Earnings Call: Q1 2019

May 2, 2019

Greetings. Welcome to Hudson Pacific Properties, Inc., first quarter 2019 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Laura Campbell, Senior Vice President, Investor Relations and Marketing. Thank you. You may begin. Thank you, operator. Good morning, everyone, and welcome to Hudson Pacific Properties' first quarter 2019 earnings call. Earlier today, our press release and supplemental were filed on an 8-K with the SEC. Both are now available on the Investors section of our website, hudsonpacificproperties.com. An audio webcast of this call will also be available for replay by phone over the next week and on the Investors section of our website. During this call, we will discuss non-GAAP financial measures, which are reconciled through our GAAP financial results in our press release and supplemental. We will also be making forward-looking statements based on our current expectations, which are subject to risks and uncertainties discussed in our SEC filings. Actual events could cause our results to differ materially from these forward-looking statements, which we undertake no duty to update. With that, I would like to welcome Victor Coleman, our Chairman and Chief Executive Officer, Mark Lammas, our COO and CFO, Arthur Suazo, our EVP of Leasing. Victor will give an overview of our performance, Art will discuss leasing activity in our markets, and Mark will touch on financial highlights. Note they will be joined by other senior management during the Q&A portion of our call. Victor? Thank you, Laura, and welcome everyone to our first quarter 2019 call. Year to date, without exception, we are seeing very strong demand for high-quality tenants for both our existing operating properties and our innovative development and redevelopment projects. On the heels of a record leasing year, we signed over 1 million square feet of leases in the first quarter, with exceptional GAAP and cash rent spreads of 33% and 25% respectively. Noteworthy deals this quarter included two major leases at our redevelopment projects. We signed a 584,000 square foot lease with Google for One Westside, and more recently, we completed a second lease for the balance of Maxwell, such that WeWork Enterprise will now lease all 95,000 square feet of office space at that project. Our 1.1 million square foot pipeline of under construction and near-term planned value creation projects is now 90% pre-leased. These projects have an 8.1% weighted average estimated initial stabilized yield. In the first quarter, we maintained our stabilized and in-service lease percentages of 95.2% and 92.9% respectively. Accounting for renewals and backfills in deals, in leases, LOIs or proposals, we've successfully addressed 65% of our remaining 900,000 square feet of 2019 expirations, which are 17% below market. As indicated on our fourth quarter call, in addition to continued strong demand from small sub 10,000 square foot tenants in the San Francisco Peninsula and Silicon Valley markets, we're seeing a resurgence of mid-size requirements. That is deals in the 10,000 to 25,000 square foot range. In the first quarter alone, we've completed 30 deals totaling 260,000 square feet in those two markets, with GAAP and cash rent spreads of 35% and 26% respectively. This includes several notable 20,000 square foot plus deals across our Foster City and Redwood Shores assets, which in aggregate increased our in-service leased percentage in those markets by 330 basis points to over 80%. Our studio business continues to thrive as major content companies race to build global streaming brands and drive monthly subscriptions. Netflix has the early lead and is expected to spend $15 billion on new content this year. Apple, Amazon, Disney+, WarnerMedia, Comcast NBCUniversal, and CBS All Access are also rapidly expanding amid favorable consumer and industry trends. We expect aggregate spend among all content players to more than double in the next 10 years. In turn, as major studios like Warner Bros., Paramount, NBCUniversal push to generate more content, those stages will no longer be available to competitors. This will directly benefit our studios, particularly as we have longstanding relationships with the two largest players, which are Netflix and ABC Disney. We're also a primary resource for HBO's West Coast Productions and a host of other streaming companies like Amazon and Apple. Over the last three quarters, for which all of the three same-store studio properties is available, our trailing 12-month lease percentage increased 430 basis points to 92.4%, and rents increased nearly 2% to $39 per foot. In terms of capital recycling, we continue to add strategic valuation and create opportunities to our portfolio. At our investor day a year ago, we discussed our interest in expanding both our office and studio portfolios in Vancouver. The city is one of the top markets for tech and media job growth for a variety of reasons, including proximity to Seattle, high quality of life, abundant near colleges and universities, and a favorable immigration policies. Vancouver has experienced very strong population growth, yet achieved record low unemployment, with companies like Microsoft, Amazon, and Apple rapidly expanding in the city. Office fundamentals in the city, particularly in the downtown area, are extremely strong. Vacancy is very low, less than 3%. Class A triple A rents grew 13% year-over-year. Supply is in check with under-construction projects delivering in 2022 over 50% pre-leased. As such, in the first quarter, we were thrilled to announce