarter were comprised entirely of core retail collocation sales.
Well 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 never customers as well as new logos.
As mentioned, we had some key network and cloud deployment during the quarter.
Following the completion of the natively deployed caught on around where the top tier cloud service provider and <unk>.
Offsetting the momentum we saw with our network cloud technology verticals, well the slowdown in sales to enterprise customers.
The ongoing pandemic you longer to the buying patterns for enterprise with customers.
Many become more deliberate and assessing the impacts of current market conditions on their own business I'm 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 patients that persistence required to secure them as customers.
The volume of our pipeline.
The second quarter remains as strong as we've seen in recent years.
Which leaves us to believe these challenges did not eliminate sales opportunities, but luckily before 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 sale 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 strategic existing customers.
Any success mid digital media gaming and streaming services sectors as well as education and collaboration companies.
And what are you from high quality, new logos that we expect to provide ongoing future opportunities.
Turning to new logos in the second quarter, we want 31, new logos, which accounted for approximately 32% of our annualized GAAP rent.
Logos include many quality brands that enrich our ecosystem, including our technology services company, providing internet services to education healthcare and government communities.
T automation security company operating next level network security services.
No well known cloud based software company that offers alienate well connections between businesses and their suppliers.
We remain acutely focused on attracting high quality new customers the value our platform and will help drive future growth or there are two needs evolve.
Moving forward through the second half of 2020, we continued to see demand for high performance hybrid cloud architectures, we are focused on maintaining pricing discipline and enhancing the quality and vibrancy of our customer ecosystems.
In order to translate our pipeline of the sales we continue to help enterprises navigate these challenging times and realizing the value of course that ecosystem, where their digital transformation future growth.
We're working on attractive scale and selective hyperscale opportunities I think aligned with our campus value and our shareholder objectives, and that's always we remain focused on improving efficiency and effectiveness and all we do.
Technology continues to play an increasingly important role <unk> six out of every business.
We believe our network dense cloud enabled enterprise rich campus ecosystems position us well to capture a strong sure of high performance hybrid cloud requirements, and that's needs and our major metropolitan markets.
With that I will turn the call over to John.
Thanks, Steve.
Today, I will review, our second quarter results discuss our balance sheet, including liquidity and leverage.
And review, our financial outlook and Twentytwenty 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 inline with our expectations.
The negative cash mark to market for the quarter, What's the result of two customer renewals in Virginia.
Excluding these two renewals mark to market for the quarter, what 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 ourselves backlog as of June Thirtyth consist 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 gap backlog to commence in Q4 2020.
Net income was 52 cents per diluted share a decrease of one cents year over year and an increase of four cents sequentially.
AFFO per share was $1.35, an increase of eight cents per share or 6.3% year over year, and six cents 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 cobot 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 request 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 five times at quarter end consistent with the previous quarter.
Inclusive of the current gap backlog mentioned earlier, our leverage ratio is 4.8 times.
To recap and update our financing activities during the quarter and as mentioned on our last earnings call.
On May six the company closed on a seven year $150 million unsecured private placement of senior notes at 3.75%.
$100 million was funded at closing and the remaining $50 million was founded 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 $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 fold 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 five cents per share at the midpoint or approximately 1%, it's largely driven by interest expense savings, resulting from our financing activities earlier this year and lower rates expected through the rest of this year.
Other than the changes 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 up 2021, our balance sheet, a strong with no near term debt maturities.
Our business fundamentals are strong and we believe we are well position for the long term.
With that operator, we would now like to open the call for questions.
Thank you well now be conducting a question answer session. If you like to ask a question today. Please press star one on your telephone keypad and a confirmation tone indicate your line is in the question Q.
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One moment, please while we poll for questions.
Thank you. Our first question comes from the line of Jordan Sadler with Keybanc capital markets. Please proceed with your question.
[noise] Hi, <unk> your line is up for questions Jordan Sadler.
