Greetings. Welcome to Hudson Pacific Properties, Inc. 1st 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.
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' Q1 2019 earnings call. Earlier today, our press release and supplemental were filed on an 8 ks 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 to 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'd like to welcome Victor Coleman, our Chairman and CEO Mark Lamas, our COO and CFO Art 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 will be joined by other senior management during the Q and A portion of our call. Victor?
Thank you, Laura, and welcome, everyone, to our Q1 2019 call. Year to date, without exception, we're 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 1,000,000 square feet of leases in the Q1 with exceptional GAAP and cash rent spreads of 33% 25%, respectively. Noteworthy deals this quarter included 2 major leases at our redevelopment projects. We signed a 584,000 square foot lease with Google for all of our One West side 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 1,100,000 square foot pipeline of under construction and near term planned value creation projects is now 90% pre leased, and these projects have an 8.1% weighted average estimated initial stabilized yield. In the Q1, we maintained our stabilized and in service lease percentages of 95.2% 92.9%, respectively. Accounting for renewals and backfills and deals in leases, LOIs or proposals, we've successfully addressed 65% of our remaining 9 100,000 square feet of 2019 expirations, which are 17% below market. As indicated on our Q4 call, in addition to continued strong demand from small sub-ten thousand square foot tenants in the San Francisco Peninsula and Silicon Valley markets, we're seeing a resurgence of midsize requirements, that is deals in the 10000 to 25000 square foot range. In the Q1 alone, we completed 30 deals totaling 260,000 square feet in those two markets with GAAP and cash rent spreads 35% 26%, respectively.
This includes several notable 20,000 square foot plus deals across our Foster City and regular chores assets, which in aggregate increased our in service leased percentage in those markets by 3 30 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 $15,000,000,000 on new content this year. Apple, Amazon, Disney Plus, WarnerMedia, Comcast NBCUniversal and CBS All Access are also rapidly expanding in these favorable consumer and industry trends. And 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 long standing relationships with the 2 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. And over the last three quarters, for which all of the 3 same store studio properties is available, our trailing 12 month lease percentage increased 430 basis points to 92.4 percent 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 and particularly in the downtown area are extremely strong. Vacancy is very low, less than 3%.
Class A and AAA rents grew 13% year over year. Supply is in check with under construction projects delivery in 2022 over 50% pre leased. As such, in the Q1, we were thrilled to announce our JV with Blackstone Property Partners to acquire the 1,450,000 Square Foot Bentall Center, which we expect to close later this quarter. Bentall Centre 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 tendencies, but in place rents are more than 20% below market and 60% of the square footage rolls in the 1st 5 years. Thus, we will capture a meaningful rent upside facilitated by our signature lobby and common area renovations as well as the repositioning of at grade and subterranean retail. Bentall Centre also affords us the opportunity to expand in Vancouver by building another by 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 end markets.
Thanks, Victor. After spending over 1,000,000 square feet of deals in the Q1, our leasing pipeline, that is deals and leases, LOIs or negotiation, remains essentially unchanged at 1,300,000 square feet. Let's take a closer look
at
our core markets. 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, a 106,000 square foot office development at Sunset Las Palmas in Hollywood remains to be leased. The project won't deliver until Q1 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 2 30 basis points year over year. Class A rents were up 5.1 percent to $59 per square foot year over year. We have coverage that is deals renewed, backfills 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 and Saatchi's 4th quarter 113,000 square foot exploration at Del Amo. With Saatchi and Saatchi likely to downsize or vacate, we are actively marketing the asset even as we evaluate a potential sale.
Our stabilized Los Angeles portfolio was 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 7,000,000 square feet of requirements in the market, about 300,000 square feet in excess of available supply. 1st quarter alone had 585,000 square feet of net positive absorption. Vacancy fell 50 basis points to 3.6 percent 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 and 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's 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 2 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 8 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 remained 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 midsized 10000 to 25,000 square foot requirement, 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 4,000,000 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 3rd quarter 29,000 square foot lease at Northeast 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 0.1% leased and in place rents are 18% below market. And with that, I'll turn the call over to Mark for financial highlights.