our JV with Blackstone Property Partners to acquire the 1.45 million square foot Bentall Center, which we expect to close later this quarter. Bentall Center is one of the city's most prominent office properties. It's a perfect opportunity to enter the Vancouver market in scale and with the potential to add significant value. The location is fantastic, situated in the center of the city's financial core, with direct access to the SkyTrain and numerous urban amenities. The property is fully leased with strong leasing tenancies, but in-place rents are more than 20% below market, and 60% of the square footage rolls in the first five years. Thus, we will capture meaningful rent upside, facilitated by our signature lobby and common area renovations, as well as the repositioning of at-grade and subterranean retail. Bentall Center also affords us the opportunity to expand in Vancouver by building another buy-right, approximately 500,000 square foot office tower. Although the exact scope and scale remain to be determined. Finally, a brief update on Campus Center. We placed the office campus and the adjacent land under contract to sell, with both expected to close in the coming weeks. Based on the current pricing, we anticipate our gain on the land will largely offset our loss on the office campus. Mark is going to provide more detail as to the mechanics of this transaction in just a moment. With that, now I'm going to turn it over to Art for further commentary on our leasing and markets. Thanks, Victor. After signing over 1 million square feet of deals in the first quarter, our leasing pipeline, that is deals and leases, LOIs for negotiation, remains essentially unchanged at 1.3 million square feet. Let's take a closer look at our core market. In Los Angeles, we've had back-to-back quarters of signing multiple full-building deals with major tech and media companies at our value creation assets. Only Harlow, our 106,000 square foot office development at Sunset Las Palmas in Hollywood, remains to be leased. The project won't deliver until first quarter 2020, but we've already had activity on the entire project with full and multiple users. Fundamentals in Hollywood remain very favorable, in line with 19,000 square feet of positive net absorption this quarter. Vacancy in Hollywood was stable at 9.4% and down 230 basis points year over year. Class A rents were up 5.1% to $59 per square foot year over year. We have coverage, that is deals, renewed backfill, and leases, LOIs or proposals on 59% of our remaining 160,000 square feet of 2019 expirations in Los Angeles, which are 14% below market. This is primarily Saatchi & Saatchi's fourth quarter 113,000-square-foot expiration at Del Amo. With Saatchi & Saatchi likely to downsize or vacate, we are actively marketing the asset even as we evaluate a potential sale. Our stabilized Los Angeles portfolio is 99% leased and in-place rents are 12% below market. San Francisco has a supply shortage, particularly in terms of large block space. Brokers estimate there are over 7 million square feet of requirements in the market, about 300,000 square feet in excess of available supply. First quarter alone had 585,000 square feet of net positive absorption. Vacancy fell 50 basis points to 3.6%, and rents increased 2.1% to $87 per square foot. We have nothing of note in terms of remaining 2019 expirations in San Francisco, and we're in negotiations with multiple tenants to backfill the remaining 38,000 square feet of SS&C's former space at the Ferry Building. Our stabilized San Francisco portfolio is 95.4% leased, and in-place rents are 34% below market. We're seeing continued positive momentum along the San Francisco Peninsula, which for purposes of this discussion, includes Palo Alto. Vacancy remained stable at 6.7% in the quarter, with Class A rents increasing 2.1% to $88 per square foot, in line with 375,000 square feet of net positive absorption. We have coverage on 71% of our remaining 407,000 square feet of 2019 expirations along the peninsula, which are 16% below market. Stanford Health, 63,000 square foot lease at Page Mill Center, is a known vacate, and we're finalizing plans to reposition that space, while evaluating additional building and common area upgrades. We're in negotiations on two of the largest expirations, 34,000 square foot space at Clocktower Square and 35,000 square foot space at 555 Twin Dolphin. Our stabilized Peninsula portfolio is 89.9% leased, and in-place leases are 11% below market. With Campus Center held for sale, 90% of our Silicon Valley footprint is in North San Jose, where rents increased 8.3% in the quarter to $47 per square foot. Vacancy remains stable at 15.1%, despite 166,000 square feet of net negative absorption. We have coverage on 55% of our remaining 262,000 square feet of 2019 expirations in Silicon Valley, which are 17% below market. These are mostly smaller sub 10,000 square foot leases, and as Victor noted, we're seeing an increase in mid-size 10,000 to 25,000 square foot requirements, including some from high-quality users new to the market. Our stabilized Silicon Valley portfolio is 95.9% leased, and in-place leases are 9% below market. Downtown Seattle remains tight with 138,000 square feet positive net absorption this quarter, 7.5% vacancy, down 150 basis points year-over-year, and Class A rents of $45 per square foot unchanged year-over-year. New supply has been quickly absorbed, and brokers estimate over 4 million square feet of tenant requirements for the broader Puget Sound region. With office space at our delivered 450 Alaskan