Thank you sorry about that was needed a good morning.
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 <unk> or they hyperscale just trying to understand you know the the nature of sort of the delays it's just.
No business moving away from you know.
Sorry, it's yeah bigger customers that are just taking longer to execute or if it's it's.
So I'm just a bunch of smaller customers who are equally next year.
Sure. Thanks, Jordan they'll 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 killed it really started back in March and we've actually seen the number of opportunities.
And increase since that time and as mentioned in my prepared remarks, it's one of the robust no new pipeline. So we've seen in recent years. So so that's encouraging to see as far as the elongated sales cycles are terrific, you're kind of referring to there and you think about the the current business environment that we're in today those enterprise customers that are.
Let's see him or the value and digitizing their business in today's environment are seeing interest there and that's where the pipelines coming from where the challenges Ben is first of all grappling with the their own challenges of operating in this environment as far as employee distance engagement there are customers there.
Supply chain all of those things that are more complicated now along with 'em kicking off a new I T. A project that needs to be evaluated and all the various aspects of the go into that so that's just takes more time.
You know somebody.
The challenge that go along with other for me about a bit longer than what we've seen in prior cycles.
They do tend to be larger deals than what we see it historically interfyl <unk>.
And is that so are those larger deals we also with enterprise customers followers.
Yes is that okay.
Okay is it mix.
Sorted.
Attic, Oh, sorry status quo for you guys in terms of what you guys you what you guys and Gordon.
Target.
So the question again, there Jordan, so it's sort of status quo in terms of mix it customers in the pipeline because I mean, they come to the pipeline bigger when you're trying to understand what's driving it if it's no different type of customer just bigger requirements sure. The Powerpoint is bigger and bigger from a a from an enterprise.
Perspective, so that's good to see its also bigger from just a <unk> dollars <unk>.
Especially in the scale size opportunities Hyperscale come and go and that's not necessarily on an area that we're primarily focused on but yeah. Those enterprise scale opportunities, we see more of those so that's encouraging to see and we're optimistic about the second half of 2020, Jordan either out all the add to the big driver here are the.
[noise], 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 or in other words the amount of data that they will be transferring of round from time to time between their own Sir.
Servers their cloud servers between clouds between cloud adjacent functions is growing and we've had some private research a commission and surveys done and we think it's going to continue to grow and our own historical research and of course I performance strongly emphasize is the value of increasing.
These customers in our ecosystem in terms of stickiness.
Growth and all the other organic growth attributes that you didn't hire so it's definitely a class of customer that's worth pursuing and we believe the opportunities. We're you know we're in the in the early stages of a good opportunities for the next few years to acquire these customers.
Okay, and then just as a follow up or some of these folks.
Targeted for slotted for the Santa Clara backfill.
You're talking about as we seven.
Yes.
Oh, well, we missed on the prior calls it but as an option for us and as we look at the various opportunities out there one of the benefit that we have now in Santa Clara that we have.
Across more and more of our portfolio is the the ability to leverage the campus and putting customers into the REIT space with the right time.
Yes, we stuff and.
Lisa still under lease and so a that rolls off and provides opportunity there and we have SB eight now also to up the customers into we're just look at the balance of that and where the best places 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.
Okay. Thank you.
The next questions from the line of Johnson <unk> RBC. Please proceed with your question.
Oh, yes, thanks, very much I wanted to follow up on maybe some questions and Steve or Paul could you could address.
Just around enterprise and it sounds like you're confident in the sales funnel interested in any quarter to date any any success as you've seen quarter to date now that the quarters kind of a third of the way done and any changes are around close rate right. I mean, the funnel can get larger late stage final stage bottom yet logs.
But at the close rate you know is getting the other way than to maybe that's not so good so just kind of comments or observations on.
Piece parts.
