Brandywine Realty Trust Reit (BDN) Q2 2021 Earnings Call Transcript

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Brandywine Realty Trust Reit (BDN 0.66%)
Q2 2021 Earnings Call
Jul 27, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to Brandywine Realty Trust Second Quarter 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your speaker host today, Mr Jerry Sweeney, President and CEO. Please go ahead, sir.

Gerard H. Sweeney -- President and CEO

Lydia 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 Tom Wirth, our Executive Vice President and Chief Financial Officer.

Prior to beginning today's call, certain information discussed during this call may constitute forward-looking statements within the meaning of the federal securities law, and 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 factors that could impact our anticipated results, please reference to our press release as well as our most recent annual and quarterly reports that we filed with the SEC.

So, first and foremost we hope that you and yours continue to be safe, healthy and engages as we return the economy to normal, and well certainly the COVID-19 situation remains volatile with the daily news breaking. There is much more optimism among our tenants as the economy trends toward 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 it reported between 15% and 20% occupancy levels. The predominance of tenants returning to expanded beyond just small employers as occupancy for tenants 50,000 square feet and 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 COVID-19 impact on our business. As previously noted on earlier calls each building of ours had 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 is a growing need for space planning services, which as we expected, is I think a 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 are 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 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 space expire in the next two years. Those efforts have been successful. We have reduced our forward rollover exposure to an average of 6% over the next three years, and as noted on page 2 of our SEC to 7.1% from 2022 to 2024. 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 remain a top priority. We do believe we have some key near-term earnings drivers of 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, and we're clear we're seeing trend lines of tenants requirements higher quality space, which we believe positions our portfolio extremely well, and that's really evidenced by what we're hearing, but also by a 23% increase in our development pipeline of 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 the increase in leasing visibility through the balance of the year, we did increase our speculative revenue target mid point by $500,000 and reduce the range --narrow the range rather from $18 to $22 million to $22 to $21 million, and as reported we are now 98% complete at that revised range.

Rent collections continued to be very strong, one of the best in the sector as we've collected over 99% of our second quarter rents. Our July receipts continue to track toward 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% to 12% business plan range, but 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 are above our full year published ranges, however, as we mentioned last quarter, based on leases already executed 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 up 0.5% and year-to-date is below our 2021 range of 0% to 2%. Second quarter cash same-store NOI was 1.8%, again below our 2021 range of 3% to 5%. Again, very similar to the mark-to-market dynamics tenant schedule 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 DC operation, all of our regions are expected to post positive same-store results, and our Met DC region will remain negative while 1676 International continues toward its lease up phase.

We are still forecasting 21 year and debt-to-EBITDA in the range of 6.3 to 6.5 as we've always cautioned that it does depend on the timing of future development starts for the balance of the year. Just a couple of comments on leasing velocity, because I know everyone is 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. Yeah, a lot of tenant prospects with the pandemic one to virtually tour spaces before committing to an in-person tour. We continue to see this trend evolve during the quarter. We added total of over 1500 virtual tours with almost 800,000 square feet being targeted. That lead 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 short of 600,000 square feet during the quarter. And while these recovering 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 where we are 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 two 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 rates, 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. So, we're hoping that as the economy continue to revere mostly convincing of that deal cycle time, and that's really is where the rubber meets the road in terms of revenue generation.

In looking at liquidity, we have maximized the liquidity and tends to having $460 million of line of credit availability by the end of the year. As Tom 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 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 continue to make progress on many fronts, and 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 and $70 million. The pipeline on those four 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, so as the renovation program for 250 King of Prussia Road that is 169,000 square foot project located in the Radnor Submarket that we acquired for approximately $120 dollars per square foot as part of an overall transaction with Penn Medicine. We 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 square foot development, and these two projects will deliver more than 300,000 square feet 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 Yard West is very much on pace and on schedule. That's the life science residential and office project we commenced on March 1st. The project will be built to a 7% blended yield and consists of 326 apartment units, a 100,000 square feet of life science space, 100,000 square feet of innovative office space and street level retail. It 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 three quarters per cent. However, given the front loaded the equity commitment for both us and our partner, even with Brandywine $55 million equity commitment, of which 46.5 has 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 there a 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 in four quarter 2021 at a development yield of 9.6%. Cira Labs, which we announced last quarter is a 50,000 square foot 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 build a significant amount of interest with proposals outstanding for roughly 78% of that space.

