Brandywine Realty Trust Q2 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to Brandywine Realty Trust Second Quarter 2021 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there’ll be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker host today, Mr. Jerry Sweeney, President and CEO. Please go ahead, sir.

Olivia, 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, I just want to note that certain information we discuss during this call may constitute forward-looking statements within the meaning of federal securities law. Although we believe estimates reflected in these statements are based on reasonable assumptions, we cannot assure that the anticipated results will be achieved. For further information on factors 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 the COVID-19 situation remains volatile, 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%, 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, just a 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 we expected is a good sign. 48 tenants representing about 1.2 million square feet 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. But about 103 of our tenants representing almost 3 million square feet expressed an interest in parking. 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 focused on tenants whose spaces expire in the next 2 years. Those efforts have been successful, reducing our forward rollover exposure to an average of 6% over the next 3 years. As noted on Page 2 of our supplemental materials, our forecasted rollover exposure is below 10% annually in each year through 2026. So over the last several quarters, we have significantly improved our intermediate-term portfolio stability. Revenue and earnings growth remains a top priority. We do believe we have some key near-term earnings drivers. First, we have 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. This is true for both our wholly owned and joint venture inventory. We are also projecting that 405 Colorado and 3000 Market will 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. This is evidenced by what we’re hearing, but also by a 23% increase in our development pipeline Q2 over Q1. 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. 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 midpoint by $500,000 and narrowed the range, rather, from $18 million to $22 million to $20 million to $21 million. We are now 98% complete at that revised range. Rent collections continue to be very strong and among 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. Our average lease term was 8.5 years, which exceeded our 7-year business plan target. Cash mark-to-market was a positive 14%, and our GAAP mark-to-market was also positive 22%. All these results were above our full-year published ranges. However, as we mentioned last quarter, we will be within our business plan ranges based on leases already executed and commencing later this year with lower mark-to-market results. 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% to 2%. Second quarter cash same-store NOI was 1.8%, again, below our 2021 range of 3% to 5%. 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 ‘21 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 through its lease-up phase. We are still forecasting 2021 year-end debt-to-EBITDA in the range of 6.3 to 6.5. As we’ve always cautioned, that does depend on the timing of future development 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. We think there are some encouraging signs, at least what we’ve seen over the last quarter. A lot of tenant prospects with the pandemic want to virtually tour spaces before committing to an in-person tour. We continue 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 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 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, so pre-pandemic, the same quarters we’re in now. Those data points were also encouraging. On a comparable set of properties, the pipeline today is up 7% compared to the second quarter of 2019. Leases that we executed this quarter are also up 13% from the second quarter of ‘19. Deals at the proposal stage are up 20%, including new and expansion proposals that are up 13% over that comparative period. There are 2 additional benchmarks we looked at that demonstrate we’re clearly still in the recovery phase. Overall, we’re surprisingly good compared to the second quarter of 2019. Our deal conversion rates are down 6% to 28% in the second quarter of ‘21 versus 34% in the second quarter of ‘19. Given where we are in this recovery phase, the medium deal cycle time is up 27 days to 104 days this past quarter versus 77 days in the second quarter of ‘19. We’re hoping that as the economy continues to open, we’ll see a compression of that deal cycle time as that’s really where the rubber meets the road in terms of revenue generation. In looking at liquidity, we have excellent liquidity and anticipate 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 a peer average below 4%. We have also grown our CAD during that same 5-year period at 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 sold 2 small non-core land parcels and posted a small gain on that. Looking at development, as we always note, we have several production development projects that can be completed in 4 to 6 quarters costing 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 and looking for high-quality space. We did start the renovation program for 250 King of Prussia Road, a 169,000 square foot project located in the Radnor submarket that we acquired for approximately $120 per square foot as part of an overall transaction with Penn Medicine. We’ve designed that project to accommodate a significant life science component. The renovation started in the second quarter and will wrap up within the next 4 quarters. This project will be the first component of our Radnor Life Science Center, which will initially consist of this project and our planned 155 Radnor ground-up 150,000 square foot development. These 2 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. Looking at the existing development projects, Schuylkill Yards West is on pace and on schedule. This is a life science residential and office project