Yeah, well I'll start and <unk> are just said, there's clearly the I can't say a whole lot about where we were doing in Q3, thus far I can say there you know we continue to try to improve on all fronts between pipeline and close rate and all those kind of things and helping customers religious navigate this new environment as they look to typically tour space and how we find pipeline.
And for example, I'm really trying to be agile about how we approach funny, new demand, which I think we've done a more and more effective out as you can see I'm just the numbers of new opportunities coming into the pipeline, but also in customers as they evaluate space and there are alternatives. So I'm doing virtual tourism and a those kinda. Thanks to help them continue in there.
The process of making selections and then moving on in there and there are two projects. So I'm not continues to were to continue to get better and better at that as customers continue to get more and more efficient out and so we feel like that's gonna also start to stabilize and customers are are going to start moving forward.
No more consistently in the future.
And I guess still it's Paul those has anything more to add on that I thought you just maybe a question for Jeff on him all the cabinet.
I know, it's just a minor blip.
In terms of dollar contribution, but it is the first time that that chart topping consistently up into the right and I Wonder John did that have anything to do with renewal spreads or what are the what are the contributors to that.
This quarter that metric.
Yeah, John it's really attributable to two items.
First when you look at our our renewal spreads for the last three of the last four quarters had been negative ultimately that's going to translate and put some pressure on to that EMR per cap be what you're seeing some of that reflected this quarter. So.
Secondly.
There's a customer and SB seven that Weve mentioned and talked about as it relates to our churn expectations going forward.
With that customer has largely vacated the premises and over the last couple of quarters and as a result.
They are no longer drawing the power associated with that deployment.
That also puts a negative impact on the MMR per cab be as well.
And finally, maybe if Paul wants to answer it. The you know just competitive environment around pricing or competitive supply. There has been a lot of scale, we've seen in markets, such as northern Virginia in Portland, and elsewhere, but where are you operate.
Are you seeing the amount of competitive supply kind of get absorbed and what's happening with pricing.
Market pricing trends, so I think it's really a tale of two cities.
We are pricing has been pretty stable you know we have lower density this quarter, but that's typical for retail driven quarter.
But our per kilowatt pricing has been stable and it's primarily because of the type of customers that were winning and their need for you know 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.
It seems to have.
Stayed down in markets like Santa Clara.
New York.
Even Chicago to some extent and so.
No we're not we're not going after that category business as aggressively.
Thanks very much.
Our next questions from the line of Colby Synesael with Cowen and company. Please proceed with your question [noise].
Sure.
I guess kind of follow up just my questions have already been asked but.
When I think of the.
The retail co location growth opportunity in United States.
It's probably around what your what your growth rate is you look at what for example on that when it is putting up in their America's number.
And even if you back out for example, he hyperscale growth that you're thinking like acute yes, or a swing you just said their enterprise yeah, you're you're gonna see that mid single digit type drought. So it's it's really not a function.
You guys I'm not executing it just that's what the market is giving you I.
I guess with that said.
Is there an opportunity here or should the company actually becoming more aggressive.
And looking for growth elsewhere, or whether it is being more aggressive going after hyperscale, even at a lower return, which you've obviously seen anything bad years due in the market reward them for it.
Or potentially even go outside United States.
Or is it simply that your contact with the growth rate that you're seeing in and yeah, we have investors or analysts should be as well.
And then secondly, I'm just more as a clarification.
On SD seven.
What have you assumed in your guidance for their manger.
2020, so I think it's fairly understood that Robert.
They getting five megawatts in October.
It doesn't seem like you feel that obviously just yet so that could actually go darn and at least for November and December is it assumed in your guidance. If there is no revenue coming from that deployment and what does the pipeline look like.
Potentially filled out with another all see five megawatt type customer or given the pricing that you're seeing out there you're not even interested in doing that thank you.
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 enterprise is going to hybrid cloud I think that's a much more attractive growth picture and also a higher value picture.
And you know while cobot has certainly as Steve mentioned for good reason.
Slowed down some of those sales cycles, it's still long term worth pursuing.