Just got 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 square feet of life science space, which we believe creates an excellent opportunity to establish an 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, 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 permit.

At Broadmoor we are progressing with blockade in the first phase of Block F to recap, the scope of that 250,000 square feet of office and 613 apartment projects at a total cost of about $367 million. We are a 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 residential and is soliciting bids now on construction financing alternatives. We anticipate 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, and on Block A office we are actively in the pre-leasing market and would plan to start that as market conditions permit.

Just one 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 said we did in 2021 and based on the continued uncertain business climate, we will announce our 2022 guidance on our fourth quarter earnings call.

So, Tom will now provide a review of our financial results.

Thomas E. Wirth -- Executive Vice President and Chief Financial Officer

Thank you, Jerry. The first quarter net loss totaled $300,000 or less than one penny 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 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 a $1.1 million dollar 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 cost. 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 cost from expense savings, and a $600,000 termination fee 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, an increased primarily due to the forecasted lower NOI. The increase was forecasted and we expect this 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 executing 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 it will be due to the 107,000 square feet 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 were totaled $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 to 7.5, 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 in investment income of $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 at the initial rate of 3.7%. 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 90% 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 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 a $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 used 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 that 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 was partially due to the build-out of our incubator space as well as our development. We still project our range to be 6.3 to 6.5, but as Jerry mentioned that will be predicated on how our development starts occur, and we still see that 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.

Gerard H. Sweeney -- President and CEO

Great. Tom, thank you very much. So, just in wrapping up, I think the key takeaways are our portfolio and operations are really in solid shape. We have great team of people on both the operating, the leasing and the marketing front, and we really get 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 this cycle.

And 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 role. 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, but tenants are returning to the workplace. We think the green shoots we're seeing in terms of their space requirements are good signs, and 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, and 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 two fully approved mixed use master plan sites that can double our existing portfolio, diversify our revenue stream and drive significant earnings growth, and when you take a look at even it's Schuylkill Yards assuming a start of 3051 markets through with the other projects we have in operation or 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, in addition to life science, our Schuylkill Yards and Broadmoor developments with existing approvals in place can accommodate about 5,000 multifamily units.

As Tom touched, we've had a very attractive CAD growth rate over the last 5 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. And from a financing standpoint, certainly given the continued dislocation the public marketplace, there's always a concern about the best way to finance these properties. What I can tell you is 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, 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 in that we really do wish you are all doing well, enjoying the summer, and that you and your families are safe and engaged. And with that we'd be delighted to open up the floor for questions. We add for the interest of time, you limit yourself to one question and a follow-up. Lydia?

Questions and Answers:

Operator

Thank you. [Operator Instructions]

Our first question is coming from the line of Jamie Feldman with Bank of America. Your line is open.

Jamie Feldman -- Bank of America -- Analyst

Great, thank you and good morning. I appreciate all the commentary. So, I guess going back to your comments on the tenant survey, you said growing need for internal space planning services. Can you talk a little bit more about what you're learning from that specifically, I mean, do you think that tenants are going to want to downsize before they start growing again. Do you get any kind of sense that I'm I guess just what are you learning in terms of how much space they're going to need going forward, especially with hybrid work.

Gerard H. Sweeney -- President and CEO

Yeah, Jamie. Good morning as well. George and I'll 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 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 renewables. 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, and I think the some degree that's going to be a function of whether they go to a hybrid work program in three out two, in two out three, whatever it may be, and and whether those employees that are all in a hybrid work schedule will move to hoteling or and elimination of their private workspace. We're seeing data points all across the board. I mean I will tell you, we've had 53 tenants who have indicated they need more square footage out of the dataset, many others are in the price of kind of figuring out their overall requirements. So I hope with the next quarter to give you a little more visibility, but again a lot of these space plan discussions are underway. A lot of the tenancies that we've executed leases with, the circulation patterns or wire there has been a slightly higher percentage of private offices, but George any other points you like to add.

George D. Johnstone -- Executive Vice President, Operations

Yeah, I think we've seen an increase in the size of workstations, so that by default kind of indicates more space, but I think the closing part of your question and kind of Jerry's response, I think that still to be determined the part of the hybrid return to work. It's really going to be the key ingredient as to whether tenants need more space or less space, and 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 there are hybrid schedule. Yeah, and 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, But 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, but we think the signs we're seeing certainly a lot of the conversations we're having with tenants seem to be pretty encouraging in terms of reconfiguring space and not having some significant downsize requirements, but again, I think the data is evolving.