and 95 Jackson projects fully leased, we're focused on our remaining 53,000 square feet of 2019 expirations in Seattle, which are 35% below market. We have coverage on 81% of those leases. ADP's third quarter 29,000-square-foot lease at Northview Center is the largest expiration. They are likely to downsize significantly, but we have activity for multiple users on the entirety of that space. Our stabilized Seattle portfolio is 96.1% leased, and in-place rents are 18% below market. With that, I'll turn the call over to Mark for financial highlights. Thanks, Art. In the first quarter, we generated FFO, excluding specified items, of $0.49 per diluted share compared to $0.45 per diluted share a year ago. Higher occupancy and rental rates across both the office and studio portfolios, together with asset acquisitions, specifically One Westside, 10850 Pico, and The Ferry Building, were the primary drivers of this year-over-year increase. Specified items in the first quarter consisted of transaction expenses of $100,000, or $0.00 per diluted share, and one-time debt extinguishment cost of $100,000, or $0.00 per diluted share, compared to specified items consisting of transaction expenses of $100,000, or $0.00 per diluted share, and one-time debt extinguishment cost of $400,000, or $0.00 per diluted share a year ago. In the first quarter, NOI at our 31 same-store office properties increased 7.2% on a GAAP basis and 2.3% on a cash basis. While first quarter same-store office cash NOI came in below the 3% midpoint of our previous full year guidance range, we have in fact increased our full year office cash NOI guidance to a revised midpoint of 3.5%, reflecting our view of stronger same-store office performance through the remainder of the year. Our same-store studio NOI increased by 25.3% on a GAAP basis and 23.8% on a cash basis. By way of reminder, Sunset Las Palmas, which was acquired in mid-2017, now qualifies for both quarterly and year-to-date 2019 same-store studio comparisons. Our strong first quarter same-store studio results were in part driven by our leasing success at Sunset Las Palmas, which increased occupancy year-over-year from 77.6% to 89%. In terms of capital markets activity during the quarter, in addition to the $350 million public bond issuance described in earlier press releases and public filings, we also recast our Sunset Gower/Sunset Bronson loan, previously scheduled to mature March 4, 2019, into a five-year fully revolving $235 million loan now scheduled to mature March 1, 2024. We also reduced the interest rate by 90 basis points to LIBOR plus 1.35% and removed Sunset Gower as collateral, leaving Sunset Bronson, and by extension, Icon and CUE, as collateral. Before turning to guidance, I want to provide further color around the impairment loss running through our first quarter results. As Victor noted, we have placed Campus Center's office campus and the adjacent land and development rights under separate contracts to sell. Accordingly, we've reclassified both properties as held for sale, and we anticipate these sales to close at or around the end of this second quarter. The impairment loss is due to the fact that GAAP accounting standards require us to recognize the anticipated loss associated with the office campus upon its designation as held for sale, but not the anticipated gain associated with the adjacent land, which we expect will largely offset the loss. Turning to guidance. We are increasing our full year 2019 FFO guidance range from $1.95-$2.03 per diluted share, excluding specified items, to $1.96-$2.04 per diluted share, excluding specified items, thus raising the midpoint from $1.99-$2.00 per diluted share. Specified items consist of those identified in connection with our first quarter results. Our estimate also assumes the successful disposition before the end of this second quarter of Campus Center, including the adjacent land and development rights, for approximately $150 million, with proceeds to be applied towards the repayment of our revolving credit facility and other unsecured indebtedness. It otherwise excludes the impact of unannounced or speculative acquisitions, dispositions, financings, and capital markets activity. One final word about guidance. In light of the recent acquisition of One Westside and 10850 Pico and the anticipated joint venture acquisition of Bentall Center, we have added further full-year guidance detail to our earnings press release. You can now find guidance estimates for corporate-related depreciation and amortization to identify the estimated amount of depreciation and amortization not added back to FFO. We have also included estimates for both interest expense and interest income, largely to provide further detail regarding projected interest income associated with our in-substance defeased debt. Lastly, we have added estimates for the company share of FFO from unconsolidated joint ventures, primarily to assist you with estimating amounts stemming from our ownership and management of Bentall Center or any other future unconsolidated joint ventures. With that, I'll turn the call back to Victor. Thank you, Mark. To summarize for the quarter, our portfolio is concentrated in markets that are heavily populated by our economy's highest growth industries. Our first quarter results show that this strategy has continued to propel our leasing success. With our active value creation pipeline now almost entirely pre-leased, from a leasing perspective, we're focused on the following. First, the renewal and backfill of our remaining 2019 expirations, of