And well you know.
The next five to 10 years will tell the story about how aggressively how why is it is to aggressively go after.
The less differentiated deployments and except lower yields.
You know our view is that that the approach were on well actually generate more value.
Create less risk of future churn and generate more organic growth within our datacenter campuses and will provide a good level you know of mid to high single digit growth and 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 SB seven we don't give Jeff will Jeff will.
Shaking his head at me if I try to give specific detail about what's in our guidance.
But of the market in Santa Clara as you know Colby tends to be lumpy in terms of hyper scale opportunities they come up.
Periodically and they moved 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. The current tenant is is a 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 SD eight.
We don't expect it to be a material difference from what we are currently receiving.
Hey, Colby the only thing I would add as far as you approach that we're taking and no looking at retail.
Can have a lot of different views I think it's Paul alluded to there, but what we're also building here as you know future value for these key markets in the U.S. and lot of that involves dollar the interconnection, which we've been focused on since the beginning and is very difficult to replicate so that's part of our differentiation, but also native cloud.
I'll drop a little bit of 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 a more demand in the future, but also be able to to garner better returns. So that's part of your broader picture too.
Thank you.
The next question from the line of neat Cross <unk> was found Burke. Please proceed with your question.
Hey, good afternoon I just wanted to also asked on the seven backfill have you guys had customers come through recently to look at that specific state <unk>.
I'm just trying to understand what the hold up.
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 factored into the specific customers and pipeline and so forth be theres several different pieces of that customers lead part part of which rolls off later this year part of which rolls off later next year and how we fill up that entire room is based off of the demand in there and the other characteristics we have with.
In the campus. So there's a lot of different factors at play into whether or not we place a customer there. So I wouldn't say theres no traction that is not accurate.
We actually see good demand out of that market. There's just a matter of where we place those various customers based off of all the different dynamics.
Okay, what about the two I think last quarter.
Well there what's the latest.
Backfilling that space.
Yeah, I think that also just speaks to the overall you know options that we have them out of that general market. That's a different asset with different characteristics that are associated with it and we have different pipeline demands that better aligned 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, there right you filled and muddied sooner rather than later or.
Well I mean that at the end of the day, you're always make a decision about where the market is the value the customer specific asset and.
And.
What you have to net from the Red.
Even our overall ROI C is which has been high continues to be high has been driven by mix of decisions all along the spectrum pricing. So yes, we can be flexible where we feel it's appropriate to be flexible and where we deal with that we have the ability to to claim.
More value we do that.
Okay. Thank you.
Our next question comes from the line of Erik Rasmussen with Stifel. Please proceed with your question.
Yeah. Thanks for taking the questions you know just back to leasing it seemed a it could take a little bit of a pause after a solid Q1.
In book any so you know scale deals, but with any deals that were pushed out or how should we think about then the balance a year in terms of maybe regaining some momentum.
And then a follow up.
Sure roll up to your point, we did come off a record Q1 as far as retail and skill revenue is concerned so that was.
The exciting to see and I'd be the first one to tell you that are would have liked to see more come out of Q2.
Being said and as I mentioned in my prepared remarks, some a lot of the sales cycles worry long dated so I wonder if you want to call that a push necessarily into future quarters or not because as I mentioned, we got to ultimately translate those into to sales. So we'll see how that plays out, but but given the day the pipeline looks good and were.
We feel positive about the the balance of year and how will finish up 2020 as far as total sales are concerned.
Okay, Great and then maybe just Silicon Valley you know is lot discuss the SB seven SB eight but what are your plans for SC night is that more of Optionality at this point in the focus on so the team is you know Backfilling SB seven and then you have another 25% is so good.
Well I capacity NFC, eight and that they almost becomes a jigsaw puzzle in terms of how you want Oh fulfilled that demand that you're seeing in the most efficient way, but how should we think about then you know SV nine in the context of all that thank you.
