Q2 2021 Brandywine Realty Trust Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Brandywine Realty Trust second quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
So ask the question during the session you will need to press. The Star then the 1 key on you touched on the telephone please.
Be advised that today's conference is being recorded if he will call operating systems. Please press Star then zero.
I'd now like to hand, the conference over to your Speaker host today. This is Jerry Sweeney President and CEO. Please go ahead Sir.
Thank you very much good morning, everyone and thank you for participating in our second quarter 2021 earnings call.
On today's call with me are George Johnstone, our executive Vice President of operations.
Dan Palazzo, our vice President and Chief Accounting Officer.
And.
More of our executive Vice President and Chief Financial Officer.
Prior to beginning today's call I just wanted to certain information we discussed during this call may constitute forward looking statements within the meaning of the federal Securities law. Although we believe estimates reflected in these statements are based on.
Reasonable assumptions, we cannot give assurance of the anticipated results will be achieved for further information on factors that could impact our anticipated results. Please reference of our press release as well as our most recent annual and quarterly reports that we file with the SEC.
So first and foremost we hope that you and yours continue to be safe health.
Healthy and engaged as we return the economy, the normal and while certainly the COVID-19 situation remains volatile with with the daily news breaking there is much more optimism among our tenants as the economy trends towards the full reopening we're hearing that directly from both large and small tenants.
Our portfolio occupancy as of late June increased to approximately 33%, which represents a significant increase from where we were in April where our reported between 15 and 20% of occupancy levels. The predominance of tenants returning has expanded beyond just small employers.
As occupancy for tenants 50000 square feet of below is over 45%.
During our comments today, we will review our second quarter results discuss progress on our 2021 business plan and update all of you on our recent capital activity. Tom will then provide a financial overview.
After that Dan Tom George and I are available for any questions first is the general update on the on the COVID-19 impact on our business.
As previously noted on free on earlier calls each building of ours has a customized return to workplace presentation and our property teams.
We're doing an excellent job guiding our tenants to return to a safe work environment.
Just on an update of tenant survey that was completed in late June we found a couple of interesting things first there is a growing need for space planning services, which as we expected as I think of good sign.
48 tenants, representing about $1.2 million square feet have requested assistance for more internal space planning team and we have engaged with them.
We also got a lot of feedback on an increased need for parking due to near term public transportation concerns, which we certainly believe.
Short term in duration, but about 103 of our tenants representing almost 3 million square feet expressed an interest in parking and actually during the quarter. We entered into a 167, new monthly contracts and saw a 30% increase in our parking lot occupancies.
From a portfolio management standpoint, we have been very much focused on tenants who space. The expire in the next 2 years. Those efforts have been successful we have reduced our forward rollover exposure to an average of 6% over the next 3 years and as noted on page 2 of our Sip to 7.1.
<unk> percent from 'twenty 2 to 'twenty 4 so our forecast of rollover exposure is below 10% annually in each year through 2026, so over the last several quarters, we have significantly improved our intermediate term portfolio stability.
Revenue and earnings.
Growth remains a top priority. We do believe we have some key near term earnings drivers of <unk>.
First we have as you all know some several key vacancies that upon lease up over the next 8 quarters will generate between 7% and 10 cents of additional revenue per share that is in both of our wholly owned and joint venture.
The inventory we are also projecting that 4 of 5 Colorado and 3000 market.
Stabilized in 2022, as we bring those development projects online and where we're seeing clear trend lines of tenants requiring higher quality space, which we believe positions our portfolio of.
Well and that's really evidenced.
By what we're hearing but also by of 23% increase in our development pipeline of Q2 over Q1 and looking at the numbers for the second quarter, we posted <unk> of 32 per share which was in line with consensus estimates we made.
Extreme the progress on all of our 2021 business plan metrics and during the quarter, we had 20000 square feet of positive absorption.
Given increased the leasing visibility through the balance of the year, we did increase our speculative revenue target by mid point by $500000.
And reduce the range of narrowed the range rather from 18 to 22, million% to 20% to $21 million and as reported we are now 98% complete at that revised range rent collections continue to be very strong and 1 of the best in the sector as we've collected over 99% of our second.
Quarter rents are July of receipts continue to track towards that same level tenant retention was 58% our lease percentage remains within our business plan range second quarter capital costs were 12, 8% of of generated revenues slightly above our 10% to 12% business plan range.
But our average lease term was 8.5 years, which exceeded our 7 year business plan target.
Cash Mark to market was a positive 14% and our GAAP Mark to market was also positive 22%.
All of those results were above our full year published ranges. However.
Range, we mentioned last quarter based on leases already executed and commencing later this year with lower Mark to market results, we will be within our business plan ranges. We also expect that every region will post positive mark to market results on both the cash and GAAP basis for 2000.
'twenty 1.
Our second quarter GAAP same store NOI was up 5.
And year to date is below our 2021 range of zero to 2% second quarter cash same store NOI was 1.8% again below our 2021 range of 3% to 5% again.