we commenced on March 1. The project will be built with a 7% blended yield and consists of 326 apartment units, 100,000 square feet of life science space, 100,000 square feet of innovative office space, and street-level retail. We still have an active pipeline comparable to last quarter. We closed our 65% loan-to-cost construction loan at a floating rate equal to 3.75%. Given the front load of the equity commitment for 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 ‘22, but it completes 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 to commence in the fourth quarter of '21 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 the Pennsylvania Biotechnology Center. B.Labs will open in the fourth quarter of ‘21. Since the announcement, we have entered the marketing pipeline and have built significant 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. We can deliver about 3 million square feet of life science space, creating 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 we have a high degree of confidence. Our goal remains to be able to start later this year, assuming market conditions permit. At Broadmoor, we are progressing with Block A and the first phase of Block F. The 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 ‘21. On Block A office, we are actively in the pre-leasing market and plan to start that as market conditions permit. 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 21 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. So 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. While our second-quarter results were in line, we had a number of moving pieces and several variances from 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 due to the restrictions that were in place for most of the quarter in Philadelphia, negatively impacting those results. Interest expense totaled $15.5 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 2 insurance claims generating approximately $1.1 million of other income. We recorded no land gains and minimal tax provisions 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 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, 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 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 some other assumptions. Portfolio operating income is expected to total $68.5 million and be sequentially higher during the second quarter. Part of that will be due to the 107,000 square feet of forward leasing activity anticipated to commence during the third quarter, generating a second consecutive quarter of positive absorption. FFO contribution from our unconsolidated joint ventures, which totaled $5.8 million for the third quarter, reflects a $1 million sequential decrease from the second quarter primarily due to a noncash, nonrecurring termination fee and incrementally higher net operating expenses. G&A for the third quarter will decrease from $8.4 million to $7.5 million. The sequential decrease is primarily due to 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. For termination and other income, we expect a total of $2.1 million for the third quarter. Net management and leasing will total $3.2 million, and interest and investment income will be $2 million. For land gains, we expect about $2.3 million for the quarter based on the previously mentioned closings and 1 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 closed on the $186.7 million construction loan at Schuylkill Yards at an 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 in 2021. So the timing of those payments was significant to the quarter but anticipated for our full-year range, and our CAD range remains unchanged. Our second half of 2021 capital plan is straightforward, totaling 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, an $82 million draw on our line of credit, $48 million in cash on hand, and roughly $20 million 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 projected increase in the 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 6.3 to 6.5, but as Jerry mentioned, that will be predicated on how our development starts occur. We still see a net debt-to-GAV between 42% and 43%. Additionally, 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. In wrapping up, I think the key takeaways are that our portfolio and operations are really in solid shape. We have a great team of people on the operating, leasing, and marketing front. We’ve kept excellent visibility into our tenant base. Information has been key. The level of conversation with all our customers has significantly enhanced during this cycle. We’re very pleased that our annual rollover through 2024 is only 7% a year, which is a low watermark for the company in terms of portfolio rollover. Leasing pipeline continues to increase, certainly not as fast as we would like, and I know a lot of folks on the call are looking for more visibility, but tenants are returning to the workplace. We think the green shoots we’re seeing in terms of their space requirements are good signs. We 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, in both design and execution, are 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 are still 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 assume a start of 3151 Market Street alongside the other projects we have in operation or under construction, that will represent about 5% of our portfolio square feet. So it’s a measurable contribution from 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 multifamily units. As Tom touched on, we’ve had a very attractive CAD growth rate over the last 5 years. We think we’ve created and established stability in a well-covered and attractive dividend that we believe is poised to increase as we grow earnings. From a financing standpoint, given the continued dislocation in the public marketplace, there’s always a concern about the best way to finance these properties. I can tell you 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, and we’re confident that executable financing is available for our entire development pipeline in today’s marketplace. As usual, we’ll end where we start in that we really wish you’re all doing well and enduring 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.

