Earnings Call: Q2 2021

Jul 27, 2021

Ladies and gentlemen, thank you for standing by, and welcome to Brandywine Realty Trust second quarter 2021 earnings conference call. I would now like to hand the conference over to your speaker host today, Mr. Jerry Sweeney, President and CEO. Please go ahead, sir. Lydia, thank you very much. Good morning, everyone, and thank you for participating in our Q2 2021 earnings call. On today's call with me are George D. Johnstone, our Executive Vice President of Operations, Daniel Palazzo, our Vice President and Chief Accounting Officer, and Thomas Wirth, our Executive Vice President and Chief Financial Officer. Prior to beginning today's call, certain information we discuss 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 that the anticipated results will be achieved. For further information on facts that could impact our anticipated results, please reference our press release, as well as our most recent annual and quarterly reports that we file with the SEC. First and foremost, we hope that you and yours continue to be safe, healthy, and engaged as we return the economy to normal. While certainly the COVID-19 situation remains volatile with daily news breaking, there is much more optimism among our tenants as the economy trends towards a 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 we reported between 15% and 20% occupancy levels. The predominance of tenants returning has expanded beyond just small employers, as occupancy for tenants 50,000 square feet and below is over 45%. During our comments today, we'll 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 COVID-19 impact on our business. As previously noted on earlier calls, each building of ours has a customized return to workplace presentation, and our property teams are doing an excellent job guiding our tenants to return to a safe work environment. Based on an updated tenant survey that was completed in late June, we found a couple of interesting things. First, there's a growing need for space planning services, which as we expected, is, I think, a good sign. 48 tenants representing about 1.2 million sq ft have requested assistance from our 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 are short-term in duration. About 103 of our tenants representing almost 3 million sq ft expressed an interest in parking. Actually, during the quarter, we entered into 167 new monthly contracts and saw a 30% increase in our parking lot occupancies. From a portfolio management standpoint, we've been very much focused on tenants whose spaces 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% from 2022 to 2024. Our forecasted rollover exposure is below 10% annually in each year through 2026. Over the last several quarters, we have significantly improved our intermediate term portfolio stability. Revenue and earnings growth remain a top priority. We do believe we have some key near term earnings drivers. First, we have, as you all know, some several key vacancies that upon lease up over the next 8 quarters, will generate between $0.07 and $0.10 of additional revenue per share. That is in both our wholly owned and joint venture inventory. We are also projecting that 405 Colorado and 3000 Market stabilize in 2022 as we bring those development projects online. We're seeing clear trend lines of tenants requiring higher quality space, which we believe positions our portfolio extremely well. That's really evidenced by what we're hearing, but also by a 23% increase in our development pipeline Q2-over-Q1. In looking at the numbers for the second quarter, we posted FFO of $0.32 per share, which was in line with consensus estimates. We made excellent progress on all of our 2021 business plan metrics, and during the quarter, we had 20,000 square feet of positive absorption. Given increased leasing visibility through the balance of the year, we did increase our speculative revenue target by midpoint by $500,000 and reduced the range, or narrowed the range rather, from $18 million-$22 million to $20 million-$21 million, and as reported, we're now 98% complete at that revised range. Rent collections continue to be very strong and one of the best in the sector, as we've collected over 99% of our second quarter rents. Our July 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 generated revenues, slightly above our 10%-12% business plan range. 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 a positive 22%. All of those results were above our full-year published ranges. As 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 a cash and GAAP basis for 2021. Our second quarter GAAP same store NOI was 0.5%, and year to date is below our 2021 range of 0%-2%. Second quarter cash same store NOI was 1.8%, again below our 2021 range of 3%-5%. Very similar to the mark to market dynamics. Tenants scheduled to take occupancy later this year will accelerate same store growth and enable us to achieve our 2021 business plan range. With the exception of our Met D.C. operation, all of our regions are expected to post positive same store results, and our Met D.C. region will remain negative, while 1676 International continues through its lease-up phase. We are still forecasting 2021 year-end debt to