As with similar to the Mark to market dynamics tenants scheduled to take occupancy later this year, we will accelerate same store growth and enable us to achieve our 21 business plan range.
With the exception of our met DC operation all of our regions are expected to post positive same store results in our met DC region.
Region will remain negative while $16.76 international continues through with it.
Its lease up phase.
We are still forecasting.
'twenty, 1 year end debt to EBITDA in the range of 6.3% to 6.5% as we've always cautioned that does depend on the timing of future development.
<unk> starts for the balance of the year.
And just a couple of comments on leasing velocity, because I know everyone's looking for recovery data points just like we are.
And we think there are some encouraging signs at least what we've seen in the last quarter of.
A lot of tenant prospects.
With the pandemic 1 of.
To lead towards spaces before commit.
Committing to an in person tour, we continue to see this trend of off during the quarter. We had a total of over 500 virtual tours with almost 800000 square feet being targeted that led to a 46% increase in physical tours.
Of virtual for Q1, our overall pipeline.
Standard of 1.4 million square feet with approximately 200000 square feet in advanced stages of lease negotiations. Our overall pipeline increased by just shy of 600000 square feet during the quarter.
And while these.
<unk> of recovery points are encouraging we do believe it will take several quarters to assess the full impact on the office business from the pandemic so to gain some insight we looked at our leasing metrics from the second quarter of 2019, So pre pandemic same quarters were and now those data points.
We thought were also encouraging on a comparable set of properties. The pipeline today is up 7% compared to the second quarter of 2019.
Leases that we executed this quarter are also up 13% from the second quarter of 19 deal.
At the proposal stage are up 20%, including new and expansion of proposals being up 13% over the comparative period.
There are 2 additional benchmarks, we looked at that demonstrate that we are clearly still in the recovery phase, but overall were surprisingly good compared to the second.
Of 2019.
Our deal conversion rates it was down 6% to 28% in second quarter of 'twenty, 1 versus 34% in the second quarter of 19, and as you might expect given where we are in this recovery phase the medium deal.
Core cycle time is up 27 days.
2 of 104 days.
This past quarter versus 77 days in the second quarter of 19, So we're hoping that as the economy continues to ramp and we will see condensing of that deal cycle time as thats.
<unk> is where the rubber meets the road in terms of revenue generation and looking at liquidity, we have excellent liquidity anticipate having $460 million of line of credit availability of by the end of the year. It's.
As Tom will touch on we have no unsecured bond maturities until 2023 and have a fully unencumbered.
<unk> wholly owned asset base, our dividend is extremely well covered at 57% of <unk>, 81% of cat at the midpoint of our guidance.
Our 5 year dividend growth rate has been 5.3% versus the peer average below 4% and we have grown our CAD.
During that same 5 year period close to an 8% annual rate versus the peer average again below 4%.
From a capital allocation standpoint, it was a fairly quiet quarter, we continued to make progress on many fronts and subsequent to quarter end as part of our land recycling program.
Graham we did sell 2 small non core land parcels and posted a small gain on that.
Looking at development.
As we always note we have a number of production development projects.
That can be completed in 4 to 6 quarters that cost between 40 and 70.
$70 million the pipeline on those 4 production assets grew 40%.
Since the first quarter.
Which is a good sign again I think of tenants entering the market, but also looking for high quality space and along those lines we did.
Start the renovation program for $2.
King of Prussia Road.
That is the 169000 square foot project located in the Radnor Submarket that we acquired for approximately $120 per square foot as part of an overall transaction with Penn Medicine.
We've designed that project to accommodate a significant life science component.
<unk> the renovation started in the second quarter and wrapped up within the next 4 quarters. This project will be the first component of our Radnor Life Science Center, which will initially consist of this project and our planned 155, Radnor ground up 150000 square foot development.
And these 2 projects will deliver more than 300000 square feet of life Science and office space to 1 of the region's best performing long term sub markets and looking at the existing development projects yards West is very much on pace on schedule.
That's the life science residential.
The office project, we commenced on March 1st the project will be built with 7% blended yield and consists of 326 apartment units of 100000 square feet of life Science space 100000 square feet of innovative office space and street level retail.
Still.
<unk> been active pipeline comparable to last quarter, we did close our 65% loan to cost construction alone at of floating rate equal to 3.8 and 3 quarters of percent. However, given the frontload the equity commitment from both us and our partner.
Even with Brandywine is $55 million.
Still have equity commitment, which of which $46.5 has already invested the first funding of that construction loan won't occur until first quarter of 'twenty 2 but it does complete the capital stack for that project.
Looking at our 405 price, Colorado project in Austin that project is now complete we're.
Reschedule of the Grand opening in the fall.
During the quarter, our lease percentage did increased to 24% and we currently have a pipeline of 527000 square feet, including about 40000 square feet in final lease negotiations.
<unk> 3000 of market is our life science renovation.
Within Schuylkill yards that project is fully leased the.
The construction will finish later this year.