As a reminder, to ask a question, you will need to press star one on your telephone. Our first question coming from the line of Jamie Feldman with Bank of America.

Appreciate all the commentary. Going back to your comments about the tenant survey, you mentioned a growing need for internal space planning services. Can you elaborate on what you’re learning about that specifically? Do you think tenants will want to downsize before they start growing again? What are your insights regarding how much space they are likely to need going forward, especially with hybrid work?

Yes. Jamie, George and I will tag-team this. The data points are still evolving. I think it will take several quarters to get a clear idea. Many 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 for increased circulation patterns, additional spacing between workstations, and the incorporation of more partition walls. We believe all these items will lead to more space requirements. We’ve actually had a number of expansions in the last couple of quarters as part of renewals. However, I hesitate to indicate that it’s a definitive trend line yet because we’re still waiting for larger tenants to weigh in. To some degree, that will depend on whether they implement hybrid work programs, whether employees will move to hoteling or eliminate private workspace. We’re seeing data points all across the board. Of the 53 tenants looking for more square footage in our data set, many others are still figuring out their overall requirements. Our hope is that next quarter we can provide more visibility. But many of these space planning discussions are underway. Regarding our executed leases, circulation patterns are wider, and there’s been a slightly higher percentage of private offices. George, do you have any additional points to add?

Yes. We’ve seen an increase in the size of workstations, which suggests more space is needed. However, the key ingredient that remains to be determined about the hybrid return to work is whether tenants will need more or less space and whether that becomes a permanent desk versus a hoteling desk. Many employees prefer to have a dedicated workspace even on a hybrid schedule.

To close the loop, Jamie, the data we’re getting from tenants indicate that most employees want a hybrid work schedule for a variety of reasons, but they are generally reluctant to forfeit a private workspace. We'll see how this plays out over the next couple of quarters, but the conversations we’re having with tenants point to encouraging signs about reconfiguring space without significant downsizing requirements. However, the data is still evolving.

That’s very helpful. You also mentioned a potential upside of $0.07 to $0.10 from backfilling some vacancies. Can you give us an update on those spaces and perhaps your assessment of how long that might take to play out?

Sure, Jamie. In Austin, we still have 36,000 square feet previously returned by SHI, with proposals out on 25,000 square feet of that space. We’re looking to finalize a deal in the next 30 to 60 days. At Two Logan, we’ve already leased one floor out of the Comcast space returned, with proposals out for expansion to an existing tenant and a second proposal to another prospect, leaving just one floor remaining to lease. The revenue gain for us at 1676 in Tysons, we last quarter announced a 75,000 square foot deal commencing in Q4. We have about 175,000 square feet to go there, and the project is currently 40% leased with a pipeline of about 336,000 square feet looking at that available space. Additionally, we have a lease out and are hoping to finalize another lease for a fitness center at 555 Lancaster Avenue in Radnor in the next 30 to 60 days. At Commerce Square within our JV inventory, we’ve doubled our pipeline from the first quarter to about 200,000 square feet of prospects for roughly 240,000 square feet of available inventory. We are close to finalizing a lease for 30,000 square feet at Two Commerce. The good news is our pipeline continues to build, and we look forward to providing further updates in the next call.

That’s really helpful. Just a follow-up on Tysons. With a 336,000 square foot pipeline there, what are the current delays? It seems like that market is relatively stable. What do you believe it will take for people to sign leases?

Jamie, there’s a lengthy gestation cycle for leases in this market. Year-to-date, aside from a few renewals, the largest transaction has only been about 30,000 square feet. We have several larger tenants in our pipeline, but decision timelines continue to lag as tenants reconsider their workplace strategies, as was noted in your previous question. However, we are aggressively marketing all our projects and closely monitoring market trends. The information we receive indicates that the pipeline is expected to continue to build, just as seen in Austin, where leasing volumes have been low thus far this year despite a strong active prospect base.

Jerry, briefly sticking with Austin, can you differentiate between the pipelines for 405 Colorado and for Broadmoor? Are tenants considering both projects, or are they distinctly different?

There’s not really a significant overlap between those 2 projects. George, could you provide some insights on the 405 pipeline?

Sure. We’ve seen tenants primarily looking for downtown spaces in the 405 Colorado pipeline, which totals about 540,000 square feet. We’re seeing tenants from various industries including tech companies, law firms, and financial service companies. Right now, we have about 40,000 square feet in final lease negotiations.

At the Broadmoor development, there are a couple of tech-oriented tenants in that pipeline as well. However, the smaller tenant activity hasn’t picked up yet because we’re looking for a larger tenant to kick off that building. The upcoming pipeline isn't exclusively tied to Brandywine’s projects, but the overall market is starting to pick up momentum.