EBITDA in the range of 6.3-6.5. As we've always cautioned, that does depend on the timing of future development starts for the balance of the year. Just a couple 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. A lot of tenant prospects, with the pandemic, want to virtually tour spaces before committing to an in-person tour. We continued to see this trend evolve during the quarter. We had a total of over 1,500 virtual tours, with almost 800,000 square feet being targeted. That led to a 46% increase in physical tours over Q1. Our overall pipeline stands at a 1.4 million square feet, with approximately 200,000 square feet in advanced stages of lease negotiations. Our overall pipeline increased by just shy of 600,000 square feet during the quarter. While these recovery points are encouraging, we do believe it will take several quarters to assess the full impact on the office business from the pandemic. To gain some insight, we looked at our leasing metrics from the second quarter of 2019, pre-pandemic, same quarters we're in 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 2019. Deals at the proposal stage are up 20%, including new and expansion proposals being up 13% over that comparative period. There are 2 additional benchmarks we looked at that demonstrate that we're clearly still in the recovery phase, but overall, we're surprisingly good compared to the second quarter of 2019. Our deal conversion rate, it was down 6% to 28% in second quarter of 2021 versus 34% in the second quarter of 2019. As you might expect, given where we are in this recovery phase, the median deal cycle time is up 27 days to 104 days this past quarter versus 77 days in the second quarter of 2019. We're hoping that as the economy continues to rip, and we'll see condensing of that deal cycle time as that really is where the rubber meets the road in terms of revenue generation. In looking at liquidity, we have excellent liquidity. Anticipate having $460 million of line of credit availability by the end of the year. As Thomas Wirth will touch on, we have no unsecured bond maturities until 2023 and have a fully unencumbered, wholly owned asset base. Our dividend is extremely well covered at 57% of FFO and 81% of CAD at the midpoint of our guidance. Our 5-year dividend growth rate has been 5.3% versus a peer average below 4%, and we have grown our CAD during that same 5-year period close to an 8% annual rate versus a peer average, again, below 4%. From a capital allocation standpoint, it was a fairly quiet quarter. We continue to make progress on many fronts. Subsequent to quarter end, as part of our land recycling program, we did sell two 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 million and $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. Along those lines, we did start the renovation program for 250 King of Prussia Road. That is a 169,000 sq ft project located in the Radnor sub-market that we acquired for approximately $120 per sq ft as part of an overall transaction with Penn Medicine. We've designed that project to accommodate a significant life science component. The renovation started in the second quarter and will be wrapped up within the next four 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, 150,000 sq ft development. These two projects will deliver more than 300,000 sq ft of life science and office space to one of the region's best-performing long-term submarkets. In looking at the existing development projects, Schuylkill Yards West is very much on pace and on schedule. That's a life science residential office project we commenced on March 1st. The project will be built to a 7% blended yield and consists of 326 apartment units, 100,000 sq ft of life science space, 100,000 sq ft of innovative office space, and street-level retail. Still have an active pipeline comparable to last quarter. We did close our 65% loan to cost construction loan at a floating rate equal to 3.75%. Given the front load of the equity commitment from both us and our partner, even with Brandywine's $55 million equity commitment, of which $46.5 million is already invested, the first funding of that construction loan won't occur until first quarter of 2022, but it does complete the capital stack for that project. Looking at our 405 Colorado project in Austin, that project is now complete. We're scheduling a grand opening in the fall. During the quarter, our lease percentage did increase to 24%, and we currently have a pipeline of 527,000 square feet, including about 40,000 square feet in final lease negotiations. 