And we're projecting the lease commencing fourth quarter 'twenty, 1 at a development yield of 9.6%.
The <unk> labs, which we announced last quarter is a 50000 square.
Incubator that we're partnering with Pennsylvania Biotechnology Center, the labs will open in the fourth quarter of 'twenty, 1 since the NFS and we haven't heard the marketing pipeline of build a significant amount of interest with proposals outstanding for roughly 78% of that space.
Just have a couple of more updates on schuylkill yards and broad more within Schuylkill yards of the life Science push continues as we've cited previously we can deliver about 3 million square feet of life Science space, which we believe creates an excellent opportunity to establish and corollary research community to all of the other great.
Activity over here in University City.
$31.51 market Street, our dedicated life Science building is fully designed and ready to go we have of leasing pipeline on that still in the 400000 square foot range. It is advancing advancing slowly, but I think with a high degree of confidence and our goal remains.
Being able to start that later this year assuming market conditions.
The permit at broad more we are progressing with blocking the first phase of block F to recant that scope of that is 350000 square feet of office and 613 of apartment projects.
At a total cost of about $367 million, we don't really go mode on all of those components. We are moving forward through final documentation with our selected equity partner on block a and block F of residential and are soliciting bids now on construction financing alternatives we antigen.
Anticipate a third quarter closing date.
On both blocks and our plan remains to start the residential component of block, a which is 341 units at $119 million cost in the fourth quarter of 'twenty, 1 and on block a office we are actively.
And the pre leasing market and would plan to start that as market conditions permit.
Just 1 final note before I turn the call over to Tom to refinance the results.
And it relates to our third quarter earnings cycle as you may recall.
We would normally provide 'twenty 2 earnings.
This is planning the <unk> guidance during our third quarter 'twenty 1 earnings cycle, However, consistent with what we're saying we did in 'twenty, 1 and based on the continued uncertain business climate, we will announce our 'twenty 2 guidance on our fourth quarter.
Earnings call. So Tom will now provide.
<unk> and review of our financial results. Thank.
Thank you Jerry.
The first quarter net loss totaled 3.
$300000 of less than 1 penny per diluted share and <unk> totaled $55.9 million or <unk> <unk> per diluted share and in line with consensus estimates some general observations regarding.
Good day, even our second quarter results, while the second quarter results were in line, we had a number of moving pieces and several variances to the first quarter guidance.
The portfolio operating income totaled $67.60.
$67 million, which was below our fourth our estimate by $1 million residential.
<unk> and parking revenue were below budget as the results of the restrictions that were in place for most of the quarter and Philadelphia are negatively impacting those results interest expense totaled $55.5 million and was below our first <unk>.
First quarter forecast due to higher interest capitalization on our 4.
4 of 5 Colorado project termination and other income totaled $2.7 million and was $1.7 million above our first quarter forecast, primarily due to 2 insurance claims generating approximately $1.1 million of other income.
We recorded no land gains and minimal tax provision compared to a.
The $1.1 million income guidance for the first quarter 2 land sales were delayed.
From this quarter into the next quarter, 1 transaction as Gerry mentioned is already closed subsequent to quarter end and we anticipate the second transaction closing later this quarter.
G&A totaled $8.
Million or of 200000 above our 8.2 million dollar first quarter guidance. The increase was primarily due to employee medical benefit cost <unk> contribution from unconsolidated joint ventures totaled $6.8 million or $1.3 million above our first quarter estimate the.
Higher <unk>.
The contribution was primarily due to lower net operating cost from expense savings and the 600000 dollar a termination fee at Commerce square.
Our second quarter fixed charge and interest coverage ratios were 4.0, and 3.8 respectively. Both metrics decreased.
For me from the first quarter or second quarter annualized net debt to EBITDA increased to $6..9 is currently above our guidance range and increased primarily due to the forecasted lower NOI.
The increase was forecast and then we expect the metric to improve during the second half of the year from higher forecasted.
Slide the lie.
Additional reporting item on the cash collections as Jerry mentioned, we had a very strong quarter of 99% and tenant write offs total less than $100000 for the quarter.
Portfolio changes as we noted a 905 is now completely out of all of our metrics as that building has.
And then I'm going out of service related to our broad more master plan.
Looking at third quarter guidance.
We anticipate the third quarter results to improve compared to the second quarter based on executed leasing activity and have some other assumptions our portfolio operating income we expect that the total $6.8.
But take a million dollars and be sequentially higher during the second quarter.
Of that will be due to the 107000 square feet of forward leasing activity anticipated to commence during the third quarter and should.
Generate a second consecutive quarter of positive absorption.
<unk> contribution from our unconsolidated joint.
8 fighters, which totaled $5.8 million for the third quarter of $1 million sequential decrease from the second quarter, primarily due to a noncash the noncash.
Non recurring termination fee and incrementally higher net operating expenses.
Just the G&A for the third quarter will decrease from 8.4% to 7.
The venture 5 of the sequential decrease is primarily due to the annual equity compensation vesting during the second quarter that will not occur in the third quarter we.