Jamie Feldman -- Bank of America -- Analyst

Okay that's very helpful. And then, you had also mentioned $0.07 to $0.08 cents 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.

George D. Johnstone -- Executive Vice President, Operations

Yes, sure Jamie, This is George, I will be happy to walk through those. Regionally starting in Austin, I think as everybody is well aware where we still have 36,000 square feet of of space that had been given back to us from FHI. We've got two proposals out on 25,000 square feet of that space and looking to kind of wrap up a deal in the next 30 to 60 days. The space that Comcast has given back at 2 Logan, as you recall, that was four floors, about 88,000 square feet. 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 a 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 a 75,000 square foot deal that will commence in the fourth quarter. We've got about 175,000 square feet to go there. Overall, that project is 40% leased, and we've got a pipeline today of about 336,000 square feet looking at that 175,000 feet of available space and then we've got, I think the one we touched on last quarter as well, added 555 Lancaster Avenue in Radnor. We've got a fitness center of space that we've got a lease out for and we're hoping to get that wrapped up here in the next 30 to 60 days as well. And then quickly, over 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 quarters. So, we've got about 200,000 square feet of prospects, looking that roughly 240,000 square feet of available inventory. We do have one lease out for, close to be out for signature, kind of going through second round of comments between attorneys for 30,000 square feet over at 2 Commerce in the space we got back there.

So, that's 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 further update on the next call.

Jamie Feldman -- Bank of America -- Analyst

Thank you. That's really helpful. If I could just ask a followup, just on Tysons since you said a 336,000 square foot pipeline, what's the delay there? It seems like that market is relatively stable. What do you think you're going to take for people to sign leases.

Gerard H. Sweeney -- President and CEO

Well, I think the Jamie. Look, I think one of the things we're seeing throughout these markets is there is just while the pipeline is building, it's taking a lot longer for leases to get pulled together. So we take a look at the market stats for Tysons, really 2020 and 2021 year to date. I have deal that George had mentioned, was far and away the largest deal done in that marketplace. A number of tenants have done renewals, but next to that the largest deal in the market that was done was about 30,000 square feet. So we are 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. So, 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 everyone of those projects, and running from being aggressive in terms of tracking down the economics you need to make the deal, to a 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 are, but more importantly where we think they're going, and I think that's more of a generic comment in terms of all the space across the board, but the flow of information that we're getting from brokers is that they expect the pipeline to build. I mean, even down in Austin, which has 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 had been fairly anemic year-to-date. There's a lot of things that the scheduled to be in the queue, but they haven't that hit the decision timeline yet. So, I don't know if that's helpful color or not, but I think we track with our percentage is of market share for deal activity and I think the deals that we've done in all of those key markets George outlined, we've been tending to maintain or improve our market share on every submarket.

Jamie Feldman -- Bank of America -- Analyst

Okay, great, very helpful. Thank you.

Gerard H. Sweeney -- President and CEO

Thanks Jaime.

Operator

Our next question is coming from the line of Emmanuel Korchman with Citi. Your line is open.

Emmanuel Korchman -- Citi -- Analyst

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 two pipelines. Are you seeing tenants looking at both, or is there a stark difference between the two?

Gerard H. Sweeney -- President and CEO

Yeah, there is not really a significant overlap between those two projects, George, maybe give some color on the pipeline 405.

George D. Johnstone -- Executive Vice President, Operations

Yeah, I mean I think predominantly we continue to see tenants that certainly just broadly downtown hit that 405 Colorado pipeline, it's about 540,000 square feet as at the end of the second quarter. In very few times that we see in that same prospect, also looking at it's North West in terms of Broadmoor. We've seen everything from tech companies to law firms, the financial service companies in that 405 pipeline, and as Jerry mentioned in his comments, we've got about 40,000 square feet kind of in final lease negotiation.

Gerard H. Sweeney -- President and CEO

And the Broadmoor development is a couple of larger tenants are kind still tech-oriented that are part of that pipeline, and I think the smaller tenant activity we haven't really seen on that Broadmoor 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 it's the store, I just mentioned to the previous question, which as you know expectations are high that the pipeline will continue to build, not just Brandywine prices but market wide. When we 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 historical standards, I mean even whether it be downtown there were only a couple of larger deals that were signed, one was a sublease and out in the Southwest, there is, we're really very few deals done, couple of 20,000 square foot transactions done at 7 Oaks and Uplands and few other deals done [Indecipherable], but our leasing, we leased about 15,000 square feet at Barton Skyway that was almost a market leading position right now particularly when you combine that with the the deal that George mentioned right at the [Indecipherable].