which roughly 300,000 square feet remain unaccounted for as of the end of the first quarter. Second, the stabilization of our leased-up assets, which are few. By the end of the first quarter, we will require roughly 200,000 square feet of net positive absorption to reach 92% lease. Third, lease up of our 100,000 square foot plus Harlow development, for which currently we have strong tenant interest and will not deliver it until 2020. In terms of capital recycling, quarter after quarter, we've uncovered exceptional value-add transactions like the Ferry Building, One Westside, and now Bentall Center, while pruning our portfolio of non-core assets and markets. These deals leverage our unique repositioning and adaptive reuse expertise to generate high-quality future cash flow, and we feel confident in their value creation potential. We will continue to evaluate opportunities that play to our strengths and make financial and strategic sense. As always, I'd like to thank the entire Hudson Pacific team for their excellent work this quarter. Most importantly, I'd like to particularly commend our operations and sustainability teams, whose exemplary efforts and most recently earned Hudson Pacific Properties the EPA's coveted Energy Star Partner of the Year award. Congratulations to all. To everyone listening, we appreciate all your efforts and support, and we look forward to updating you next quarter. Operator, with that, let's open the line for questions. Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Nicholas Yulico with Scotiabank. Please proceed with your question. Oh, thanks. Can you talk a little bit more about the driver of the increase to same-store guidance in office? Is that a better occupancy assumption? What pieces of the portfolio are driving that? Yeah. Just to give you a quantification of that, the increase from the prior 3% midpoint to the 3.5% midpoint is about $1 million and $4. The key drivers of that, it's made up of a number of things. We picked up some ground at 83 King in Seattle. That contributed about a half a million better NOI for the year than previously expected. Largely leasing driven, but a few other things contributed there, too. The other thing we picked up a fair amount of ground on was the recovery of Proposition C. You'll recall that there's a measure that taxes on rents. I'm talking about the June Proposition C, not the November Proposition C. The team went through in sort of great detail on what recovery would look like with respect to that incremental tax. We think we're going to do better there than we previously expected. Those are really the key contributors to that $1,000,004 increase from our prior guidance. Okay. It's helpful. As we think about the lease-up assets in the Valley, you actually got some good leasing done in Foster City, Redwood Shores. Those have been slower markets. How are you feeling about the lease-up trajectory for those assets there for the rest of this year? Nick, I feel good about it. I've been saying along, listen, with all the programs we've been implementing on the ground, the VSP programs and monetizing all of the spaces and having market-ready space, we've seen this trajectory for several quarters. All of them, kind of, there's a 300 basis point movement in those collective buildings. The pipeline behind them, going to building by building, 333's got probably 20,000 sq ft of deals in the pipeline. Metro Center has probably about 75,000 sq ft in that active pipeline. ShoreBreeze has another 20,000 sq ft. A lot of these are VSP spaces that we've completed, so I feel really good. Okay. Just one last question on Vancouver. Can you talk about what the ultimate capital outlay in that city could be? You have the initial JV. There's a potential development right. I think you guys are also maybe looking at other assets to buy in the market. How should we think about ultimate investment in Vancouver? Nick, listen, I wouldn't think about it until we tell you there's something to be talking about. Seattle's a good example of that. We came into the Seattle market almost exactly the same size, and we probably almost tripled our footprint there. It's going to be based on opportunities. The difference here is, you touched on it, we have an absolute right to build almost 500,000 square feet. We're going to evaluate timing the marketplace through design and demand that's going on there. We probably have another potentially, if we push it, maybe an initial 400,000 square feet. We have almost 900,000 square feet on that asset alone if we do certain things. There could be some retraction. We're looking at other deals. I can assure you we're going to be an active player in that marketplace. We're very excited about it. All right, thanks everyone. Thanks, Nick. Our next question comes from the line of Craig Mailman with KeyBanc Capital Markets. Please proceed with your question. Hey, guys. Maybe just to follow up on Vancouver, and maybe just generally your thoughts here on capital outlays. You guys have done a good job match funding with dispositions. Is that what we should expect as you guys look to grow in Vancouver or elsewhere, that you'd want to recycle some capital first just to fund it, just given kind of where the stock is trading today versus the yields you're buying at? Craig, we've been pretty consistent. In recycling capital, we've got a very strong balance sheet. We've got lots of access on that right now. We've got some opportunity with some increased debt. I think we're very flexible in what we're looking at. As deals come by, we'll figure out which is