We expect interest expense to approximate $16 million with capitalized interest of $1.5 million termination and other income.
<unk> point to total $2.1 million for the third quarter net.
The net management and leasing will total of $3.2 million and interest and investment income $2 million for land gains, we expect about $2.3 million for.
For the quarter based on the 2 previously mentioned.
We expect the things and 1 additional non core land sale generating total proceeds of $16.7 million.
21 business plan also assumes no new property acquisitions of sales activity no anticipated HCM of share buyback activity and no financing of refinances.
Financing activity we.
Did close on the $186.7 million construction loan of Schuylkill yards and as of at the initial rate of 375%.
While we have no other financing of refinancing activity in our 2021 plan, we continue to monitor the debt markets ahead of.
In 2023 unsecured bond maturity.
Looking at our capital plan, our second quarter CAD was 95% of our common dividend, which is above our stated range. The increase was due to several large tenant allowance payments, which we anticipated occurring during 2021, so the timing.
<unk> of those payments were significance of the quarter, but anticipated for a full year range and our CAD range remains unchanged. Our second half 'twenty..1 capital plan is very straightforward and totals about $245 million with $120 million of development $65 million of dividends.
$20 million of revenue maintain capital $30 million of revenue create capital and $9 million of equity contributions to our joint ventures, primarily schuylkill yards.
The primary sources, our cash flow after interest payments of $95 million $82 million use of our line of credit.
Using the cash on hand, totaling $48 million and again $20 million roughly in land and other sales based on the on the capital plan outlined our line of credit balance will be approximately $140 million, leaving $460 million of line availability.
The increase in the projected line.
Line of credit balances, partially due to the build out.
Of our incubator space as well as our development, we still project our range to be 63 to 65, but as Jerry mentioned that will be predicated on how our development starts occur and we still see our net debt to JV between 42 and 43% in.
In addition, we anticipate our fixed charge coverage ratio to be approximately $3.7 of our interest coverage ratio to be about 4.0 I.
I will turn the call back over to Gerry.
Great Tom Thank you very much.
So just in wrapping up I think the key takeaways are.
Yes.
Our.
Our portfolio and operations are really in solid shape, we have a great team of people on both the operating the leasing of the marketing front and we've really kept excellent visibility into our tenant base information has been key so the level of conversation with all of our customers has been significantly enhanced during.
Cycle.
I think we're very pleased that our annual rollover through 'twenty 4 is only 7% of year I think thats, a low watermark for the company in terms of portfolio of role.
Leasing pipeline continues to increase certainly not as fast as we would like and certainly I know a lot of folks from the car looking.
During the.
More visibility as well, but tenants are returning to the workplace.
We think the the green shoots we're seeing in terms of their space requirements of our are good signs and we do expect a compression of decision timelines later this year and a continuation.
<unk> of positive Mark to markets.
Driven by improving market velocity stable overall market conditions and escalating construction prices.
The safety and health both in design and execution are really our tenants top priorities, we are well positioned to meet their concerns.
<unk>.
And we believe that new development of our trophy stock will benefit from this trend as I mentioned earlier, our development project pipeline increased by about 23% during the quarter.
We still are very excited about our forward growth drivers we have 2 fully approved mixed use master planned.
That can double our existing portfolio diversify our revenue stream and drive significant earnings growth and when you take a look at.
Even at Schuylkill yards, assuming a start of $31.51 markets through with the other projects we have.
In operation of under construction that will represent about 5%.
Of our portfolio square feet. So a measurable contribution building from a diversification of our revenue stream and an addition of life science, our schuylkill yards and broad more developments with the existing approvals in place can accommodate about 5000 of multifamily units as.
As Tom.
Site has always had a very attractive CAG growth rate over the last 5 years, we think we've created and established the stability to a well covered and attractive dividend that we believe is poised to increase as we grow earnings and from a financing standpoint, certainly given the continued dislocation that public marketplace, there's always a concern.
Concern about the.
The best way to finance these properties what I can tell you is it private equity is more than abundant the debt markets as we've seen with the Schuylkill yards West construction loan are extremely competitive strong operating platforms and Walt can see projects like Brandywine continued to gain.
<unk> touch significant traction for project level of investments and we're confident that there is executable financing available for our entire development pipeline in today's marketplace.
So as usual, we'll end, where we start and that we really do wish you're all doing well enjoying the summer and that you and your families.
<unk> 6.8 and engaged and with that we'd be delighted to open up the floor for questions.
We ask the the interest of time.
The limit yourself to 1 question and a follow up.
Libya.
Thank you, ladies and gentlemen of the line is to ask the question Youre..1 of your question the start under 1 key on your Touchtone telephone.
Do we draw of question press the pound key.
Please standby, while the compile the Q&A roster.
The first question coming from the line of Jamie Feldman with Bank of America. Your line is open.
Great. Thank you and good morning.
I appreciate all the commentary so I guess going back to your comment.