Emmanuel Korchman -- Citi -- Analyst

Great, thank you. And 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 from non-renews that we should think about as we think about that roll over the next few years.

Gerard H. Sweeney -- President and CEO

Yes. No, we really haven't. I mean I think again these larger tenants I think are still thinking through, Manny, 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 large tenant that even despite the events of the past couple of weeks, still 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. So we are still actually waiting for some visibility from some of those some larger tenants in terms of what they actually plan on doing. George, anything to add to that?

George D. Johnstone -- Executive Vice President, Operations

No, I think the only one that we discussed previously with Baker moving out of Cira Center, and the good news there is we've got two of those four floors, we've got to lease out and we've got proposals out for the other two. So I mean that is our largest known move out that we've discussed, I think for two or three calls in a row here, but the progress on backfilling it has come together nicely.

Emmanuel Korchman -- Citi -- Analyst

Thanks everyone.

Gerard H. Sweeney -- President and CEO

Thanks Manuel.

Operator

Our next question is coming from the line of Anthony Paolone with JP Morgan. Your line is open.

Anthony Paolone -- JP Morgan -- Analyst

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 is like where do you think that 30% utilization goes say post Labor Day in September and then where does that number, do you think go away at year-end for everything to be tracking?

Gerard H. Sweeney -- President and CEO

Hey Tony, good morning. We'll give you those answers based on the information we have today. I haven't a watch 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 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. Lot of It depends on, it's the CDC change in the guidelines. If there is any further adverse news on breakthrough, reinfections, but 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 trans [Indecipherable] done a wonderful job of really preparing for getting back to full commuter loads. So we think they 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 that kind of September through December there is a ramp up close to full occupancy by the end of the year.

Anthony Paolone -- JP Morgan -- Analyst

Just to clarify, when you say full, is that 30% go into our 100% or 30% go into the typical 70% on a given day?

Gerard H. Sweeney -- President and CEO

I would say it's effective utilization rates pre-pandemic.

Anthony Paolone -- JP Morgan -- Analyst

Yeah. Okay, 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 mix or do you think that's just a function of inflation, market conditions and it's just going to be a higher number?

Thomas E. Wirth -- Executive Vice President and Chief Financial Officer

Yeah, Tony good question. And you know with. 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 that can skew a given quarter, but aren't necessarily indicative of future ramp up. I mean we basically averaged 12.0 over the last four years as 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 percentages and bring us back in line with that full year guided range.

Anthony Paolone -- JP Morgan -- Analyst

Okay, got it. Thank you.

Gerard H. Sweeney -- President and CEO

Thank you Tony.

Operator

Our next question is coming from the line of Craig Mailman with KeyBanc Capital. Your line is open.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Hey, guys. Jerry just wanted to follow up on your commentary about parking. Is there--can you just give a sense of like is this company's paying for employees to entice them to come back in the office or is employees kind of doing it on their own, because either accepted not running so why they wanted to or safety concern?

Gerard H. Sweeney -- President and CEO

Hai Craig. Great. 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 is this concern that we think will dissipate quickly over riding mass transit and we think it's a number of employees contacting us who are indicating that they're coming back to work and they previously took the regional rail system and they like to have monthly parking pass through the end of the year. So that's we're. So I don't think there's any defined path, other than people are requiring more parking short term. So we think that actually those fairly well. I mean 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 in 4 or 5 from the line we 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 will smooth that as more people do in fact come back to work and commuting patterns revert to their pre-pandemic on those.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

And then just on the kind of the good demand you're seeing at for the life science conversion. Could you just talk about that the credit profile or kind of size and some of these tenants looking for the space, where they are in their life cycle.

Gerard H. Sweeney -- President and CEO

Yes certainly. We have been very pleased Jeff DeVuono and his team are doing a great job along with PA Biotech, really tapping into an ever broadening network of potential users. A lot of the companies that we are talking to were actually larger than we initially programed our pipeline would be. So, they tend to be into their second round of financing. There's a couple of pre-IPO companies with a good private equity capital behind them. They typically are going through their 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 a turnkey operation or on short-term licensing agreement. So, we're creating the infrastructure. Our guess is there'll be some tenants will be larger than we thought they would be, would stay there longer and there may be some tenants that might a Board after not having successful trials of raising capital, George, any additional color on that?