3000 Market is our life science renovation within Schuylkill Yards. That project is fully leased. The construction will finish later this year, and we're projecting the lease commencing fourth quarter 2021 at a development yield of 9.6%. B.Labs, which we announced last quarter, is a 50,000 sq ft incubator that we are partnering with Pennsylvania Biotechnology Center. B.Labs will open in the fourth quarter of 2021. Since the announcement, we have entered the marketing pipeline and built a significant amount of interest with proposals outstanding for roughly 78% of that space. Just a couple more updates on Schuylkill Yards and Broadmoor. Within Schuylkill Yards, the life science push continues. As we've cited previously, we can deliver about 3 million sq ft of life science space, which we believe creates an excellent opportunity to establish a corollary research community to all the other great activity over here in University City. 3151 Market Street, our dedicated life science building, is fully designed and ready to go. We have a leasing pipeline on that still in the 400,000 square foot range. It is advancing slowly, but I think with a high degree of confidence. Our goal remains being able to start that later this year, assuming market conditions permit. At Broadmoor, we are progressing with Block A and the first phase of Block F. That scope of that is 350,000 square feet of office and 613 apartment projects at a total cost of about $367 million. We are in go mode on all those components. We are moving forward through final documentation with our selected equity partner on Block A and Block F residential, and are soliciting bids now on construction financing alternatives. We anticipate a third quarter closing date on both Blocks A and F. Our plan remains to start the residential component of Block A, which is 341 units at $119 million cost in the fourth quarter of 2021. On Block A office, we are actively in the pre-leasing market, and we plan to start that as market conditions permit. Just 1 final note before I turn the call over to Tom to review financial results, and it relates to our third quarter earnings cycle. As you may recall, we would normally provide 2022 earnings and business plan and FFO guidance during our third quarter 2021 earnings cycle. However, consistent with what we did in 2021, and based on the continued uncertain business climate, we will announce our 2022 guidance on our fourth quarter earnings call. Tom will now provide a review of our financial results. Thank you, Jerry. For the first quarter, net loss totaled $300,000 or less than $0.01 per diluted share, and FFO totaled $55.9 million or $0.32 per diluted share, and in line with consensus estimates. Some general observations regarding our second quarter results. While our second quarter results were in line, we had a number of moving pieces and several variances to the first quarter guidance. Portfolio operating income totaled $67 million, which was below our estimate by $1 million. Residential and parking revenue were below budget as a result of the restrictions that were in place for most of the quarter in Philadelphia, negatively impacting those results. Interest expense totaled $55.5 million and was below our first quarter forecast due to higher interest capitalization on our 405 Colorado project. Termination and other income totaled $2.7 million and was $1.7 million above our first quarter forecast, primarily due to two insurance claims generating approximately $1.1 million of other income. We recorded no land gains and minimal tax provision compared to our $1.1 million income guidance for the first quarter. Two land sales were delayed from this quarter into the next quarter. One transaction, as Jerry mentioned, is already closed subsequent to quarter end, and we anticipate the second transaction closing later this quarter. G&A totaled $8.4 million or $200,000 above our $8.2 million first quarter guidance. The increase was primarily due to employee and medical benefit costs. FFO contribution from unconsolidated joint ventures totaled $6.8 million or $1.3 million above our first quarter estimate. The higher FFO contribution was primarily due to lower net operating costs from expense savings and a $600,000 termination fee at Commerce Square. Our second quarter fixed charge and interest coverage ratios were 4.0 and 3.8 respectively. Both metrics decreased slightly from the first quarter. Our second quarter annualized net debt to EBITDA increased to 6.9 and is currently above our guidance range and increased primarily due to the forecasted lower NOI. The increase was forecasted, and we expect the metric to improve during the second half of the year from higher forecasted NOI. Additional reporting item on cash collections, as Jerry mentioned, we had a very strong quarter of 99%, and tenant write-offs totaled less than $100,000 for the quarter. Portfolio changes, as we noted, 905 is now completely out of all of our metrics as that building has been taken out of service related to our Broadmoor 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 to total $6.85 million and be sequentially higher during the second quarter. Part of that will be due to the 107,000 sq ft of forward leasing activity anticipated to commence during the third quarter and should generate a second consecutive quarter of positive absorption. FFO contribution from our unconsolidated joint ventures will total $5.8 million for the third quarter. A $1 million sequential decrease from the second quarter, primarily due to a non-recurring termination fee and incrementally higher net operating expenses. G&A for the third quarter will decrease from $8.4 million-$7.5 million. 