And the tenant survey you said growing need for internal state planning services can you talk a little bit more about what youre learning how of that.
Specifically I mean do you think that tenants are going to want to downsize before they start growing again, you get any kind of sense that.
I guess, just what are you learning in terms of how much space theyre going to need going forward.
Especially with hybrid work.
Yes, Jamie.
Good morning as well.
George and I will tag team this.
I think the data points are still evolving and as I mentioned I think it will take several quarters to really get a really good idea I mean, a lot of our tenants.
Particularly the larger ones are still.
Working through what level of flexibility they will incorporate into their employees work schedules.
What we've been seeing is that the primary.
Request through our space planning exercises are really for increased circulation patterns additional.
Well spacing between workstations.
The incorporation of more partition walls.
We think all of those items will lead to.
The to more space requirements, we've actually had.
A number of expansions in the last couple of quarters as parts of renewables, but I would hesitate to indicate.
Additionally, the definitive trend line, yet because we're still waiting for some of the larger tenants to really weigh in and I think to some degree that's going to be a function of whether they go to a hybrid work.
The program in 3 out to into out 3 whatever it may be and.
Right that is and whether those employees that are on our hybrid work schedule, we will move to hotel ing or and elimination of their private workspace, we're seeing data points all across the board.
I will tell you we've had.
53 tenants.
Tenants, who have indicated they need more square footage out of the data set.
Any others from the price of kind of figuring out there the overall requirements.
So our hope would be next quarter, we can give you a little more visibility, but again a lot of the space planning discussions are underway a lot of the tenants.
And these that we've executed leases with.
The circulation patterns of wire theres been a slightly higher percentage of private offices, but George to any other points you like that yes, I think we've seen.
Increase in the size of workstations, so that the.
By default kind of indicates more space, but I think the.
The closing part of your of your question and kind of Jerry's response, I think the still to be determined the part of the hybrid returned to work is really going to be the.
The key ingredient as to.
Tenants of tenants need more space or less space and the.
And again whether that.
It becomes a permanent desk vs that hotel <unk> desk.
I do think of lot of employees.
Would prefer that they know they've got a dedicated workspace, even if they're on a hybrid the schedule yet and I think just.
Whether close the loop the Jamie that's clearly some of the data we're getting back from some of the from the tenants who we're talking to is that.
Most employees clearly 1 of the hybrid work schedule for a whole variety of reasons.
But again most of those employees are reluctant to force.
The a private workspace, we will see how that all works its way through the system over the next couple of quarters, but we think the signs we're seeing certainly a lot of the conversation, we're having with tenants.
It seemed to be pretty encouraging in terms of reconfiguring space.
And.
<unk> not having some significant downsize requirements, but again I think the data is evolving.
Okay, that's very helpful.
And then you had also mentioned 7 to 8 tenths of upside from back filling some of the vacancies.
Can you just give us an update on the spaces and maybe handicap, how long that might take the play.
The out.
Yes sure Jamie This is George I'd be.
Happy to walk through those.
Regionally starting in Austin, I think as everybody is well aware of where we still have 36000 square feet of of space that had been given back to us from <unk>. We've got 2 proposals Alf on.
5000 square feet of that space and looking at the kind of wrap up of deal.
The next 30 to 60 days.
The space the Comcast.
As has given back at 2 Logan as you recall that was 4 floors about 88000 square feet, we have already leased.
<unk> 1 of those floors.
We've got a proposal out to to an existing tenant for expansion.
Got a second proposal out to a to another prospect, which would leave us just 1 floor.
Remaining to lease the largest part of that.
Revenue.
Gain for US is down at $16.76 in Tysons.
Last quarter announced the 75000 square foot deal that will commence in the fourth quarter. We've got about 175000 square feet to go there overall of that projects, 40% leased and we've got a pipeline today of about 3.
336000 square feet looking at that 175000 feet of available space.
And then we've got I think the 1 we touched on last quarter as well.
Of that 555 Lancaster Avenue in Radnor, we've got.
Our fitness center space that we've got.
The lease out for and we're hoping to get that wrap up here in the next 30 to 60 days as well and then quickly over at Commerce square within our JV inventory.
We got to.
Proposals out there we've actually doubled our pipeline as of June 30th from where we were.
The at the end of the first quarter. So we've got about 200000 square feet of prospects.
Looking at the.
Roughly 100 or 240000 square feet of of <unk>.
<unk> inventory, we do have 1 lease out for.
Close to being out for signature.
Kind of going through second round of comments between the attorneys for 30000 square feet over at 2 commerce and in the space, We got back there so.
That's kind of the update.
The.
The good news is that pipeline continues to build I think all of those properties are.
At all situated.
And we look forward to providing further update on the next call.
Thank you that's really helpful. If I could just ask the follow up on just the tightening.
Okay.
You say, the 336000 square foot pipeline.
The delay there it seems like that market.
Of our whether the stable.
What do you think you can take from people that signed leases.
Well I think the Jamie.