Thanks, Art. In the Q1, 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, 10,850 Pico and the Ferry Building were the primary drivers of this year over year increase. Specified items in the Q1 consisted of transaction expenses of $100,000 or $0.00 per diluted share and onetime 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 dollars or $0.00 per diluted share a year ago. In the Q1, NOI at our 31 same store office properties increased 7.2% on GAAP basis and 2.3% on a cash basis, while 1st 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 percent to 89%. In terms of capital markets activity during the quarter, in addition to the $350,000,000 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 5 year fully revolving $235,000,000 loan now scheduled to mature March 1, 2024. We also reduced the interest rate by 90 basis points to LIBOR plus 1.35 percent and removed Sunset Gower as collateral, leaving Sunset Bronson and by extension ICON and Kew as collateral.
Before turning to guidance, I want to provide further color around the impairment loss running through our Q1 results. As Victor noted, we have placed campus centers, office campus and the adjacent land and development rights under separate contracts to sell. Accordingly, we 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 dollars to $2.03 per diluted share, excluding specified items, to $1.96 to $2.04 per diluted share, excluding specified items, thus raising the midpoint from $1.99 to $2 per diluted share. Specified items consist of those identified in connection with our Q1 results. Our estimate also assumes the successful disposition before the end of this Q2 of Campus Center, including the adjacent land and development rights for approximately $150,000,000 with proceeds to be applied towards the repayment of our revolving credit facility and other unsecured indebtedness. That 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 10,850 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's 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 Q1 results showed that this strategy has continued to propel our leasing success. With our active value creation pipeline now almost entirely pre leased from leasing perspective, we are focused on the following: 1st, 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 Q1. 2nd, the stabilization of our leased up assets, which are few.
By the end of the Q1, we will require roughly 200,000 square feet of net positive absorption to reach 92% leased. And third, lease up of our 100,000 square foot plus parallel development for which currently we have strong tenant interest and will not deliver it until 20 20. 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. But 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. And 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 Our first question comes from the line of Nick Yulico with Scotiabank. Please proceed with your question.
Thanks. Can you talk a little bit more about the driver of the increased same store NOI guidance in office? Is that a better occupancy assumption? And what pieces of the portfolio are driving that?
Yes. I mean just to give you a quantification of that, the increase from the prior 3% midpoint to the 3.5% midpoint is about 1,400,000 dollars 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 $500,000 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 Prop C. You'll recall that there's a measure that taxes on rents, I'm talking about the June prophecy, not the November prophecy.
And the team went through in sort of great detail on what recovery would look like with respect to that incremental tax. And we think we're going to do better there than we previously expected. And so those are really the key contributors to that $1,400,000 increase from our prior guidance.
Okay. That's helpful. And then, 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. I mean, how are you feeling about the lease up trajectory for those assets there for the rest of this year?
Yes. I think 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, amenitizing all of the spaces and having market ready space. We've seen this trajectory for several quarters. So all of them kind of there was a 300 basis point movement in those collective buildings.
The pipeline behind them building by building, 333 has got probably 20,000 square feet of deals in the pipeline. Metro Center has probably about 75,000 square feet in that active pipeline. And Shore Breeze has another 20,000 square feet. A lot of these are VSP spaces that we've completed. So I feel really good.
Okay. And then just one last question on Vancouver. I mean, 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. And I think you guys are also maybe looking at other assets to buy in the market.
So how should we think about ultimate investment in Vancouver?
Nick, I mean, listen, I wouldn't think about it until we tell you there's something to be talking about. I mean, Seattle is a good example of that. We do 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. So we have almost 900,000 square feet on that asset alone if we do certain things. And there could be some retraction. We're looking at other deals.
But 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 a follow-up on Vancouver and maybe just generally your thoughts here on capital outlays. I mean, you guys have done a good job match funding with dispositions. I mean, 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?