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 expect interest expense to approximate $16 million with capitalized interest of $1.5 million. Termination and other income, we expect to total $2.1 million for the third quarter. Net management and leasing will total $3.2 million, and interest and investment income, $2 million. For land gains, we expect about $2.3 million for the quarter based on the two previously mentioned closings and one additional non-core land sale generating total proceeds of $16.7 million. Our 2021 business plan also assumes no new property acquisitions or sales activity, no anticipated ATM or share buyback activity, and no financing or refinancing activity. We did close on the $186.7 million construction loan at Schuylkill Yards and at the initial rate of 3.75%. While we have no other financing or refinancing activity in our 2021 plan, we continue to monitor the debt markets ahead of our 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. The timing of those payments were significant to the quarter but anticipated for our full-year range, and our CAD range remains unchanged. Our second half 2021 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 are 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 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 of credit balance is partially due to the build-out of our incubator space as well as our development. We still project our range to be $6.30-$6.50, but as Jerry mentioned, that will be predicated on how our development starts occur. We still see net debt to GAV between 42% and 43%. In addition, we anticipate our fixed charge coverage ratio to be approximately 3.7, and our interest coverage ratio to be about 4.0. I will turn the call back over to Jerry. Great, Tom. Thank you very much. Just in wrapping up, I think the key takeaways are our portfolio and operations are really in solid shape. We have a great team of people on both the operating, the leasing, and the marketing front, and we've really kept excellent visibility into our tenant base. Information has been key, the level of conversation with all of our customers has been significantly enhanced during this cycle. I think we're very pleased that our annual rollover through 2024 is only 7% a year. I think that's a low watermark for the company in terms of portfolio roll. Leasing pipeline continues to increase, certainly not as fast as we would like, and certainly I know a lot of folks on the call are looking for more visibility as well. Tenants are returning to the workplace. We think the green shoots we're seeing in terms of their space requirements are good signs. We do expect a compression of decision timelines later this year and a continuation of positive mark-to-markets driven by improving market velocity, stable overall market conditions, and escalating construction prices. Safety and health, both in design and execution, are really our tenants' top priorities. We are well positioned to meet their concerns. We believe that new development in 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 plan sites that can double our existing portfolio, diversify our revenue stream, and drive significant earnings growth. When you take a look at even at Schuylkill Yards, assuming a start of 3151 Markets through the other projects we have in operation or under construction, that will represent about 5% of our portfolio square feet. A measurable contribution building from a diversification of our revenue stream. In addition to life science, our Schuylkill Yards and Broadmoor developments with existing approvals in place can accommodate about 5,000 multi-family units. As Tom touched on, we've had a very attractive CAD growth rate over the last five years. We think we've created and established stability to a well-covered and attractive dividend that we believe is poised to increase as we grow earnings. From a financing standpoint, certainly given the continued dislocation in the public marketplace, there's always a concern about the best way to finance these properties. What I can tell you is that 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 well-conceived projects like Brandywine continue to gain significant traction for project-level investments. We're confident that there's executable financing available for our entire development pipeline in today's marketplace. As usual, we'll end where we start, in that we really do wish you're all doing well, enjoying the summer, and that you and your families are safe and engaged. With that, we'd be delighted to open up the floor for questions. We ask that in the interest of time, you limit yourself to one question and a follow-up. Olivia? Thank you. Ladies and gentlemen. The first question coming from the line of Jamie Feldman with Bank of America. Your line is open. Great. Thank you and good morning. Appreciate all the commentary. I guess going back to your comments on the tenant survey, you'd said growing need for internal space planning services. Can you talk a little bit more about what you're learning on that specifically? Do you think that tenants are going to want to downsize before they start growing again? What are you learning in terms of how much space they're going to need going forward, especially with hybrid work? Yeah. 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. 