Look I think 1 of the things we're seeing throughout these markets.
While the pipeline is building.
It's taking a lot longer for leases to get pulled together so when we take a look at.
Relative.
The market stats for Tysons.
Really 2020, 1 year to date.
That guide house deal.
George had mentioned was far and away of the largest deal done in that marketplace.
There has been.
A number of tenants have done.
On the renewables.
But next to that the largest deal in the market that was done was the.
It was about 30000 square feet. So we are in our pipeline. There is a number of larger tenants. The gestation cycle is very long.
And the decision timelines continue.
The delayed as tenants rethink their workplace strategies as we talked about on the on your previous question.
So look I think whether it's a <unk> 76 or commerce square the other holes, we have in our inventory and the development projects. We're in it we're not worried of them and aggressive.
To get getting in leasing mode.
On every 1 of those projects.
And the.
Running from being aggressive in terms of tracking down the economics, we need to make the deal.
2 of kind of a comprehensive deep briefing in the company for dead deal reviews. So we're staying very much in front of where we think the markets.
More of our but more importantly, where we think they are going.
And.
I think that's more of a generic comment in terms of all of the spaces across the board.
But the flow of information that we're getting from brokers is that the.
They expect the pipeline to build I'm, even down in Austin.
<unk>, which has always demonstrated some phenomenal statistics in terms of the number of active prospects through opportunity Austin and the flow through the portfolio leasing volumes downtown and.
In the southwest had been fairly anemic year to date Theres a lot of things that the scheduled in the Q, but.
They haven't really hit the they haven't hit the decision timeline, yet so I hope that's helpful color or not but I think we track what our percentage is of.
Of market share for deal activity and I think the.
The deals that we've done.
In all of those key markets George outlined as we're continuing.
To maintain or improve our market share on in every sub market.
Okay, great very helpful. Thank you. Thanks.
Thanks, Jamie.
Our next question coming from the line of Emmanuel Korchman with Citi. Your line is open.
Good morning, everyone Jeremy maybe.
With the Austin for a second there if you think about your pipeline for 4 of 5 Colorado and for broad more which I think he said what was going to get pushed harder later this year.
What are the differences between those 2 pipelines are you seeing tenants looking at both or is it or is there a stark difference between the 2.
Yeah, there's not really a significant.
The it's picking lap between those 2 projects.
George maybe get some color on the pipeline of 4 of 5 yes, I mean, I think predominantly we continue to see tenants the.
Certainly just wanted the downtown.
Hit that 405, Colorado pipeline, it's about 540 <unk>.
Over where feet.
As at the end of the second quarter and very few times are we seeing that same prospect also looking out in the northwest and in terms of broad more.
We've seen everything from tech companies to the law firms the.
The financial service companies.
In that 4 of 5 pipeline and the.
And as Jerry mentioned in his comments, we've got about 40000 square feet kind of.
Final lease negotiation.
Yeah, and then Jamie.
Of the broad more development of couple of larger tenants are kind of still tech oriented that are part of that pipeline and I.
The.
The smaller tenant activity, we haven't really seen on that broad more development as of yet because I think the marketplace knows that we're looking for a larger tenant to start that building.
But I think the.
It's the story I just mentioned to the previous question, which is you know.
I think expectations are high that the pipeline will continue to build not just the brandywine price of of <unk>.
Market wide.
But when you really take a look at the detail of a lot of leasing activity that occurred in the second quarter. It was well below in Austin for example, well below Austin's historical standards, I mean, EBIT, whether it would be downtown.
Currently.
A couple of larger deals that were signed 1 was the sublease.
And out in the in the southwest there is we are really very few deals done a couple of 20000 square foot transactions done it.
7 of <unk> and uplands and a few other deals done at <unk>.
<unk> on the lake, but our leasing.
It's about 15000 square feet of Barton Skyway that was almost of market leading position right now, particularly when you combine that with the.
The deals that George mentioned ways that the the vacant space walk through.
Great. Thank you.
I'm.
I'm, sorry, you walked us through the limit of lease roll through 2026, as you've gone out to those tenants for early renewals have you gotten any from non renews. The we should think about as we think about the rollover. The next few years.
No, we really haven't I mean, I think the.
Again, these larger tenants I think are still thinking through.
So many of their long term perspectives and I don't think that Thats, something we'll know by Labor day, I think that's going to evolve as they bring people back to work we are still even as of yesterday hearing back from our larger tenants that even despite the.
The events of the past couple of weeks.
There is still of the majority of them are starting to bring people back after labor day.
Frankly, a number of them still haven't finalized there.
<unk> policy, whether that'll be 1 day of week 2 days of week.
So we're still actually waiting for some visibility from some of those.
Through some from some of those larger tenants in terms of what they actually plan on doing.
George anything to add to that no I think the only 1 that we've discussed previously with Baker of moving out of Seara Center and.
The good news there is we've got 2 of those 4 floors, we've got of lease out and we've got proposals.
For the other 2 so I mean that is our largest known move out that we.