I mean, Craig, we've been pretty consistent. Recycling capital, we've got a very strong balance sheet, got lots of access on that right now. We've got some opportunity with some increased debt. So I think we're very flexible in what we're looking at. And as deals come by, we will figure out which is the most appropriate avenue to deploy capital.
And 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. But that may change the payment with the activity and the interest level is going to be us finding some new deals.
That's helpful. Then just want to go back to your commentary about seeing resurgence of mid sized deals in Northern California and the Valley 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 midsize 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 a messaging that I guess now we're going almost on 2.5 years on starting with Google making their announcement that they're going to be 10,000,000 square feet in San Jose. I mean, I would say our team feels
from the people running on
the ground that the hottest market that we've seen activity is San Jose. And it's all based upon what 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. And we're seeing some nice movement in rent growth and 0 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 100 of 1000 of square feet. And those deals will be probably announced between now and the next two quarters.
Okay. That's good. And then 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 3rd party provider versus maybe taking an in house and looking at a higher amenity or higher service offering and maybe this is where office landlord could be trending to over time?
I mean you guys have the service level with the studio, so it wouldn't be a stretch for you guys. I mean is that something that's potentially on the table versus just kind of given 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. 1st and foremost, we're comfortable with the risk factor that we could step into that at any time.
And 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. And so 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 wouldn't. The enterprise tenants, in 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.
And I think at the end of the day, they know a landlord like Hudson will absolutely have the ability transfer over the services and it would probably be an opportunity for them,
and 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. And it's been uniformly 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 in 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, being attracted to it? Or is that just a certain subset that's going to
want that in the rest of the market? I think it's a good question. At the end of the day, the ultimate factor here is flexibility. And as these enterprise tenants or household name tenants, are entering our markets, they pretty much have a presence there. So 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. And I think this is an adjunct and a growth aspect. Mean, 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?
Yes. Jamie, listen, I think that asset is well both of the assets down there in the assets 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 is proven out. The yields keep getting better. The returns on these assets are getting better. It took longer to lease up. But now that we are almost I mean, we're less than 6 months away from somewhere between 4,5000 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. So it's not that much of a burden and they're pretty cool assets.
Okay. And you talked about content spend doubling over the next 10 years. I mean 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? I mean, this is what was an arbitrage 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 pretty committed, not pretty, 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. But you're really only looking I mean, 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, at this time.
I think Vancouver, hopefully will be an entree with the Bentall transaction to us to look at the studio business there and maybe a few more deals here as well.
Okay. And then any thoughts on what the Warner Brothers decision in Burbank for their office developments coming is going to mean for the sector overall?
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. So that's a positive. Obviously, the valuation of that asset and the sales price just proves our storyline and our valuations. And I think what we carry our NAV valuations at 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 Brothers. They had to get to their lawsuit on the AT and 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. And Jeff Worth 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 2 parter on WeWork. One, if you can just comment on sort of the rent upside from the taking the Bank of America Vault space at $14.55 And then 2, 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 peer set on the WeWork?
On the first question, it's a pretty easy one. Yes. 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 of 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.
So that gives you I don't want to get down to this dollar specifically to WeWork, but suffice to say, it's 1,000 times higher, which sounds crazy, but that's where the market is trending obviously.
So, I
don't know if you want to pick up more. Yes. Listen, we have a unique structured lease with WeWork because it's grandfathered into the original deal that we did, details by which is to a confi. But 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. And then 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.
But it seems like that market is a growth market. And 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 the where you see growth in the Pacific Northwest?
Well, listen, it's public knowledge. Amazon recently exercised a long term renewal at 'nineteen, 'eighteen Fairview. And the construction is underway for Tower 3, which is another 1,100,000 square feet. So they're growing still in Seattle. The demand is still high.