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 requests through our space planning exercises are really for increased circulation patterns, additional spacing between workstations, the incorporation of more partition walls. We think all of those items will lead to more space requirements. We've actually had a number of expansions in the last couple of quarters as parts of renewals. I would hesitate to indicate that it's a definitive trend line yet, because we're still waiting for some of the larger tenants to really weigh in. I think to some degree, that's going to be a function of whether they go to a hybrid work program of in three, out two, in two, out three, whatever it may be, and whether those employees that are on a hybrid work schedule will move to hoteling or an elimination of their private workspace. We're seeing data points all across the board. I will tell you, we've had 53 tenants who have indicated they need more square footage out of the data set. Many others are in the process of kind of figuring out their overall requirements. Our hope would be next quarter we can give you a little more visibility. Again, a lot of these space planning discussions are underway. A lot of the tenancies that we've executed leases with, the circulation patterns are wider. There's been a slightly higher percentage of private offices. George, any other points you'd like to add? Yeah, I think we've seen an increase in the size of workstations, so that, by default, kind of indicates more space. I think the closing part of your question and kind of Jerry's response, I think the still to be determined part of the hybrid return to work is really going to be the key ingredient as to whether tenants need more space or less space. Again, whether that becomes a permanent desk versus that hoteling desk, because I do think a lot of employees would prefer that they know they've got a dedicated workspace, even if they're on a hybrid schedule. Yeah, I think just to close the loop, Jamie, that's clearly some of the data we're getting back from the tenants who we're talking to, is that most employees clearly want a hybrid work schedule for a whole variety of reasons. Again, most of those employees are reluctant to forfeit a private workspace. We will see how that all works its way through the system over the next couple of quarters. We think the signs we're seeing, certainly a lot of the conversation we're having with tenants, seem to be pretty encouraging in terms of reconfiguring space, and not having some significant downsize requirements. Again, I think the data's evolving. Okay, that's very helpful. You had also mentioned 7%-8% of upside from backfilling some of the vacancies. Can you just give us an update on those spaces and maybe handicap how long that might take to play out? Yeah, sure. Jamie, this is George. I'd be happy to walk through those. Regionally, starting in Austin, I think as everybody's well aware, we still have 36,000 sq ft of space that had been given back to us from SHI. We've got two proposals out on 25,000 sq ft of that space looking to kind of wrap up a deal in the next 30-60 days. The space that Comcast has given back at 2 Logan, as you recall, that was four floors, about 88,000 sq ft. We've already leased one of those floors. We've got a proposal out to an existing tenant for expansion. We've got a second proposal out to another prospect, which would leave us just one floor remaining to lease. The largest part of that revenue gain for us is down at 1676 in Tysons. We, last quarter, announced the 75,000 sq ft deal that will commence in the fourth quarter. We've got about 175,000 sq ft to go there. Overall, that project's 40% leased, and we've got a pipeline today of about 336,000 sq ft looking at that 175,000 ft of available space. We've got, I think, the one we touched on last quarter as well, out at 555 Lancaster Avenue in Radnor. We've got a fitness center space that we've got a lease out for, and we're hoping to get that wrapped up here in the next 30-60 days as well. Quickly, over at Commerce Square within our JV inventory, we got two proposals out there. We've actually doubled our pipeline as of June 30th from where we were at the end of the first quarter. We've got about 200,000 square feet of prospects looking at roughly 240,000 square feet of available inventory. We do have 1 lease out close to being out for signature, kind of going through second-round comments between attorneys for 30,000 square feet over at 2 Commerce in the space we got back there. That's kind of the update. The good news is that pipeline continues to build. I think all of those properties are well-situated, and we look forward to providing a further update on the next call. Thank you. That's really helpful. If I could just ask a follow-up just on Tysons. You said a 336,000 sq ft pipeline. What's the delay there? It seems like that market's relatively stable. What do you think you're going to take for people to sign leases? Well, Jer, look, I think one of the things we're seeing throughout these markets is while the pipeline is building, it's taking a lot longer for leases to get pulled together. When we take a look at the market stats for Tysons, really 2020 and 2021 year-to-date, that Guidehouse deal that George had mentioned was far and away the largest deal done in that marketplace. A number of tenants have