Discussed I think.
For 2 or 3 calls in a row here, but.
But the.
Progress on back filling it has come together nicely.
Thanks, everyone.
Thanks, Matt.
Zhao.
Our next question coming from the line of Anthony <unk> with Jpmorgan. Your line is open.
Okay. Thank you.
Thanks for all of the color on the feedback from your tenants and all of the connectivity of there. It seems like you all have.
In that regard.
Like where do you think the 30% utilization goes.
The post Labor day in September and then where does that number do you think of it.
Year end for everything to be tracking.
Hey, Tony and good morning.
We'll give you we'll give you those answers based on the information we have today I.
The news this morning, so we'll see what happens but.
The vast majority of our tenants are planning on rotating back in after labor day. So for example, I won't mention their names, but 2 of our larger tenants in a conversation with their executives yesterday.
The plan on.
Bringing people back.
<unk> in labor day, and being very close to full occupancy by the end of the year.
That's I think that's the best visibility we can give you at this point.
A lot of it depends on.
Of the CDC changed in the guidelines if there is any further.
The adverse.
<unk> news on breakthrough re infections, but at this point most of the schools are back are back in full time session. In the fall that was a major gating issue with a lot of the larger tenants day.
Carriers are back in operation mass Trans out here in the fill up the area of sepsis done a wonderful job of really.
Caring for getting back the full full.
Full of commuter loads. So we think the there were the primary gating issues in getting these larger employers to bring their employees back in.
So at least as of now the indications are the.
Kind of September through December Theres, a ramp up.
Up close to full occupancy by the.
Gives me by the end of the year.
Got it and just to clarify when you say full is that that 30% go into a 100 or 30 go into like the typical 70 on a given day and yes, I would say, it's effective utilization rates pre pandemic.
Okay got.
Got it and then just my other question has to do with just Capex, it's running a little bit ahead of plan above your 10% to 12% number do you think that's mix or do you think that's just a function of inflation market conditions, it's just going to be a higher number.
Yes.
Good question and.
It really varies quarter to quarter more just based on which deals are commencing in that quarter and you can kind of get a few that.
The can can skew a given quarter, but aren't necessarily indicative of future ramp up I mean.
<unk> base.
Tony averaged 12.0 over the last 4 years of capital as a percentage of of revenues and that really is kind of where the top end of our range is and so even though this quarter trended higher the deals that we know are commencing in Q3 and Q4 are at lower.
Capital of percentages and bring us back in line with that full year guided range.
Okay got it thank you.
Thank you Tony.
And our next question coming from the line of Craig Mailman with Keybanc capital. Your line is open.
Hey.
Hey, guys.
Jerry I just wanted to follow up on your commentary about parking.
Can you just give a sense of like is this company's paying for our employees to entice them to come back in the office or as employees kind of doing it on their own because either accepted not running the.
The way they wanted to or safety concerns.
Yeah.
Hi, Craig Good morning, I think it's both actually I think we're seeing some employers provide incentives by agreeing to pay per parking the bring their employees back.
There is.
The concern that we think will dissipate fairly quickly over a variety of mass transit.
And we think it's a number of employees contacting us who are indicating that they are they're coming back to work and they previously took the regional rail system.
Like to have.
Monthly parking passes through the end of the year so.
So I don't think Theres any.
Defined path other than people are requiring more parking short term.
So we think that that actually bodes fairly well I mean, our parking occupancy levels pre pandemic, where very high parking is a very good adjunct benefit we provide to brandywine employees within our centrally located.
University of <unk>.
The properties in 4 of 5 comes from the line will have over 500 parking spaces. So it's a valuable amenity to differentiate ourselves from some of our competition.
So we think that this temporary increase in short term parking.
Requests.
We'll smoothed that Ed.
We see more people do in fact come back to work and commuting patterns revert to their pre pandemic of nodes.
Alright, and then just on the kind of of the good demand youre seeing it here for the life Science conversion could you just talk about.
The credit profile of our kind of size of some of these tenants.
As I'm looking for the space kind of where they are in their lifecycle.
Yes, certainly.
We have been very pleased.
Jeff the vinyl and his team are doing a great job along with PAA of biotech really tapping.
Tapping into an ever broadening network of potential uses.
A lot.
A lot of the companies that we're talking to are actually larger than we initially programmed our pipeline would be.
So they tend to be in.
Into the second round of financing.
There's a couple of pre IPO companies with good private.
The private equity capital behind them there they typically are.
Going through the trial phase of their approvals so the.
The credit worthiness is certainly something we focus on.
And we haven't seen anything at this point that would cause us real concern given that we're providing kind of the turnkey operation Orange on short term licensing agreements.
We're creating the infrastructure.
Our guess is there'll be some tenants there'll be larger than we thought they would be and would stay there longer and there may be some tenants that might.
Our board after not having successful charge of raising capital George any additional color on that.
No other than the fact.
The pipeline continues to build there and.
We've got 239 seats and that incubator space and we've got coverage on just about 80% of it right now so.