Yes, they are subleasing Rainier Tower, which is 720,000 square feet, but they have virtually that entire building is completed with 2 tenants. And so in the meantime, you're right, I mean, they are expanding in Bellevue. I think they've done about 2,000,000 square feet at a couple of projects and they're looking at a third right now. Bellevue is a great marketplace. I think people dumped on it pretty quickly and it made a quick turnaround.
And 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 assets there. We never had an opportunity. I don't know how much more is there for guys like us to do, but it's 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 1 shortly. And then 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. I mean 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 2 years has really surprised a lot of people of the strength in the pre leasing of the existing construction.
And 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 2 deals in Seattle right now. 1 is a development and one is a renovation repositioning.
Thank you, Victor.
Thanks, Alex.
Our next question comes from the line of Manny Korchman with Citigroup. Please proceed with your question.
Hi, 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 studio, whether it be share stages between 2 shows more often? What options are people going to have as everyone's chasing that quicker creation of more content?
You know, May, it's an excellent question. I do think that technology will come into play here in a strong way and you'll see maybe the need to have less stages, more we've always said this, the biggest play that we see coming on the content is the post and pre editing, and that means office space. And that's going to be where the technology comes into play. I mean, you've heard me mention this before. Content the way people look at content, the way Netflix is having content, is going to change.
And you're going to see an increase in animation and content. So you don't need soundstages. You need green screens, a lot smaller square footage. You can do those in other places. Yes, I do think there is a worldwide demand for soundstage spaces.
It's not just in Los Angeles or in Vancouver or in New York, but it is all around the world. And 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. But 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 is going to be Los Angeles.
And does that mean surrounding Los Angeles? It's yet to be sort of defined as that. But right now, Los Angeles is the key because that's where the talent is. And 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 and you mentioned that obviously you got interest expense. Was there anything that specific that drove you to add those to that page or is that just you guys wanting to give us more color?
Yes. 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. And so as the bonds roll off and the interest associated with that and the notional of the underlying bonds term out, a fair amount of interest income is now hitting the income statement.
And we thought it was material enough that we should give you and everyone else clarity around that.
Great. Thanks.
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 sort of 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 and 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 point 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, 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 square feet or so.
The office component has taken over the studio component. So 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. So I think that's compressed down. And I do think that we're probably in the I would think we're probably in somewhere around the 50 basis points spread differential right now. And 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 3, 5, 7 with annual increases and with options for them to continue to take.
And to date, the ones that we signed long term, nobody gives them back. They're not saying they're going to give out spaces. The actions contrary to that, they want to continue more and they want longer term lease term on it. So I think that would give you a 0 to 50 basis points now spread differential, and I think we would all feel very comfortable with that. Competition is a good question.
I would refer it to 2 points. The first point is that whoever owns them today now has a clear path to sell because 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 0 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. So the ones that are competing for these are 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. And there's a lot of security around or comfort and security, I guess, around executing long term leases, which maintains this as a viable option to invest in.
Okay, great. And then just sticking to 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?
Yes. I mean, listen, at Gower right now, we're in design development phase for almost 500,000 square feet in 2 projects. And we're probably talking about 12 to 15 months before we get approvals on that. There is nothing left from our there's a small piece, but really we're not we don't have anything on the docket Bronson at the time. Las Palmas, we have almost at least under 500,000 square feet and that's probably more like 18 to 24 months on approval.
We're in early design phase there. So that gives you an idea where our pipeline is for the next 4 years.
Great. Thank you.
Thanks so much, Vikram.
Our next question comes from 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 means you already have with development? Or would you think about going ahead with a couple of these things in the near future together?
So 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, but beyond where we would be buying and repositioning. And so we are still very excited about the potential opportunity developing 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. But 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 marketplaces, the tenant demand, our ability to execute on either existing or repositioning or ground up.
And then, listen, we've been very vocal on the fact that we have capital allocated for future growth, but we also have 3 exceptional joint venture partners who are all aggressively trying to continue to do more deals with us in these marketplaces. And 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, and we're onward and upward in Q2. And 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.