done renewals. Next to that, the largest deal in the market that was done was about 30,000 sq ft. In our pipeline, there's a number of larger tenants. The gestation cycle is just very long, and decision timelines continue to get delayed as tenants rethink their workplace strategy, as we talked about on your previous question. Look, I think whether it's 1676 or Commerce Square, the other holes we have in our inventory in the development projects, we're in an aggressive marketing and leasing mode on every one of those projects. Running from being aggressive in terms of tracking down the economics we need to make the deal to a kind of a comprehensive debriefing in the company for dead deal reviews. We're staying very much in front of where we think the markets are, but more importantly, where we think they're going. I think just that's more of a generic comment in terms of all the space across the board. The flow of information that we're getting from brokers is that they expect the pipeline to build. Even down in Austin, which always demonstrates 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 have been fairly anemic year-to-date. There's a lot of things that are scheduled to be in the queue, but they haven't hit the decision timeline yet. I don't know if that's helpful color or not, but I think we track what our percentage is of market share for deal activity. I think the deals that we've done in all those key markets George outlined, is we're continuing to maintain or improve our market share in every sub-market. Okay, great. Very helpful. Thank you. Thanks, Jamie. Our next question coming from the line of Emmanuel Korchman with Citi. Yelena Saltman. Hey, good morning, everyone. Jerry, maybe sticking with Austin for a second there. If you think about your pipeline for 405 Colorado and for Broadmoor, which I think you said 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 there a stark difference between the 2? Yeah, there's not really a significant overlap between those two projects. George, maybe give some color on the pipeline at 405. Yeah, I think predominantly, we continue to see tenants that certainly just want to be downtown hit that 405 Colorado pipeline. It's about 540,000 square feet at the end of the second quarter. Very few times are we seeing that same prospect also looking out in Northwest in terms of Broadmoor. We've seen everything from tech companies to law firms, to financial service companies in that 405 pipeline. As Jerry mentioned in his comments, we've got about 40,000 square feet kind of in final lease negotiation. Yeah. Jamie Feldman, up at the Broadmoor development, there's two larger tenants that are kind of still tech-oriented that are part of that pipeline. I think the smaller tenant activity we haven't really seen on that Broadmoor development asset yet, because I think the marketplace knows that we're looking for a larger tenant to start that building. I think it's a story I just mentioned to the previous question, which is, expectations are high that the pipeline will continue to build, not just in Brandywine projects, but market-wide. 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. Whether it be downtown, there were only two larger deals that were signed. One was a sublease. Out in the Southwest, there were really very few deals done. A couple 20,000 sq ft transactions done at Seven Oaks and Uplands and a few other deals done at Plaza on the Lake. Our leasing, we leased about 15,000 sq ft at Barton Skyway, and that was almost a market-leading position right now, particularly when you combine that with the deals that George mentioned when he did the vacant space walkthrough. Great. Thank you. Jerry, you walked us through the limited lease roll through 2026. As you've gone out to those tenants for early renewals, have you gotten any firm non-renews that we should think about as we think about that roll over the next few years? No, we really haven't. These larger tenants, I think, are still thinking through many of their long-term perspectives, and I don't think that that's 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 events of the past couple of weeks, the majority of them are starting to bring people back after Labor Day. Frankly, a number of them still haven't finalized their remote work policy, whether that'll be one day a week, two days a week. We're still actually waiting for some visibility 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 one that we discussed previously was Baker moving out of Sierra Center, and the good news there is we've got 2 of those 4 floors we've got to lease out, and we've got proposals out for the other 2. That is our largest known move-out that we've discussed, I think, for 2 or 3 calls in a row here. The progress on backfilling it has come together nicely. Thanks, everyone. Thanks, Manny. Our next question coming from the line of Anthony Paolone with JPMorgan. Your line is open. Okay, thank you. Thanks for all the color on the feedback from your tenants and all the connectivity there it seems like you all have. In that regard, where do you think the 30% utilization goes, say, post-Labor Day in September, and then where does that number, do you think, go at year-end for everything to