Given the limited lease roll through 2026 that you discussed, have you encountered any firm non-renewals from tenants as you’ve approached them for early renewals? What should we consider moving forward?

We haven’t really received any firm non-renewals. The larger tenants are still contemplating their long-term plans, and we anticipate further clarity after Labor Day. A number of them plan to bring back employees after Labor Day, which was one of the key gating issues holding them back. However, many haven't yet finalized their remote work policies, so more visibility will come once they do.

The only significant known move-out is Baker moving out of Cira Center, but we’re actively working on proposals for that space.

Thanks for all the color on feedback from your tenants. With regard to estimated utilization of 30%, where do you expect that to lead to in September, and what are your expectations for year-end utilization?

Our tenants plan to rotate back in after Labor Day with expectations of close to full occupancy by year-end. This projection is based on discussions held recently and assumes that there are no significant changes to CDC guidelines or concerning news around COVID-19. The primary gating issues are on the verge of resolution with schools and daycares fully reopening.

Just to clarify, does full occupancy imply 100% utilization or closer to historical utilization rates of 70%?

I would say it indicates effective utilization rates similar to pre-pandemic levels.

Regarding CapEx, I know you’re running a bit ahead of plan, above your 10% to 12% target. Is this primarily a mix issue, or do you see it as a broader-function of inflation and expect it to be a higher number?

Yes, good question. Capital expenses tend to vary quarterly based on the deals that are commencing in any given quarter, which can skew results but aren't necessarily indicative of future trends. We’ve averaged around 12% over the last few years, so while this quarter trended higher, the deals scheduled for Q3 and Q4 will be at lower capital percentages, ultimately bringing us back in line with our full year guidance.

I wanted to follow up regarding parking. Can you clarify whether companies are paying for employees to encourage their return to the office or if employees are independently seeking parking due to safety concerns?

Both factors are in play. Some employers are incentivizing employees by covering parking, while others are responding to concerns about returning to mass transit. Employees are also expressing a desire for parking as they return to work. We believe this trend can be viewed positively, indicating rising demand for parking amenities as more individuals come back to work.

Given the positive demand for the life science conversion at Cira, can you provide details about the credit profile and size of some of the tenants seeking space? Where are they in their lifecycle?

We have been pleased with the response. Many companies we’re engaged with are larger than we initially planned for our pipeline. They are generally in their second round of financing, with some being pre-IPO and backed by strong private equity. They are typically moving through their trial phases of approvals. We are vigilant about tenant creditworthiness; however, we have not encountered concerns so far. The spectrum includes prospective tenants that could significantly exceed our initial expectations in terms of long-term occupancy. Many are well-backed by private equity or anchor institutions, which adds to their stability.

The pipeline continues to build, and we currently have 239 seats in the incubator space, with about 80% of it already covered.

I recognize that transaction volume is still low, but what’s your sense of private market pricing broadly? It seems your portfolio has remained relatively resilient throughout the pandemic. What are your conclusions regarding cap rates and values?

There have not been many transactions to analyze. Austin, for instance, continues to achieve impressive dynamics, especially with recent trades meeting substantial valuations. We see continued cap rate compression in that market with rates hovering around 3%. Conversely, Washington, D.C. has seen limited activity. A recent trade by a public company at a discounted rate raises questions about market norms, as there’s a substantial amount of available capital seeking placements.

Most of my questions have been asked, but regarding construction costs and lumber volatility, could you explain where the pricing is on Broadmoor relative to your original pro formas? Has there been any rent pressure?

Construction costs have generally risen, leading to a recognized need for slightly higher rents to offset these rises. Our expected net effective rents remain in line with previous projections. For specific developments, we’ve seen initial bids come back approximately 4% to 6% over our estimates, but we’re negotiating to bring those numbers back down. We had built in contingency within our owner's budgets. As anticipated costs rise, we’re squeezing to maintain our feet to our original estimates.

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.

Great, Olivia, thank you for your help today, and thank you all for participating once again. We look forward to updating you on our third-quarter call with the continued progression of the business plan. In the meantime, please enjoy the rest of the summer, enjoy family time, and stay safe. Thank you very much.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.