the most appropriate avenue to deploy capital. We've really not looked at any assets currently today other than the ones we've mentioned, which is Campus, and maybe, which is a small asset, down in Torrance, for us to dispose of at this time. That may change depending on what the activity and the interest level is going to be us finding some new deals. That's helpful. Just want to go back to your commentary about seeing a resurgence of mid-size deals in Northern Cal, kind of the Valley and Peninsula. Just maybe just give some insight into what's driving that. Is that IPO related or just pent-up demand? Kind of what are you guys seeing? Well, listen, I think we've been ahead of this, and I think our story has been pretty consistent. When San Francisco filled, we said that it's got to go somewhere, and there's really no other place to go. The mid-size growth is part and parcel of what we have been seeing because that's what our portfolio attracts. There's a lot of large-size deals that are going on there, and I think that's been prevalent really from the messaging that I guess now we're going almost on two and a half years on starting with Google making their announcement that they're going to be 10 million sq ft in San Jose. I would say our team feels, from the people who are on the ground, that the hottest market that we've seen activity is San Jose, and it's all based upon where the drivers are, and our portfolio is indicative of that. We're as highest occupied in that portfolio now than we've ever been. We're seeing some nice movement in rent growth and zero pushback on transactions when it comes to rents that we're quoting. I do think you are accurate. The IPO market is strong. Clearly, this is a big year. We've seen announcements and execution, and it looks like it's going to be pretty aggressive between now and the end of the year, and that's going to help. We do know, as we sit today, there are lots of large tenants, household name tenants, that are looking to take space in the valley of hundreds of thousands of sq ft. Those deals will be probably announced between now and the next two quarters. Okay. No, that's good. Just one last one, kind of bigger picture. You guys have done a little bit more leasing to WeWork. Just kind of your thoughts here on leasing to that third-party provider versus maybe taking it in-house and looking at a higher amenity or higher service offering, and maybe this is where office landlords could be trending to over time. You guys have this service level with the studio, so it wouldn't be a stretch for you guys. Is that something that's potentially on the table versus just kind of giving the ups away to a WeWork-type tenant? Well, it's absolutely on the table. We've discussed it. We've made it publicly known that that's an area of business that we will get into. I think you have to classify it on a couple of levels. First and foremost, we're comfortable with the risk factor that we could step into that at any time. I think the fact that we have the ability to execute on those assets in our portfolio with those tenants, I believe that that's something that we will do, either independent of WeWork or in conjunction with. We're going to continue to look at it as we sit today. It's not like we are in a position where we're looking at the business of the enterprise tenants and saying, "Oh, those are guys that come to us." If we had an opportunity to do those deals, we would have. The enterprise tenants, almost uniformly, with the exception of 1455, in our portfolio, is 100% WeWork Enterprise. They never came to us. We have relationships. They have long-standing relationships with WeWork. They want to continue those relationships. I think at the end of the day, they know a landlord like Hudson will absolutely have the ability to transfer over the services, and it would probably be an opportunity for them, in my guess, to lower a little bit of rent and make the transition pretty seamless. Currently today, we've had the conversations on multiple levels on saying, do we want to spend the capital for shorter-term leases for a higher risk of these tenants saying that they're going to leave and go somewhere else? It's been uniformly the decision that we'd rather go with the structure. We've commented on our unique structure with WeWork in terms of the leases that is different than most landlords have. As a result, I think we're in a pretty comfortable position, and confident that the tenants currently today can shift over if we decide to add those amenities. Do you think what WeWork's doing on the enterprise side, though, is going to change what you guys have to do from a lease structure to maybe be more flexible for those enterprise clients who are looking for that and being attracted to it? Or is that just a certain subset that's going to want that and the rest of the market- I think it's a good question. At the end of the day, the ultimate factor here is flexibility. As these enterprise tenants or household name tenants are net entering our markets, they pretty much have a presence there. It's not like they're entering a new marketplace. I'm not going to give an example of a market, but these West Coast markets that we're in, that these enterprise tenants are going to, already have a presence. I think this is an adjunct in a growth aspect. Spotify is a great example, right? They took a building across the street from us, and now they need more space. They could have come to us, but they want the flexibility, and my guess is that so long as they're in business, they're going to stay there a long time and continue to grow. Great. Thank you. Thanks, Craig. Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question. Great. Sticking with Maxwell, can you talk about your long-term plans for that asset and then just your latest thoughts on whether you want to grow more downtown, or might harvest some of those assets? Yeah. No, Jamie, listen, I think both of the assets down there in the sister are going to be core to our portfolio. We are looking at some other opportunities down there. I think we've commented publicly in the past. The ones that we're looking are either smaller redevelopments or ground-up development. There's not a tremendous amount there. I do think that our story has proven out. The yields keep getting better. The returns on these assets are getting better. It took longer to lease up. Now that we're less than six months away from somewhere between 4,000 and 5,000 new employees being housed in that marketplace, it's going to be pretty interesting to see what happens. It may not be cheap at the end of the day, and that would be the bigger question, but it's close enough for us to operate and manage out of our Hollywood and other Los Angeles assets. It's not that much of a burden, and they're pretty cool assets. Okay. You talked about content spend doubling over the next 10 years. Is there a way to get more aggressive into the business now? I know at your Investor Day, you talked about maybe growing in more markets. Just what are your latest thoughts on how you can get ahead of that wave? Well, the cat's out of the bag, right, Jamie? What was "an albatross" for us, and people were questioning why we're in the business, has now proven out to be a pretty good business strategy, and I'm not so sure there's going to be that many deals that are going to be coveted for us to turn around and buy and/or reposition that is not going to be public knowledge. There are opportunities in our markets here. We are looking at one currently now today. There are opportunities, we hope, in Vancouver. We are looking at a few others that have come to our attention. I think we're very committed to the industry, to the business lines, and I just think that the growth opportunities may shift a little bit around other markets. You're really only looking-- We told you we're not going to go to Atlanta. We have talked about opportunities potentially in New York, but there's nothing on the horizon that we're even closely looking at this time. I think Vancouver, hopefully, will be an entrée with the Bentall transaction for us to look at the studio business there, and maybe a few more deals here as well. Okay. Any thoughts on what the Warner Bros. decision in Burbank, for their office developments coming, is going to mean for the sector overall? Listen, there's a couple of points on that. First of all, there goes more sound stages that are not accessible to the content players that are vastly growing. That's a positive. Obviously, the valuation of that asset and the sales price just proves our storyline and our valuations. I think what we carry our NAV valuations with studios are still much higher than what these last three studios have traded at now, are a lot lower in terms of cap rates than what we carry them on. This was a long-standing transaction with Warner Bros. They had to get through their lawsuit on the AT&T side, and once that transaction was completed, this was something that was always going to take place. It's just another business line of content players that are growing in the marketplace, and there's a desperate need that Burbank has to offer with development. Jeffrey Worthe has the ability to build those buildings, and it was a phenomenal deal. What would you say the cap rates were for the studios? I didn't. Would you? No. Okay. Thank you. You're welcome. All right. Thank you. Appreciate your thoughts. Thanks, Jamie. Our next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed with your question. Hey, good morning out there. Just going back to WeWork for a second. Just a two-parter on WeWork. One, if you can just comment on sort of the rent upside from taking the Bank of America vault space at 1455. Two, Victor, you mentioned that your leases with WeWork are different from other landlords. And maybe I missed the first part of that, but if you could just walk through what makes your leases different than your peers on the WeWork. On the first question, it's a pretty easy one. Yeah. Let me just do the quick math for you. You'll remember that Bank of America sold us the building in a sale leaseback, and the rents that were in place at the time the sale leaseback expired in July of 2017 at $5.97 net. The deal with WeWork is over 1,000 times higher than that expiring rent. I don't want to get down to this dollar specifically to WeWork. It's 1,000 times higher, which sounds crazy, but that's where the market has trended, obviously. I don't know if you want to pick up more. Yeah. Listen, we have a unique structured lease with WeWork because it's grandfathered into the original deal that we did, details by which is too confidential. Suffice to say, I am highly confident that our structured lease with them is different than most, if not all, landlords, and it has to do with a security enhancement. Okay. That sounds good. Second question is, can you talk a little bit about Bellevue? I was hearing that Amazon, and I don't know if this is accurate or not, but I heard that Amazon isn't expanding anymore in Seattle. They're looking maybe across to Bellevue. It seems like that market is a growth market. Maybe