Yes, I mean, the number of those prospects Craig our spin out from some of the anchor institutions. So there.
Yes.
They are well staffed with top level of research scientists with.
The good business oversight from either private equity or the Acura institution. So it's a pretty diverse group of prospects and I think we're very pleased with the reaction of getting thus far.
Great. Thanks.
Thank you Craig.
Yeah.
Yes.
Non next question coming from the lineup Daniel Ismail with Green Street Advisors. Your line is open.
Great.
Transaction volume is still low, but what is your sense on private market pricing across your markets broadly it seems like you.
The portfolio's been.
Pretty resistant throughout the pandemic.
What is your sense on cap rates and values across your footprint.
Hi, Danny Good morning look I think there really have not been a lot of transaction I think if we go take a look at the kind of rolling through the markets I mean, certainly Austin continues to EBIT.
Of the dynamic that is incredibly.
<unk> impressive I mean, even given the recent trade of 1 of the downtown towers and the the pricing that 1 off of that as well as the projected pricing on some of the more suburban product trades. So certainly continued compression there certainly had been tracking given the fact.
That we are doing residential development in Austin, there continues to be some significant cap rate compression there with the cap rates hovering around 3% so.
Tremendous value creation opportunity for us given our ability to create thousands of residential units of broad more.
<unk> not of lot of trading activity in Washington D C.
1 of our public company peers did a bulk trade it at the <unk>.
Cap rate that most observers view was outside the market norm.
That was a discount of trade due to the volume.
<unk> to be seen as really haven't seen a lot of additional visibility behind that.
And the Philadelphia regional marketplace.
So there is a number of projects on the market now, we'll see how they get price that but the early indications are.
That the bid lists are getting bigger that there seems to be of a.
The emerging reallocation of money back to office.
And whether.
That's driven by the expectations of recovery in demand juxtaposed with the increased cost to develop new buildings.
And certainly the lower cost of debt capital and its tremendous availability.
As well as the multiple.
Multiple hundreds of million.
Of private equity looking for a place the land, we're actually starting to see as I mentioned more people entering the bidding pool and the price and becoming marginally more more aggressive than it was even a couple of quarters ago.
And certainly our thought would be Danny.
As leasing volume.
Paucity picks up and there tends to be more.
The more data continuum on.
Mark to market rents vacancy levels going down manageable delivery schedules.
So net effect of rents.
We think.
The loss rate of level of stability, we would expect that that trend line towards more aggressive pricing will continue so long as the interest rate environment remains fairly low.
Great. Thank you James.
Thanks, Dan.
And our next question coming from the line of the Farquhar.
Aqua with Evercore ISI your line is open.
Yes. Thanks, most of my questions have been asked but Gary I was just curious we've seen a lot of volatility in.
The material costs.
Lumber Spiking, then coming back down and I'm just curious as you look at the.
The price and brought more today.
We will them.
Ask kind of versus your original pro forma and I assume.
If theres been any pressure on rents.
Just curious how maybe the expectations have changed.
Steve Great question and good morning to you the.
Yes.
A couple of different levels, 1 is I.
Across the board.
The construction costs have gone up.
That's not necessarily great news, but I think it's also well recognized.
In the broader market that costs are going up so most tenants are getting conditioned to marginally higher rents to comp.
Compensate landlords for those higher construction costs. So we've actually seen our net effective rent levels throughout our portfolio. Some of the deals of George was talking about still remains very much in line with what our projections of our so there is seems to be an ability to compensate for the increased construction costs.
That's kind of on the throughput inventory on the development projects.
Look we've certainly seen an increase in beta aluminum steel glass com.
Concrete and everyone is claiming supply chain disruptions from lumber mills being shut down during the pandemic to.
Shortage of cargo containers from the far east to increased fuel shipping costs. So the general discussion with almost every sub and average <unk> Oh my goodness costs are going up what we've actually seen is.
Initial bids come back in somewhere between 4 and 6% over our estimates.
And as we work through the sub contractor bid cycle and provide definitive notices to proceed or able to squeeze that cost back down close to our budget, we did in anticipation of cost moving up.
We always build in a fairly high level of contingency.
In our owners' budget before we lock into a guaranteed maximum price contract. So where we are seeing some escalations. We've been fortunate through the sub bidding negotiation process locking into a couple of the larger cost components like steel fabricators reserving slots in the.
And the structured parking manufacturers preordering class, we've been able to lock into the lower prices. So I think we're going to be in pretty good shape.
Great. Thanks, Thats it from me.
Thank you Steve.
I'm not showing any further.
At this time I would now like just from the call back over to Mr. Sweeney for any closing remarks, great Livia. Thank you for your help today and thank you all for participating again, we look forward to updating you on our third quarter call with the continued progression of the business plan in the meantime, please enjoy the rest of the summer enjoy family time and stay safe.
Thank you very much.
Ladies and gentlemen that does conclude the conference for today. Thank you for your participation you may now disconnect.
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