be tracking? Hey, Tony. Good morning. We'll give you those answers based on the information we have today. I haven't watched the news this morning. We'll see what happens. The vast majority of our tenants are planning on rotating back in after Labor Day. For example, I won't mention their names, but two of our larger tenants, in a conversation with their executives yesterday, plan on bringing people back in Labor Day and being very close to full occupancy by the end of the year. I think that's the best visibility we can give you at this point. A lot of it depends on if the CDC changes any guidelines, if there's any further adverse news on breakthrough reinfections. At this point, most of the schools are back in full-time session in the fall. That was a major gating issue with a lot of the larger tenants. Daycares are back in operation. Mass transit here in the Philadelphia area, SEPTA's done a wonderful job of really preparing for getting back to full commuter loads. We think those were the primary gating issues in getting these larger employers to bring their employees back in. At least as of now, the indications are that kind of September through December, there's a ramp up close to full occupancy by the end of the year. Got it. Just to be clear, when you say full, is that 30% going to 100 or 30 going to the typical 70 on a given day pre-pandemic? Yeah, I would say it's effective utilization rates pre-pandemic. Okay, got it. My other question has to do with just CapEx. I know it's running a little bit ahead of plan above your 10%-12% number. Do you think that's mix, or do you think that's just a function of inflation, market conditions, and it's just going to be a higher number? Yeah, Tony, good question. It really varies quarter to quarter, more just based on which deals are commencing in that quarter. You can kind of get a few that can skew a given quarter but aren't necessarily indicative of future ramp-up. We've basically averaged 12.0 over the last four years as capital as a percentage of revenues, and that really is kind of where the top end of our range is. Even though this quarter trended higher, the deals that we know are commencing in Q3 and Q4 are at lower capital percentages and bring us back in line with that full-year guided range. Okay. Got it. Thank you. Thank you, Tony. Now, our next question coming from the line of Craig Mailman with KeyBanc Capital. Your line is open. Hey, guys. Jerry, just wanted to follow up on your commentary about parking. Can you just give a sense of, is this companies paying for employees to entice them to come back in the office, or is this employees kind of doing it on their own because either SEPTA's not running the way they want it to, or safety concerns? Hi, Craig. Good morning. I think it's both, actually. I think we're seeing some employers provide incentives by agreeing to pay for parking to bring their employees back, while there's this concern that we think will dissipate fairly quickly over riding mass transit. We think it's a number of employees contacting us who are indicating that they're coming back to work. They previously took the regional rail system, and they like to have a monthly parking pass through the end of the year. I don't think there's any defined path other than people are requiring more parking short-term. We think that actually bodes fairly well. Our parking occupancy levels pre-pandemic were very high. Parking is a very good adjunct benefit we provide to Brandywine employees within our centrally located University City CBD properties, and 405 coming online will have over 500 parking spaces. It's a valuable amenity to differentiate ourselves from some of our competition. We think that this temporary increase in short-term parking requests will smooth out as more people do in fact, come back to work, and commuting patterns revert to their pre-pandemic modes. All right. Just on the kind of the good demand you're seeing at Sierra for the life science conversion, could you just talk about the credit profile or kind of size of some of these tenants looking for this space, kind of where they are in their life cycle? Yes, certainly. We have been very pleased. Jeff DeVino and his team are doing a great job, along with PA Biotech, really tapping into an ever-broadening network of potential uses. A lot of the companies that we are talking to are actually larger than we initially programmed our pipeline would be. They tend to be into their second round of financing. There's a couple of pre-IPO companies with good private equity capital behind them. They typically are going through their trial phase of their approvals. The creditworthiness is certainly something we focus on. We haven't seen anything at this point that would cause us real concern given that we're providing kind of a turnkey operation or in short-term licensing agreements. We're creating the infrastructure. Our guess is there'll be some tenants that'll be larger than we thought they would be and would stay there longer. There may be some tenants that might abort after not having successful trials or raising capital. George, any additional color on that? No, other than the fact that the pipeline continues to build there and we've got 239 seats in