George D. Johnstone -- Executive Vice President, Operations

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. So I mean a number of those prospects Craig our units been asked from some of the anchor institutions. They are well staffed with top level research scientists with good business oversight from either private equity or the anchor institutions. So, it's a pretty diverse group of prospects, and I think we're, we're very pleased with the reaction we're getting thus far.

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Great, thanks.

Gerard H. Sweeney -- President and CEO

Thank you, Craig.

Operator

Our next question is coming from the line of Daniel Ismail with Green Street Advisors. Your line is open.

Daniel Ismail -- Green Street Advisors -- Analyst

Great. looking at transaction volume is still low, but what is your sense on private market pricing across your markets broadly. It seems like your portfolios have been pretty rigorous throughout the pandemic, but what is your sense on cap rates and values across your preference.

Gerard H. Sweeney -- President and CEO

Yeah, hai Danny. Good morning. Look, I think there really have not been a lot of transaction. I think if we can take a look at kind of rolling through the markets, I mean certainly Austin continues to have a dynamic that is incredibly impressive and given the recent trade upon the downtown towers in the the pricing that went off as well as the projected pricing on some of the more suburban product trades, so certainly continued compression there, certainly has 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%. So 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, DC, clearly one of our public company peers did a bulk trade, I think the cap rate that most observers do was outside the market norm when that was a discounted trade due to the volume remains to be seen as we really haven't seen a lot of additional visibility behind that. And the Philadelphia regional marketplace, there is a number of projects on the market now. We'll see how they get priced out, but the early indications are that the bid list are getting bigger, that there seems to be a emerging reallocation 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 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. And certainly on top that would be Danny as leasing velocity picks up and there tends to be more data continuing on mark-to-market rents, vacancy levels going down, manageable delivery schedules, so net effective rents will that we think will demonstrate a level of stability. We would expect that that trend line toward more aggressive pricing will continue as long as the interest rate environment remains fairly low.

Daniel Ismail -- Green Street Advisors -- Analyst

Great, thank you Jerry.

Gerard H. Sweeney -- President and CEO

Thanks Dan.

Operator

Our next question is coming from the line of Steve Sakwa with Evercore ISI. Your line is open.

Steve Sakwa -- Evercore ISI -- Analyst

Yeah, thanks. Most of my questions have been asked, but, 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 kind of versus your original proformas and I assume there been any pressure on rents, just curious how maybe expectations have changed?

Gerard H. Sweeney -- President and CEO

Yeah, Steve great question, and good morning to you. I approach it a couple of different levels. One is I think across the board is certainly 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 compensate landlords or those higher construction costs. So, we have actually seen our net effective rent levels throughout our portfolio, some of the deals that George on that still remains very much in line with what our projections were. So there is seems to be an ability to compensate for the increased construction costs, that kind of on the throughput inventory. On the development projects, look, we've certainly seen an increase in the aluminum, steel, glass 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 in 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 and as we work through the subcontractor bid cycle and provide definitive notices to proceed or 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 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 in the structured parking manufacturers, pre-ordering glass, we've been able to lock into lower prices. So I think we're going to be in pretty good shape.

Steve Sakwa -- Evercore ISI -- Analyst

Great, thanks, that's it from me.

Gerard H. Sweeney -- President and CEO

Thank you Steve.

Operator

I'm not showing any further questions at this time, I would now like to turn the call back over to Mr. Sweeney for any closing remarks.

Gerard H. Sweeney -- President and CEO

Great, Lydia. 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 the family time and stay safe. Thank you very much. [Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Gerard H. Sweeney -- President and CEO

Thomas E. Wirth -- Executive Vice President and Chief Financial Officer

George D. Johnstone -- Executive Vice President, Operations

Jamie Feldman -- Bank of America -- Analyst

Emmanuel Korchman -- Citi -- Analyst

Anthony Paolone -- JP Morgan -- Analyst

Craig Mailman -- KeyBanc Capital Markets -- Analyst

Daniel Ismail -- Green Street Advisors -- Analyst

Steve Sakwa -- Evercore ISI -- Analyst

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