Think about SP nine consistent with our previous descriptions of having a proactive a shovel ready development program, so getting through the permitting process.
Having you're ready to go gives us the optionality to move quickly on it.
When we see the.
The demand or the pre lease opportunities to drive that.
Okay. Thank you.
Thank you. Our next question comes from the line of Frank Luton with Raymond James. Please proceed with your question.
Great. Thank you want to circle back.
Topic, just touching all that earlier. So you you had a product you have demand you're getting your you're able to you know get pricing that that you watch.
Clearly customers value what I can appreciate where it's hard to replicate some very interconnection dense locations, but given sort of overtime, we're going to see more compute nodes needed to be a new locations population pinnacle population shifts suppose coated same thing like that why wouldn't you be a little bit more aggressive and.
Getting some land banks is another property and she could do some future development on some newer markets and anti and replicate the product set that that you have then I've got a follow up.
Well, we look at those opportunities all the time, Frank you know what really drives our business is creating these customer ecosystems.
Were you know operating within that environment customers can fully 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.
You know long term, we think that's the most resilient business to be.
We think there's enough of that as far as we can see to generate no the type of growth opportunity opportunities we've talked about.
And you know as we've looked at the wholesale business over the last four five years. The returns have continued to diminish.
And I think the.
You know the longer term risk associated with some of those buildings in the technology space or just they're not what we want to buy into so.
You know that's a great thing about about American businesses that we all can or different opinions or views and strategies, but we feel pretty good about where we're focusing in commencing our resources for the reasons. I mentioned you know every every time, we put a customer and our data center, knowing that we're going to save them a lot of money and give them an environment where they.
It 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 don't feel good about that because the net result is there still saving money.
Alright fair enough and then you mentioned earlier in the call that sales, let me that downloads accelerating a little bit and co they'd with some of the you know the virtual selling and so forth actually doing.
Dynamic and what's kind of changed and how customers adapted from the more traditional come in and see the physical space can kick the tires kind of approach how are you guys being successful.
And with without that dynamic.
Sure roll up your freight Steve.
No. It's really starts where we started early in the process. We saw the where there is going to be.
Limited ability to do what we consider traditional of them some customer engagement demand trend and really pivoted to more virtual events and trying to leverage technology ourselves into attracting new demand so that as a prove to be beneficial so far as far as a as I mentioned earlier is the overall.
New opportunities coming into the pipeline, so that's kind of where it starts.
As part of the customers engage into the process what would typically be a lot of in person come out and view the site go through and.
You know inspect the plant in all those different physical inspections.
We also quickly adopted and recorded a virtual tours that we can conduct with those customers too.
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 few months now.
But even more recently weve been able to with our staff. This on site and followed all the protocols to ensure that they're safe for 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 on 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 to say, but.
Actually come out Steve space make sure that they know.
Where their Archie is going to be placed than it is a long term strategic decision for them. So we're helping them navigate that however works best for them.
Great. Thank you very much so.
Next question comes from the line of Nextel deal with Moffettnathanson. Please proceed with your question.
Hey, engineering and thanks for taking the questions I'm pretty sure Jeff <unk> to what degree if any did on factors like lower teeny expense or lower power prices help the bottom line.
Yeah, Nick you doing yeah, a couple of things great question.
Similar to maybe what you've heard on maybe some other calls but as you look at our Q2 results. Yeah. We had some benefit in the quarter, probably about two to three cents 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 margin so.
As you think about.
Q2 keep that a mine again that was about a two to three cents benefit in the quarter. As you think about thing is going forward through the second half of this year.
You know historically, we've always had some compression in our power margins in the third quarter largely due to increased power cost into you know 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 somewhere similar to what it has done enough pre.
Michelle just see or where we've always had about one to two cents per share.
Additional expenses the third quarter.
And one other thing to think about for the second half of this year as those developments that we have completed some this last quarter, obviously in some of the first quarter well 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 cost far staff that had been hired to run those facilities like us CH too. So just keep that in my is think about the second half of this year.