that incubator space, and we've got coverage on just about 80% of it right now. Yeah, a number of those prospects, Craig, are spin-outs from some of the anchor institutions. They're well-staffed with top-level research scientists with good business oversight from either private equity or the anchor institutions. It's a pretty diverse group of prospects, and I think we're very pleased with the reaction we're getting thus far. Great. Thanks. Thank you, Craig. Now next question coming from the line of Danny Ismail with Green Street Advisors. Your line is open. Great. I recognize that transaction volume is still low, what is your sense on private market pricing across your markets broadly? It seems like your portfolio's been pretty resistant throughout the pandemic, what is your sense on cap rates and values across your footprints? Yeah. Hi, Danny. Good morning. Look, I think there really have not been a lot of transactions. I think if we go take a look at kind of rolling through the markets, certainly Austin continues to have a dynamic that is incredibly impressive. Even given the recent trade of one of the downtown towers and the pricing that went off that, as well as the projected pricing on some of the more suburban product trades. Certainly continued compression there. Certainly have been tracking given the fact that we're doing residential development in Austin. There continues to be some significant cap rate compression there with cap rates hovering around 3%. Tremendous value creation opportunities for us given our ability to create thousands of residential units at Broadmoor. Not a lot of trading activity in Washington, D.C. Clearly, 1 of our public company peers today bulk traded, I think, a cap rate that most observers view was outside the market norm. Whether that was a discounted trade due to the volume remains to be seen, because we really haven't seen a lot of additional visibility behind that. In the Philadelphia regional marketplace, there's a number of projects on the market now. We'll see how they get priced out. The early indications are that the bid lists are getting bigger, that there seems to be an emerging reallocation of money back to office. Whether that's driven by the expectations of a recovery in demand juxtaposed with the increased cost to develop new buildings. Certainly the lower cost of debt capital and its tremendous availability, as well as the multiple hundreds of million dollars of private equity looking for a place to land. We're actually starting to see, as I mentioned, more people entering the bidding pool and the pricing becoming marginally more aggressive than it was even a couple of quarters ago. Certainly our thought would be, Danny, as leasing velocity picks up and there tends to be more data continuum on mark-to-market rents, vacancy levels going down, manageable delivery schedules. Net effective rents, we think will demonstrate a 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, Jerry. Thanks, Dan. Our next question coming from the line of Steve Sakwa with Evercore ISI. Your line is open. Yeah, thanks. Most of my questions have been asked. Jerry, I'm just curious, we've seen a lot of volatility in material costs and lumber spiking, then coming back down. I'm just curious, as you look at the price in Broadmoor today, where are construction costs kind of versus your original pro formas? I assume, if there's been any pressure on rents, just curious how maybe expectations have changed. Steve, great question. Good morning to you. I'll approach it at a couple different levels. One is, I think across the board, certainly construction costs have gone up. That's not necessarily great news. I think it's also well-recognized, in the broader markets, that costs are going up. Most tenants are getting conditioned to marginally higher rents to compensate landlords for those higher construction costs. We have actually seen our net effective rent levels throughout our portfolio, some of the deals that George was talking about, still remain very much in line with what our projections were. There 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 be it aluminum, steel, glass, concrete. 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. The general discussion with almost every sub and every GC is, "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. As we work through the subcontractor bid cycle and provide definitive notices to proceed, we're able to squeeze that costing back down close to our budget. We did, in anticipation of costs moving up, always build in a fairly high level of contingency in our owners' budgets before we lock into a guaranteed maximum price contract. 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 structured parking manufacturers, pre-ordering glass. We've been able to lock into lower prices. I think we're going to be in pretty good shape. Great. Thanks. That's it for me. Thank you, Steve. I'm not showing any further questions at this time. I would now like to send the call back over to Mr. Sweeney for any closing remarks. Great, Olivia. Thank you for your help today. 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 end our conference call today. Thank you for your participation. You may now disconnect.