just your thoughts on how you look at that market, or if you think just staying in Seattle is the best course of action given where you see growth in the Pacific Northwest. Well, listen, it's public knowledge. Amazon recently exercised a long-term renewal at 1918 Eighth, and the construction is underway for Tower 3, which is another 1.1 million sq ft. They're growing still in Seattle. The demand is still high. Yes, they are subleasing Rainier Tower, which is 720,000 sq ft, but virtually that entire building is completed with two tenants. In the meantime, you're right. They are expanding in Bellevue. I think they've done about 2 million sq ft at a couple projects, and they're looking at a third right now. Bellevue is a great marketplace. I think people jumped on it pretty quickly, and it made a quick turnaround. The guys who've been there have done exceptionally well. I don't know, other than the deals that we've looked at that we've not been able to sort of jump on because we were outbid or other people came in, like Amazon, and bought their own asset there. We never had an opportunity. I don't know how much more is there for guys like us to do that is not going to be absolutely ridiculously expensive. I think it's fair to say that we're extremely aggressive on Seattle. We've got line of sight on a couple of deals, that we should be announcing one shortly. I do think that it will continue to see the robust demand in Seattle that is also outside of just what tenants like Amazon have done. Apple is in leases on assets, and Hulu is in leases on assets, and there are other active non-tech tenants that are in leases on assets. It just shows the growth of Seattle. I just think that the Seattle marketplace in the past few years has really surprised a lot of people of the strength in the pre-leasing of the existing construction. That one deal that you're looking at in Seattle, is that a development site, or that's an existing asset? We're looking at two deals in Seattle right now. One's a development and one is a renovation, a repositioning. Thank you, Victor. Thanks, Alex. Our next question comes from the line of Manny Korchman with Citigroup. Please proceed with your question. Hey, everyone. Victor, going back to your opening comments about the studio business, just given the amount of demand for content creation and the shrinking available supply, does that drive the content creators to find other ways to make the content, whether that be to do it somewhere else, whether that be more digital, less studio, whether it be share stages between two shows more often? Just what options are people going to have as everyone's chasing that quicker creation of more content? Manny, it's an excellent question. I do think that technology will come into play here in a strong way, You'll see maybe the need to have less stages. We've always said this. The biggest play that we see coming on the content is the post and pre-editing, That means office space. That's going to be where the technology comes into play. You've heard me mention this before. The way people look at content, the way Netflix is having content, is going to change, You're going to see an increase in animation in content, so you don't need sound stages. You need green screens, a lot smaller square footage. You can do those in other places. Yes, I do think there's a worldwide demand for sound stage spaces. It's not just in Los Angeles or in Vancouver or New York, You're seeing these stages fill up everywhere. Obviously, it could lead to people building more. It's going to be an economic decision as to where you can build. I do think at the end of the day, we're pretty confident that as this industry continues to expand and as these players solidify and pour money into content, the key market's going to be Los Angeles. Does that mean surrounding Los Angeles? It's yet to be sort of defined as that. Right now, Los Angeles is the key because that's where the talent is. I reiterate always, it's not talent in front of the camera only. It's talent behind the camera. Thanks. Mark, a quick one for you on guidance. You added interest income, You mentioned that obviously you guys did interest expense. Was there anything specific that drove you to add those to that page, or was that just you guys wanting to give a small call out? Yeah. We've always had the interest expense. I just didn't want there to be any confusion in mentioning that we added the interest income. We added it because there's a substantial amount, more than we've historically had, because we continue to own the entity that houses the defeased debt associated with One Westside. As the bonds roll off and the interest associated with that and the notional of the underlying bonds turn out, a fair amount of interest income is now hitting the income statement. We thought it was material enough that we should give you and everyone else clarity around that. All right. Thanks. Once again, if you would like to ask a question, please press star one on your telephone keypad. Once again, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from the line of Vikram Malhotra with Morgan Stanley. Please proceed with your question. Thanks for taking the question. Victor, just sort of going back to some of the comments you made around studio with the cats out of the bag. I'm just wondering, what sort of competition are you seeing as you look at different opportunities and sort of helping us with our own NAVs? You made a comment about your existing assets at much higher cap rates. Just curious, can you update us on what spread