Okay, that's great detail, thanks, Jess and.
Regarding the changing rents on the newly you noted that was attributable to a couple of leases in a in Reston <unk>.
I feel like that May have happened to you at some point couple of quarters ago in that market, maybe I'm mistaken, but even 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 are coming years.
And next year.
You are actually when you look at.
Some of the negative mark to market over the last couple of quarters that we've experienced anyways I would say.
There's been some share a some share obviously coming from that from Virginia. As we saw this quarter I think it remains to be seen on in terms of pricing in that market and how al on how we execute but you know our pricing in Virginia has varied largely depending upon the types of deals were signing in those given corridors.
And obviously it and what else plays into that are the in 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 couple of long term customers inside our portfolio and as the their pricing.
Continued to increase through their contractual provisions they got well above market and obviously, we had to address that in connection with the 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.
Okay, great. Thanks, Jeff.
Our next question from Atlanta, Richard Choe with JP Morgan. Please proceed with your question.
You talked about a pause and the business is it from a specific business sector or is this more of a regional thing and then I've a follow.
Let me I've, 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.
Our plans in their process for making to kind of a big move into cloud and hybrid cloud.
Because they had to deal with.
Setting up an accommodating a lot of remote work.
That they didn't have to do before or in some cases, you know there they're going to sweat assets for a while while they see how the economy plays out how it affects their business and I think that's that's probably global why not just affecting us in our markets.
But but on the by the same token you have other customers who.
See even more the need to gain the efficiencies of hybrid multi cloud environment and you know once they cleared the decks are pursuing that more aggressively so.
Again, you got you got a countervailing tides, but we'd like the opportunities that are in front of us right now.
Yeah, I don't know them, even more their Richard So I think most was hoping that you wanted us to go ahead.
No no that's fine.
And then the other point.
Do you feel like you have enough space.
Well both to sell and that's not an issue. It's just right now the current business or vitamin seems to be more this year than availability.
Yeah, we've got a as much spaces I think we've ever had to accommodate growth and frankly across a broader set of markets of discoveries that so from a capacity standpoint, we're in good shape.
And you know if we can capitalize on the increased opportunities we have in our funnels things things will look very good.
And the only thing I would out there as you know if you think about all the work that's been done over the last couple of years to reestablish our.
Our capacity position what are 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.
In the those.
Shales that we've built very quickly.
Great. Thank you.
The next questions from the line of Eric We wish out with Wells Fargo. Please proceed with your question.
Yeah, Thanks for taking the questions. So.
My first was on Chicago.
It looks like.
I was wondering what your funnel looks like in that market. You know we understand at least in the city Cropper, 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.
Similarly, with the sales tax exemption that asked last year, because that maybe drive some additional demand into that market.
Yeah, we're we're happy to CCH to come online so that's.
Great good for our engineering and construction team. So appreciate all the work that went into that it was you know it's not easy to a few permit much less building somebody is a key metro cities. So that's our 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 C. H, one facility and having it connected with dark.
Fiber I think it's not only give us the opportunity to selling to see huge too, but it's also provided more value for C. H, one and the ability to expand that ecosystem. The call mentioned earlier and also being in proximity to other key network hubs that are right downtown there as well. So the pipeline we are encouraged with the pipeline we've stopped.
More sales there and we're excited about the opportunity that's out of US both in terms of retail and scale opportunities and in some cases hyperscale.
Okay, Great and then just a more by good.
Worker, just so I appreciate you you're not giving guidance beyond 2020, but considering as you mentioned that you had a decent amount of supply to sell into right now and more new development will be you know.
Lots on the ground up in more filling data hall, so should we kind of expects capital intensity cadence to improve beyond this year and then.
Related to that are you comfortable operating it slightly north of five times not leverage for a period of time or are kind of alternative funding sources, including equity something on the table as well. Thanks.
Yeah, Eric I think similar and maybe what we mentioned last call as we work through the rest of our development. That's an ongoing here through this year I would expect that leverage to slightly go above the five times.
And as we complete and then get those customers that are currently in our backlog able to commence optic and I would anticipate it to start to be see back down close to the five times and I think that's where you'll see us operate in the near term.
In in terms of capital you know I as I think we mentioned earlier your reference 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 that will 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 think 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 it will be developing in 21 will require much less capital. So I wouldn't see our capital needs probably coming down in twentytwenty want as compared to where they were this year and last year.
Okay. Thank you.
That.
Your next question comes from the line of Michael Rollins with Citi.
Thanks, just follow up on the capital allocation discussion out can you remind us your average borrowing rate today that 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 it.
Be able to get credit totality.
The balance sheet and then just stuck in a follow up to the backlog disclosures earlier I think you mentioned that the cash backlog was head of the gap or higher than the gap backlog you can maybe unpack what's happening within the backlog that would be great.
Yeah, Michael Let me give me some commentary on the backlog first but that's you know our gap backlog has historically always been just a little bit lower than our gap backlog. So that difference this quarter of about $5 million you know it will it will range anywhere between three and roughly 7 million that.
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 or they may get 2345 months just to ramp into those deployments and that's fairly typical for the larger type deployments.
So thats, what a cost that difference.
In terms of job our debt you know inside our supplement 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 repriced that yeah. We just did the most recent refinancing how 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 cold, but 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 a michael rare. So it's a unique time to be usually dad I don't think that that gives you a really good sense for where that would be reprice today, if I had to do it again today I think we'd be inside that rate.
You know I don't know what would be probably probably 2753, maybe a little bit lower something like that to give you some sense.
Thank you.
<unk>.
Next question is funnily enough, David Marino with Green Street Advisors to she was your question.
Hey, guys question for in Northern Virginia, and industry data that we let that you got.
Strong first half a year and maybe even a supply demand and is on that kind of swung back to not being so oversupplied.
I know you also noted that market still seeing some aggressive pricing. So what do you guys look at internally to determine when you're going to add new capacity in northern Virginia.
Oh were primarily looked at our scale and retail pipeline.
And select edge cloud opportunities that will drive that.
The you know and and mostly that's building in buildings that already exists in our existing campus. So we can spin up new capacity pretty nimbly. So we don't have to take a long term.
A swing at Atlanta allotment that market has gotten better from a supply demand perspective, but I would agree with what he said hyperscale pricing is still.
Very competitive and in that market, we I think everyone's learn to be little bit and hopefully learn to be more careful and not just the volume of.
Hyperscale Trent transactions in any period, but also the composition of it because there are periods were like like the first half of this year opening more than half of the take up in northern Virginia, which is one customer and.
And does that customer continue to by the same amount in future years historically it hasn't happened that way. So I think I think.
I think people are ripe to continue to be careful about northern Virginia.
That's helpful. And then yeah, maybe switching gears geography in the public market data center stocks have shown really strong performance year to date, and but do you have any idea how that might translate into pricing in the private market or data centers that we can't any sort of cap rate compression in the sector that still too early to tell.
You know bank, 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 public markets.
Great. Thanks for the color.
Thank you at this time I will turn the call back to Paul's Eric for a few closing comments. Please go ahead.
Well. Thank you very much for your interest in core side and your questions today.
And I'd like to thank all my colleagues throughout the course site system.
Hey, Ben tremendous as we work through all these constantly changing challenges a new regulations, but most importantly.
They've all been safe and they've kept each other safe and they kept our customers safe and they've been able to our customers to operate seamlessly in our data centers and.
Thats no small feat under these circumstances, so a great before they've done look we've had great questions on this call today appreciated the opportunity to clarify our strategy.
And our focus on growing the quality and the size in 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. This time, thank you for your participation.