we should think about office versus studio? Maybe sort of a range, like is there now enough depth to say what's high quality versus low quality? Vikram, I'll take the latter part first. In terms of the spread, we had this inherent 100 basis points spread between Class A office and studios that we said that was where the cap rate spread would be. It's inside of that now, and the reason it is twofold. You look at the studios that we currently own and the ability for us to continue to expand on, which is Gower and over at Las Palmas for about another almost 900,000 sq ft or so. The office component has taken over the studio component. There's no difference between having a Class A office building on a studio lot than there is across the street, as an accurate example of what we have. I think that's compressed down, and I do think that we're probably in somewhere around the 50 basis points spread differential right now. The second reason is on that is that we're signing these longer-term leases with absolute credit tenants on the sound stages that are three, five, seven, with annual increases and with options for them to continue to take. To date, the ones that we sign long-term, nobody gives them back. They're not saying they're going to give it up spaces. The action's contrary to that. They want to continue more, and they want longer-term lease term on it. I think that would give you a zero to 50 basis points now spread differential, and I think we would all feel very comfortable with that. Competition's a good question. I would refer it to two points. The first point is that whoever owns them today now has a clear path to sell. We're the only "institutional owner" of them, but there's a lot of one-off owners and people who are looking to accumulate based on what they've seen our floor plate delivered and go out and execute on that. I think the second part is now there's access to debt. When we first started buying these, there was zero access to debt, and now lenders see the validity of this product type, and they're prepared to go out and lend on it. Lastly, it's become a development play. The ones that are competing for these, or the ones that we've lost out to, are ones that look to develop, and they're typically developing with large demand tenants, credit tenants at the end of the day that are involved. There's a lot of security around our comfort and security, I guess, around executing long-term leases, which maintains this as a viable option to invest in. Okay, great. Just sticking to the sort of the studios, can you remind us or update us the incremental development opportunities at Sunset Gower and Bronson, and maybe even in Las Palmas as well? Can you just update us on where we are, when we could see any potential incremental development? Yeah. Listen, at Gower right now, we're in design development phase for almost 500,000 sq ft in two projects, we're probably talking about 12-15 months before we get approvals on that. There's a small piece, but really, we don't have anything on the docket for Bronson at the time. Las Palmas, we have almost just under 500,000 sq ft, that's probably more like 18-24 months on approval. We're in early design phase there. That gives you an idea where our pipeline is for the next four years. Great. Thank you. Thanks so much, Vikram. Our next question comes to the line of Blaine Heck with Wells Fargo. Please proceed with your question. Hey, thanks. Just one quick one, Victor. When you think about your acquisition options in Seattle, your possible spend on development in Vancouver or even additional acquisitions in Vancouver, can you give us any sense of the scope of these transactions and whether they're kind of mutually exclusive, given funding needs you already have with development? Would you think about going ahead with a couple of these things in the near future together? Blaine, listen, I think recently our numbers have proven out that from a development standpoint, our yields have been exceptional, and that's not my word, that's others, beyond where we would be buying and repositioning. We're still very excited about the potential opportunity to develop in all of our markets. There's really not a market, with the exception of maybe Silicon Valley, that we would not develop on other than Cloud 10, which we have not talked about today. I think at the end of the day, it's not going to be mutually exclusive. It will be dependent upon asset quality, growth in the marketplace, the tenant demand, our ability to execute on either existing or repositioning or ground up. Then, listen, we've been very vocal on the fact that we have capital allocated for future growth, but we also have three exceptional joint venture partners who are all aggressively trying to continue to do more deals with us in these marketplaces. It will depend on their interest level combined with our capital allocation in growing these marketplaces. I don't see us slowing down, but I think we've been fairly particular in the assets that we've wanted to bring on board, and we're going to maintain that discipline going forward. All right. Thanks. Thanks, Blaine. Ladies and gentlemen, since there are no further questions left in the queue, I would like to turn the floor back over to Mr. Victor Coleman for closing remarks. Well, I want to thank everybody for participating today. As usual, our Hudson team is exceptional. Another great quarter under our belts, we're onward and upward in quarter 2, we look forward to catching up at the end of this quarter. This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.